Ok it’s a stupid title but I thought after reading some of the crazy tweets on twitter any investing article at this time deserved to be a little light hearted.
On one side of the ledger we have some pundits screaming buy the dip and exclaiming this to be greatest investing opportunity ever. I assume those who posted comments along this vein have never actually experienced the GFC or have very short memories. While at the other extreme sees “experts” calling for the hoarding of gold and encouraging everyone to rush into the local supermarket to stock up on can goods and toilet paper for the plague to come.
As with all things investing, there is no right or wrong answer with the truth generally laying somewhere in the middle. While no one knows where this will end up, both sides are extremely confident of their positions, not for one moment giving an inch.
First let me start by saying I have no idea how this will play out but like most things in life which includes my investments, I hope for the best but prepare for the worst.
Anyone that knows me, will know I am constantly reminding anyone that will listen, that if you want to play in the investing game you need to have a plan. You need a plan for the good times, you also need a plan for the bad times. A plan gives you a methodology to fall back on when emotions take hold in times of euphoria and in times of despair.
Now I’m sure you’re looking for me to tell you the exact plan you need to follow to avoid any further losses and I’d love to do just that but investing is not so cut and dry. What works for me may not work for you and what works for you may not work for me. Investing is a game of emotions, forget what you’ve been told about valuing a company or buying and selling on a technical signal they mean nothing if your investment plan does not suit your personality.
As an example buy and hold is a genuine investment strategy for some but it doesn’t suit my personality. Buying the dip works for some investors but for others it can bring them undue distress.
Swing trading works for a particular type of investor while others I’ve known have been completely destroyed by the emotional roller coaster that manifests inside their heads.
Plans will also change with your stage in life. If you’re in your twenties and just starting out, the decades you have left to invest will take care of any mistakes you made buying the dip, but if you’re close to retirement and its not actually a dip but a long drawn-out crash, your life and retirement could be put on hold until the market decides to come good.
OK let cut to the chase, here is what I would be doing for the following styles of investing
Value investors
If you call yourself a value investor and you’re not getting excited by the markets sharp pull back then you really need to consider other investing styles. As value investors this is the type of market that can present life changing opportunities for you. You need to be able to stand in front of a wall of sellers convinced that you’re getting real value for money. If you haven’t already build yourself a list of dream stocks and calculated the value of each company then get the hell onto it!!!!… time is running out!
Value investing is not easy, it needs many hours of work to understand the financials and you a need a deep discount to cover any mistakes you’ve made in your valuation. Simply buying the dip is not value investing as I hear too many times.
Tips and Things to look out for:
• Debt. Let me say that again DEBT! As they say debt can stop a train and it can certainly stop even the very best businesses particularly during financial crisis. Often businesses at this time can’t find lenders to refinance debt (everyone starts to panic even banks) and while its assets might look cheap, I can tell they rarely if ever fetch what you’ll find in their books, so don’t think they will be your get out of jail free card if it all goes wrong. In times of market trouble look for strong balance sheets even if you pay a little more. (thank me later)
• Buying, just because you’re a value investor doesn’t mean it’s easy to buy when the market is saying the world is coming to an end. If you don’t have the nerve to face the stampede break your orders up into smaller limit orders starting at your margin of safety price cascading in stages down to your “dream” price then walk away. Let the market panic, you job is to stick to your plan.
Momentum investing
For last few years momentum investors have been the scorn of the market particularly from value investors but don’t let that get to you. Your returns are the real reason value investors are so jealous and now is not the time to give those life changing returns back. If you haven’t already exited the market you obviously do not have an exit plan, fortunately your returns have been so good over the last few years you should be still well ahead but you need to accept much of your good fortune has been just that, good luck. Get a plan to exit or find a way to hedge your gains.
Tips and things to look out for:
• The biggest problem for momentum investors after such a great run is to start to believe your own hype. New to game momentum investors will be rushing in on any bounce and many will be caught out on the possible dead cat variety. Just as value investors need the patience of Job waiting for their turn to buy, it’s now your turn to wait patiently for the market to suit your investing style again. Many will not be able to resist the allure of the market and will squander their gains over the coming 12 months.
• Momentum investors who are sitting on huge capital gains may consider shorting options rather than selling any companies they have held under 12 months to reduce capital gains tax when the market is telling them their time in the sun has come to an end
Chartists
Just like momentum investors the last few years have been some of the most bountiful in living memory. So like momentum investors the biggest issue for chartists is starting to believe they are better than they really are. Everyone looks like a genius when the market winds are directly behind your sails.
Tips and things to look out for:
• Chop! Chop! … Chop is a killer for new TA exponents especially after a good run. Once a market breaks down it will show many false break outs before a new trend is established. Stay true to the signals which has served you so well. New players will stray from their proven plan and give back much of the huge gains before they even know it.
• Patience is now your friend, watch the sector indexes for a new trend to be established then trade only the strongest names. Take this time to understand what other players in the market are doing. And yes even have a conversation with a value investor, you’ll become a better trader for it.
Disclosure and warning
Please Note: None of the above should be considered investment advice. These are my own opinions based on a number of years market experience. Please do your own research and consult a qualified financial advisor if you wish to invest.