Saturday, September 4, 2010

Words of Wisdom

Words of Wisdom

by Normxxx

So. We are in a depression. Note that although it is The End Of The World As We Know It (TEOTWAWKI) time, it is surely NOT Armageddon! This too can be borne, especially if you realize that there will be a Springtime sometime by the end of the 'teens decade, with probably a roaring bull market for those able to take advantage of it by the third decade of this century. First things first; you need to guard your primary income stream (eg, your job) and your assets. If you still are employed, assume you will be let go next week or next month and plan accordingly; in particular, constantly be on the alert for another job or a better opportunity— but not one that increases your risk. Try to pare down your overhead to the bare essentials. Get rid of debt!

In the stock market, one just needs to adopt that very long range outlook, and learn enough to at least be a swing or intermediate trend trader (whose moves generally follow the weekly MACD) (or get out of the market entirely— more on that later), and hunker down. In particular, abandon any need to 'make up' any market losses: as Richard Russell (who still has a few years on me) says, "In a Bear market, everyone loses; he who loses least, wins". Trade wisely and conservatively (which is NOT the same as buying only the much touted 'conservative' stocks), and at least maintain a market position— if one doesn't try for a killing, they might even make some money in the long run.

Making money in small amounts in the long run is the only sure way to beat the market: the horizon of most investors is days to weeks, so anyone who is willing to move their horizon out to months to years picks up a great advantage, ie, the market is hugely inefficient at pricing securities for the "long run""boring" stocks are very much underpriced and "story/popular" stocks are very much overpriced. (For a "market neutral" position, one would buy the former stocks and sell short the latter stocks; but this is NOT advice for anyone who is not an experienced short seller!) This is NOT the same as "buy and forget"; one must be willing to sell immediately if they discover that any security they bought was a 'mistake', ie, some or all of the reasons for buying it has since turned out not to have been so (but not just if its price goes down, eg, with the market). While good money management dictates that one have a threshold below which they will not hold any stock, it should be sufficiently large and flexible to tolerate large market swings. Best if one can increase/adjust that threshold if the entire market goes down (or up). Buy volatile stocks only after the market has made a large move down (and hedge any such stocks that are much more volatile than the market, reducing the hedge only as the stock gains above its purchase price); buy progressively less volatile stocks as the market goes up.

One needs to be willing to do the research to find those individual stocks they can believe in and have some confidence in (probably in the range of 10 to 20 such stocks), especially if the market makes a big move down. In the end, look for (largely boring) stocks that have reliably increasing earnings and dividends (and continued prospects of same) through thick and thin; they cannot stay down indefinitely as their earnings grow (even if the overall market P/E ratio goes down). One can do some hedging by buying an inverse index; but never try to 'outguess' the market. The market is very seasonal (as Sy Harding and others have discovered); use hedging to try to smooth out the seasonal tendencies and/or to compensate for the really big swings (Eg, buy an inverse fund immediately after a large 5-10% upmove in order to protect profits, gradually scaling out thereafter). (And, instead of selling out of the market each Spring and buying back in each Fall, as Sy Harding's STS does, one can simply buy an inverse fund each Spring and sell it each Fall, as part of a general market "insurance" plan.)

To be continued…

  M O R E. . .


The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

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