I hadn't thought about it this way until I read this article in the NY Times but the S&P 500 is down 25% YTD. In the video over the weekend the focus was obviously quarter end but after a down 9% week it is down 25%. Wow.
That NYT article talked about dividend investing, why indexing has struggled, why active managers have struggled and so on. Dividend investing, via funds, probably means heavy financial exposure although some dividend funds have held up very well. Active managers, per the article, never saw this mess coming.
There was an element missing which is simply to have less exposure. One point I tried to make about bear markets (before this one started) is that finding the few stocks that will go up while the market is going down a lot is very difficult. Sure a portfolio of 40 or 50 stocks will have a couple of names that are doing well but knowing what those would be ahead of time is a long shot.
A client asked me why "demand for equities is poor." I told him I don't spend a lot of time trying to figure out why because being right is irrelevant for you managing your money or me trying to do my job. Someone will win the Nobel for figuring all of this out and I am happy to leave being right to them.
If you look back at the posts I put up in the summer of 2007 as the market was skipping around the 200 DMA and then in Q4 was the market rolled over slowly (as it always does at the start of a bear market) when I said the bear had started I was just focused on the message of the market. It warned of trouble but did nothing (that I could see anyway) to predict magnitude.
It appears, based on the NY Times article and this Barron's piece that I linked to yesterday, that too many people had no plan for defense. Raising a little cash early on is by far the simplest thing you can do. Hopefully you can remember what this feels like, how the market warned way ahead of time and how many pundits told us not to worry.
I can tell you first hand that most people do not remember these sorts of things but hopefully you will. From the tough to remember camp is that bear markets end eventually. They end after the market drops a lot, when sentiment is lousy and there is no end in sight.
I can't make any case for this bear being over and the market is a long way from demand being healthy but this is exactly the time to a plan for re-equitizing if you are defensively postured. It may be over a year away or just a few weeks there is no way to know but the fact that bear markets end should not be forgotten. That they occasionally end very loudly with big fast moves up should not be forgotten. It doesn't cost you anything to be open to the possibility that the market will confound everyone at a time when no one (including me) thinks it is possible.
Wikinvest Wire
23 comments:
"because being right is irrelevant for you managing your money"
Oh how true!
Well buying before my vacation was pretty stupid.
I should have realized congress would have taken longer to finally pass a bail out plan. Still I would have thought a trillion plus dollars would buy a little bit of a bounce.
I wish I could predict when the current panic will end. I think we will have a nice bounce into year end from some level and resume the down trend after that.
I do agree it make sense to think about reequitizing, but I do not think it is time yet.
seg
My friends are openly talking about $$$ losses in their IRAs and delaying retirement. Must be we're getting close to something.
VIX just hit 53+, highest ever since 1990. I don't think they had it before then did they? A sign of capitulation, maybe?
Roger,
I'm 75% in the market and 50 - Is it ever smart to sell into panic? I can wait this out for 3 to 5 years before I really need the equity back. What would you advise???
Roger is right. The bottom of this market could be next week or next month. So, accepting the fact that no one can predict the bottom, how do you play it? I think it's important to have a plan. Otherwise, it's going to be hit or miss. Here's what I'm planning to do:
In those accounts I'm in cash or fully hedged, I'll wait until the 55 simple moving average is crossed to the upside on the SPX. At that point, I'll go 50% long on those accounts I'm currently in cash or take off 50% of my hedge on those accounts I'm fully hedged. (If the market reverses again to the downside, I'll return to my original positions.) Subsequently, when the SPX crosses above the 233 simple moving average, I'll go 100% long and/or remove any remaining hedges. (Again, if the market reverses, I'll return to my previous positions.)
No way do I think this is the only way to go. So if anyone has another approach, I would like to hear it. I'm open to a better way to go.
Is it ever smart to sell into panic? I can wait this out for 3 to 5 years before I really need the equity back. What would you advise???
You must have just started reading the blog less then 2 weeks ago
http://randomroger.blogspot.com/2008/09/allow-myself-to-introduce.html
"Doing the right thing at crucial points in market history is by far the most difficult task investors will ever face.
How many times before has the market been scared and how many of those times has panicking been the right thing to do?
The time for meaningful action has long since passed.
Doing the wrong thing at times like this is how people alter their financial futures.
You have heard this before from many other people and you know it is true."
I talked to a few old buddies who just blew out of their long term accounts for major losses. Could not take it anymore.
@ anon 7:35 AM ~ everyone I speak to or read who isn't panicked by the headlines are staying in the market or buying. This includes some people I chat to who work in the city - they're worried about their personal futures but not the macro environment so much. Just be glad you're not leveraged.
i have to think we are close to a turning point; the big one? a feel good rally? something else?
people do get very afraid at points like this.it becomes difficult or impossible to stay rational, you can either detach enough to see this or not.
getting angry, "accepting" the need to alter life plans and so one can be a coping mechanism but panicked action is where the danger lies.
VIX comparisions are tricky because for a long while it was based on OEX now SPX. Further the complexities of calculation options prices and the manner in which those complexities change over time adds to the trickeration.
to the guy who is 50, no specific advice, can't do that, but you need to ask yourself some questions. How many of these have you been through and then what happened? Do you have long term faith in the US and in capitalism? What do you suppose people that you know are smarter than you (market wise) and more successful than you (market wise) are doing and how do you suppose they feel?
MikeC, you need to read some better blogs, lol.
Friends selling out everything? Obviously reactionary, how do they get back in?
If you haven't read John Hussman this week - be sure you do - link is on Roger's right hand column.
Next to RW he is the smartest guy on the net.
