September 1st, 2009
I must confess that today has been very painful. Studies demonstrate that the average investor reacts more to losses than to gains. I guess I’m not telling you anything new because you’re probably suffering that painful loss right now. Wouldn’t it be wonderful if humans could mentally and emotionally easily offset bad feelings we’re having with the good ones we’ve had.
This brings to mind of the exception I took last Friday with Jim Cramer, that master baiter (get your mind out of the gutter, I mean “someone who sets traps in which to catch you”) and master equivocator to his latest vacuous and even dangerous call:
“‘rallies are times for action.’….too many investors don’t trade during rallies and thus watch their gains disappear….He said investors shouldn’t let their emotions prevent them from doing what is needed during big rallies…..investors often let emotions sway them to hold on to their stocks — the exact opposite of what they should be doing. ‘The goal is to buy low and sell high,’ he reminded viewers, ‘so when the market’s up big, it’s time to lock in some profits.’ ….gains in the market are not really gains until the stocks are sold….the way to play big market rallies is to sell in increments during the rally. ‘Get the great prices while they last,’
I can just hear him boast and shout, “I told you so”. So if “sell the rallies so you have cash to buy on the dips” is the answer and last week was the rally, then was today the dip? Does he and all those others who trot out that mantra refer only to day trading, or do the refer to all styles of investing? How does one know – other than their telling us – when rallies and dips near their ends so that we get green lights to act.
That’s why I believe that we, instead, should have our own longer-term vision, game plan and discipline. If we do, we’ll take a more reasoned and less emotional approach to the market’s day-to-day volatility. That’s what helped us not get suckered in to rallies last year and what will help us avoid getting into a funk and wrongly selling into corrections. We’ll be better able to emotionally handle the losses and not become unreasonably euphoric about our gains (remember, it doesn’t take a genius to make money in an up-market).
That’s why my my plan
- begins with a sense of where the market’s been, where it is, where it might be headed and by when. You’ve read my current view here often: A rally to year-end with a target of 1100-1150. There’s support around the 300-DMA (which, incidentally, the 50-DMA is about ready to cross above – that’s cause for a small celebration). I’ll run for the hills if this support fails but won’t panic if we drop to it. The market will tell me what to do when it reaches the upper target.
- Some say buy stocks as they retreat and sell when as they move higher. I prefer the opposite – buy when stocks confirm the beginning of new momentum as they break through resistance and sell when their trend changes and they fall below support. Value and fundamental investors follow the former approach, momentum investors follow mine.
- Buy and hold stocks only when favorable markets are at your back and never attempt to sail into strong headwinds.
I haven’t yet seen a change in market direction and am still waiting for the big boys to come back from the beach and start the sidelines money flowing to the market. [What a great conspiracy theory – drive the market lower so as to shake up investor confidence, loosen up shares and drive down their prices in anticipation of their buying spree. Some say that’s exactly what the Chinese do in anticipation of their commodity buying sprees.]