Are you hedging?
Raising more cash?
Sitting on your hands?
Hi Darrell, suppose it depends on your investing horizon. Mine’s long. When the market tanked in 2008 my portfolio dropped 40%. I didn’t sell (but I really, really, really wanted to). In the subsequent 5 years, my average annual return was nearly 29%. Glad I didn’t sell and try to time the market.
So, yes, I guess I’m sitting on my hands except when something in a quarterly report either raises a red flag, or gives me cause for greater optimism. Then I might lift a finger…
- Khleb
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I didn’t sell (but I really, really, really wanted to).
Hi Khleb, yes I’ve often recounted the story of how I was down so much in 2008, and everyone was panicked and saying SELL! Sell! Sell!, and I told my wife that I was so scared I was actually thinking of selling out, and if I was thinking of selling there was no one left to sell, and it must be the bottom, and it was (in Nov 2008). In 2009 I was up 110.7%. Good thing I didn’t get scared out.
Saul
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You can’t “buy the market” unless you are buying index funds. You can buy and sell individual stocks. One prime idea behind Modern Portfolio Theory is to buy uncorrelated assets to reduce the overall volatility (risk?) of the portfolio. Uncorrelated means that while one asset is going up another is going down. To me it makes sense to sell the ones that have gone up to your (sell) target and to buy others that have gone down to your (buy) target. Last week I sold AIG and today I bought BITA.
Denny Schlesinger
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Currently I’m pretty much sitting on my hands though I am continuing to raise cash, but only through deposits and contributions. I have a long timeframe for my investments and can handle the volatility. I’m just looking for a good time to put some cash to work and hopefully juice a long term return.
Thad
I used the reduction in volatility to reduce my written put exposure. I haven’t written any new puts and will continue to sit out until VIX goes up somewhere above 18.
I also recently sold my AMBA position although it was potentially a mistake but then I made 3x on my investment, and I was getting uncomfortable with their over reliance on GoPro. I am also generally nervous investing in the semi-conductor industry.
Other than the above, I haven’t really done anything else. I have been adding cash fortnightly into my account but of late thinking that I should probably pause given the AUD has lost steam and USD has gained with strengthening of the US economy.
Over the last few days, I might be down a fair bit since hitting new highs in late Feb.
Anirban.
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It’s probably no secret that Tom Gardner recently published an article in one of TMF’s subscription services asserting that the “market” is overdue for a correction. He provided as evidence the statistical analysis provided by a TMF research colleague who has studied past patterns of market behavior and from this analysis has concluded that we have experienced too long a bull streak which therefore indicates that the market will inevitably (ans soon) take a painful reversal. Tom goes on to recommend how to be prepared to take advantage of the imminent downturn. The most important first step is to stay partially in cash so you can go shopping when it occurs - Oh, by the way Tom reminds us that he has been sounding this alarm for over a year.
There’s a famous scene in Tom Stoppard’s play, “Rosencrantz and Guildenstern Are Dead” where a fair coin is tossed and comes up heads 100 times in a row. Lest you’ve forgotten, these two are minor characters from Shakespeare’s Hamlet who are summarily disposed of without much character development. The odds against 100 consecutive heads in a fair coin toss are about 2^100, a very large number indeed. This unlikely string of coin tosses has spooked Guildenstern in Stoppard’s play. It’s taken as a rather negative omen. However, the odds that the next toss will come up heads (or tails) is exactly 50:50.
I can’t help but to compare Tom Gardner’s warnings about the future behavior of the market to Guildenstern’s reaction to the toss of a coin. To be clear, I too am wary of the market’s uncharacteristically long meandering streak in positive territory. I’m old enough to remember the bursting of the dot com bubble and Bush the dumber leading the economy into a rather disastrous an painful decline. And while I was not in the market at the time, I also have recollections of Ron Reagan’s assistance in the creation of the S&L debacle largely resulting from having put Art Laffer’s economic theories into practice. The same trickle down BS espoused by current day Republicans as the cure for our modern economic malaise.
Even John McCain, one of the central characters of these events seems to have forgotten the lessons presumably learned from these events - but oi contrar, oi contrar. The mind of a conservative is an astonishing thing to contemplate.