OG
A post illustrating WHY it's so important to be in position for a recovery - http://tinyurl.com/4bm6rj
It's probably too early but I've taken some (very nice) profits in QID and SDS off the table and am scaling into a couple solid longs (emphasis on the scaling in): Volatility is so high the market could literally smash through the floor at the drop of a hat* but, then again, there's a (smaller) chance it could reverse and rip through the ceiling too.
This is in my tactical account only; strategic portfolio is unchanged.
Now hang onto your knickers me bucko's: Wheeee!
*make that the second hat, I think the first already dropped ...hmmm, maybe a shoe would have been a better metaphor, oh well (shrug).
[Hey OG, good to see you're still in there pitching, even if your opinion of some people is obviously too high ...not Hussman of course (g)]
One thing that is almost a sure bet - trying to game this market is a great way to flop.
My best performing asset by far is rental real estate, directly managed. No pressure to sell and earning a total return of over 25%.
Roger - I have heard more about Icelend in the past two weeks than in the previous 56 years! What's with this rock in the North Atlantic?
T
Having faith in America and capitalism is wonderful, but it's not going to necessarily make you money. We've always had faith that in the long run the market will go up. But the market is back to where it was 10 years ago. If that isn't the long run, what is? How do we know that the old dynamics haven't changed and that we can no longer count on the market always going up over time. There's a lot of evidence that says the golden age of America is on the decline. We face economic competition from other nations that we have not had before. At the end of WWII we were sitting on the top of the heap with the rest of the world in ruins. That's changing. We may be in for decades of hard times until, for example, labor rates among nations get to equilibrium. Other nations are getting to the point they can provide goods/services and even intellectual capital that we once thought were our exclusive domain.
All I'm saying is don't count on the old cliches. They may not be true anymore. Your investment health won't be helped by guessing where the bottom is. It could be today, it could be tomorrow or it could by next year. There is no expert in the world that knows. Anyone that tells you otherwise is either a charlatan, a liar or an idiot. Going from one blog to another won't do you a bit of good. Go to ten of them and you'll probably get 15 different conclusions. How's that going to help? Many of you are new or not experienced in the world of investment. That's not a knock on you. It's only meant to encourage you to take your investment fate into you're own hands.
However, no matter what conditions are, there are always ways to make money in the market. But you've got to have a plan that's credible and you've got to stick to it. I offer an example of but one plan in my previous entry above. What is yours?
Question for trader dick.
What is you longer period experence with your variable hedging scheme? Say from 2000 to 2008.
Would you apply your hedging differently if the portfolio is $2 million or $200000?
I have a feeling the size of a portfolio matters when you talk about actions. Thanks
well the news of not enough food was exaggerated. Similar to Switzerland, yes Switzerland, the country is not big enough to bail out the banks. It could handle Glitnir but it would not be able to handle Kaupthing.
When I first wrote about Iceland (three years ago I think) I said it would become more relelvant to the global economy, well this was not quite what I had in mind.
If the cold war was still on I think the US would be very proactive in helping them.
Kaupthing, and I presume Landsbanki but I haven't studied that one much, probably needs to sell a lot of stuff which if course is difficult to do inthis environment and what buyer wouldn't know they are forced sellers.
Kaupthing says it has a year's worth of liquidity in various things that could is either immediate cash or could be converted into cash in 15 days. That converted into might be making an assumption or two that might not work out.
Responding to question above on account size:
I think size is irrelevant. Of course, if you use inverse etf's to hedge, you have to raise the cash (selling stocks or money market?)to buy them (remember, on the 2 times inverse etf's, your money goes twice as far). I have back tested using various critical moving averages in the past and they come out quite positive.
Why do you think there might be a difference?
Hard Questions for Trader Dick and Roger:
Trader Dick, if this time really is different, and the fundamentals truly are changed, what is the logic in relying on "back testing" and moving average analysis? Isn't past performance necessarily misleading if the "new environment" makes the information signaled by past performance somewhat (how much I'd say is a guess...) irrelevant?
Roger, what research is there (or what thoughts have occurred) towards identifying what are the "leaders" out of panic selling/capitulation?
Would you say that each bear catharsis is unique, or is there the usual safe havens that are bid up significantly as soon as people realize they may have overshot the mark? (If they each are unique, do you or your analysis have any suggestions as to what seems particularly overdone in this current sell off?)(Not looking for names, but sectors... and I don't have the cujones for "Financials" ;-)
R in NY
Those who are willing and able to trade and would like to learn more about how to scale into long positions in a market like this may find Bill Cara's discussion interesting; e.g., http://tinyurl.com/3lauru
R in Ny: Very interesting question! If the market were to remain below the critical moving averages for the bulk of the time in the future, you would make less money than in the past when the bulk of the time the market was above the these moving averages. Effectively, you would be in money market most of the time rather than long the market.
In that case, the system I proposed would keep you relatively safe, but not make you much money. I was not saying that my scenario was inevitable, but if it were, making money would be difficult for anyone accustomed to be long the market.
Many people are not accustomed or even approve of being net short the market, when that might be the appropriate place to be in a bear market(as defined by being below the critical moving averages). But that is the solution to the problem you proposed. I have my own system that I use in bear markets, entailing a gradual change from being 100% long to ultimately 100% short (and vice versa in an evolving bull market). I use a number of moving averages for that approach.
R in NY,
i can think of two ways to look at leading off the bottom (be it the big one or a feel good rally). Just as tech as disappointed more times than not since its bubble I would think financials will be the same in the future.
I would think sectors the least affected by the financial crisis would be better sectors. additionally discretionary typically does well early on as early stage manufactruing too.
another idea would be buying broad based indexes because they will likely be up huge at some point and going broad might be more important that correct sector bets.
unless, of course, we go down 80%
Great post Roger. I think it is time to start thinking about the bottom and how to play it - even if it is a ways off time wise. S&P off 35% from its highs at today's intraday lows! We're getting there.
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