Author Topic: BEAR MARKET INVESTING STRATEGIES by Harry D. Schultz (pages 115-118)  (Read 575 times)

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BEAR MARKET INVESTING STRATEGIES by Harry D. Schultz (pages 115-118)
Chapter 15. Rules for Being a Flexible  Investor

“Don’t confuse brains with a bull market.”
Old Wall Street Adage

Largely because money moves across the world in the time it takes to strike a key on a computer, markets have become vastly more volatile and sensitive. Time-tested market tools and models that date back 60 years or more are still excellent indicators of market direction: but short to intermediate reactions in markets are ever more jittery, which pressure our tools. And when a default in an emerging nation can cause a major ripple in markets across the world, we must be a good deal more flexible in our investment strategies than in the past.

Also, in the last 10 years, the futures and derivatives markets have exploded, whereby the value of a derivative is linked to an underlying asset, but is several degrees more leveraged than a simple stock, bond, or commodity, bought on margin. All these factors require a level of flexibility of thinking that would have scared the investor of 40 years ago.

It requires what used to be called having a “trader’s mentality” of the market. Although the phrase has a stronger application now. When we say a trader’s frame of reference, we really mean being pliable, alert, and willing to get out of things quickly, and usually aiming at shorter-term profits. It’s a concept that may be emotionally hard for many investors to grasp after the late 1990s’ bubble, when buying almost anything and holding on to it was considered a brilliant “investment strategy.”

But, even if we enter a new bull market in the near future, the era of being able to buy almost anything and expecting it to make you a profit without monitoring has vanished for at least the next decade.

The rules that follow are not just rules that apply to any new stock you are thinking of purchasing or selling short, but rules you should apply to every stock now in your portfolio each time you review it. Even those holdings that you hope will be ultra long term should be viewed as if you were about to buy them for the first time. Then, you will be in the right emotional frame of mind to get rid of underperformers and replace them with stocks more likely to do better.

1. Almost nobody is a born trader. You have to learn. It’s almost against human nature, because most of us are averse to change. But it can be learned, like any skill.

2. In the current environment, there is no good alternative to trading. To “invest long term” works in some time frames. But this isn’t one of them. The long-term philosophy is often unproductive because it means you sometimes will buy and hold, without stops, and the investment falls. You can incur major losses. Some hold losers hoping for recovery, which “if” they come back can take a long time, during which time you may need the money.

I am not suggesting you become a day trader. Merely that you watch your investments closely on a daily (if possible) or weekly basis, through the eyes of the market indicators in this book. And ask yourself “If I didn’t own this stock, would I buy it right now?” If the answer is, “No,” then switch to a stock that will work harder for you.

Today, you can no longer afford to treat your stock portfolio as a bank account, as many did in the last decade of the 20th century. You’ve got to watch your portfolio with a trader’s eye and perspective.

3. There are times when buying a stock that’s already high on a chart breakout, out of a consolidation pattern is proper. Likewise, there are times when buying a stock at a new low price is proper if accompanied by a chart that reflects accumulation or the end of a downswing, as in a down wedge pattern. Frankly, without a chart, you are flying blind. Don’t get greedy on rises. Start selling after very sharp upsweeps and keep moving stops up. When a stock turns negative on its chart, sell it, or sell it short.

4. Hedging. This technique can be a godsend. It can prevent you from taking a loss. In theory, it works like this: Let’s say you buy a stock with bullish fundamentals. But it starts down. Do you sell? If there’s no chart sell signal and if you think the stock’s fundamentals have not changed, you can hedge. You can’t know how far this correction (if that’s what it is) will last, and almost nobody can (or should) afford to sit just holding a stock as it slides. Instead, you can hedge, which means you go short while holding the stock long. Then, when the price falls to an area of support and begins to stabilize, you cover your short at a profit and wait till the price rise finally gets back to your purchase price and then, hopefully, into a profit. Thus, by hedging, you have avoided a loss and probably ended up with two profits.

In some cases, you may not get out with two profits: but only one and a smaller loss in the second position than if you hadn’t hedged at all. Either way, you salvaged the situation through defensive action. Some people hedge at the start, go long and short the same day and then drop one when a trend is clear. It’s insurance trading.

5. Learn at least something about charts. Preferably learn a lot. And, if you can spare the time, make your own charts, because by doing so you get a feel for the “personality” of a stock, and which chart patterns work for it and which don’t. You can’t really make quality investment decisions, in my opinion, without charts. It’s possible to chart every kind of market.

As I said before, if you can spare the time, don’t immediately rely on printed or Internet chart services to supply you with charts. For the first few months, do it yourselL When you have a “feel” for how charts work, you can save time by using chart services.

6. You’ll need to work out your own final strategy for some aspects of trading because we all have different temperaments, hang-ups, fears, levels of anxiety, risk-aversion levels, ego, needs, etc. Some are happiest and can function most efficiently always taking small profits, selling after their investment has made a single leg up. Others like to buy more as their stock rises, in hopes of a big harvest when it eventually turns down. Still others, while reexamining their portfolio on a weekly basis and asking themselves if they would buy any of their holdings if they didn’t already own them, prefer to keep their initial positions without adding to them, as long as the stocks hold steady. There isn’t room here for all possible approaches, but it’s helpful to realize the need to formulate a trading strategy that suits your personality, makes you a happy camper.

7. Amazingly, markets usually give you a second chance. If you miss the first chance to buy or sell, markets quite often give you a second opportunity. It may not be precisely at the same price, but there is normally a pull back (up or down) that lets you in. This helps you to both exit and acquire. Bear it in mind so you don’t panic and sell too low or buy too high, like on an upside breakout. You can buy a bit after the breakout, but then wait to buy more till you get a pullback followed by a slight move back up, to confirm that your original chart interpretation was correct. And the same in reverse when selling or shorting after a downside breakout.

8. The best answer to the question, “When do I sell?” is this: If the stock you buy falls immediately after purchase, you should sell at once (or hedge it with a short). But if the stock you buy rises, you have two choices: either sell when it reaches a target (predetermined by a chart pattern), or, if it fails to reach its target, sell when it falls and threatens your profit. Never let a profit disappear and turn into a loss (or bigger loss) if you can help it.

9. Get in the habit of blaming yourself if you lose money not your broker, advisor, markets, etc. I find I can give identical advice to four people and three will profit and one will lose. Learning how to be a winner is the key. Ultimately, that key is not being right about the direction your stock will go, but having the right frame of mind to know when to sell, or hedge, and not place your ego above profits.

10. They used to say it’s bad if you make money on your first stock purchase. It is still true. If you suddenly think you know how to play the game now and you can’t go wrong, take care. That ego or pride-of- opinion factor can cause you to stumble. It is helpful to keep a list of market losses taped to your computer, with the date, amount lost, and why you believe the trade went wrong, to remind yourself of how easy it is to lose money if you allow your ego to get in the way, and or don’t follow the rules.

11. The final rule is to make up your own rules. You know best what you can live with. Study all the guidelines herein and then compose a list of your own that you think will work for you. Review it monthly for possible improvement, particularly if you lost money in the prior month. It can also help to make a happy list of winners with the reasons why. It can lead you to form a habit of only using certain techniques.

CONCLUSION

To evolve an investment strategy of buying and selling uniquely tailored to your personality will give you immense power, confidence (not arrogance), profits, and peace of mind.

Without a personal list of rules that become your strategy for investing and trading, you may learn how to predict the direction of the market with accuracy and still lose money because you didn’t do something at the right time. Timing comes via your strategies and can spell the difference between profits and losses.

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