But in retrospect (hindsight is so often easier to bring into focus than current vision) we see that multiples of a few hundred quite likely is indicative of something less than an ideal investment. And more recently, clearly some folks were warning that the way mortgages were being bundled provided for more than a single rotten apple in the barrel. In other words, the evidence of bubbledom were upon us and obvious to those who knew where to look. And while I am far, far far from being an astute observer and deep reader of signs that would tip us off about the current market situation as the product of yet another bubble poised for bursting I don’t see it.
It is not just my own inability to perceive the makings of a current bubble - I’ve not read any credible evidence presented by anyone else. All we have to go on is the observation that the market has no been kind in the past -
So the next flip of the coin is bound to be tails. And if it incredibly comes up heads again, most assuredly the following coin toss will be tails. Thank you Mr. Gardner for the penetrating analysis and sound advice. But I’m left wondering, if the 10% drop is inevitable and certain to be soon. Or even more dire, 20% or even 30% decline is already overdue and all but certain why should I not liquidate every investment and go 100% cash in preparation for the fire-sale shopping spree soon to present itself?
What could possibly go wrong?
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Maybe I am just too inexperienced to understand all this talk about how old this bull market is (I keep hearing second or third longest ever…something like that) and how it is due to come crashing down.
When I look at this chart of the Dow since 1900
http://stockcharts.com/freecharts/historical/marketindexes.h…
I can’t help but notice the periods between 1942-1966 and between 1975-2000. Those sure like like more than 7 year bull runs to me. Obviously I am missing something, I just don’t know what it is. I get that there were downturns (some big) in them but they more or less went up for 20+ years.
I also understand that this doesn’t mean this market will do that, but I think I am just going to keep putting money into solid companies and look back in 25 years. Hopefully the next 25 years will look similar to those 2 periods.
Brian
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Wow! Great post Brian, and great charts!
Thanks
Saul
“odds against 100 consecutive heads in a fair coin toss”
Long before he got to toss #100, a market wise observer or competent gambler would suspect somebody was lying about it being a fair toss.
And a 10% (probably more) drop is indeed inevitable unless you ignore history and human nature. When is another matter.
Your political comments are out of place on this board.
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where a fair coin is tossed and comes up heads 100 times in a row.
To that I would say that you probably don’t have a fair coin.
where a fair coin is tossed and comes up heads 100 times in a row.
To that I would say that you probably don’t have a fair coin.
I agree. If it came up heads 100 times in a row, I’d give odds on it coming up heads next time too. In fact, I’d bet on it being a two-headed coin. The chances of that happening randomly are beyond infinitesimal.
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The probability of getting heads 100 times in a row is 7.88 E-31, assuming normal coin with 50% chance of heads or tails on each independent toss.
Or, for those of you not used to scientific notation
0.000000000000000000000000000000788
But, that is not zero. It merely means that one would expect it to happen only one in every 1267650600228230000000000000000 tries.
It merely means that one would expect it to happen only one in every 1267650600228230000000000000000 tries.
So you’re saying there’s a chance
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C’mon folks, apparently I’m the only reader of this board to has read Rosnencrantz and Guildenstern - please read Stoppard’s play. It’s a good read, very entertaining.
The 100 consecutive heads coin toss was intended to be outrageously unlikely, yet, not beyond possible. Is a mathematically improbable outcome fraught with meaning? Are there philosophical implications? Is it an omen? Or is it simply improbable?
When it comes to investment decisions, does each month of bullish market behavior indicate that next month has a higher probability of becoming a bear market simply because of the past statistical observations without any other forces at play? If that’s true, at what point does the decision to go 100% in cash become the best investment decision?
The chances of that happening randomly are beyond infinitesimal.
If you think hitting 1 in a million is hard, try doing that 5 TIMES IN A ROW!!!
"So the next flip of the coin is bound to be tails. And if it incredibly comes up heads again, most assuredly the following coin toss will be tails. Thank you Mr. Gardner for the penetrating analysis and sound advice. But I’m left wondering, if the 10% drop is inevitable and certain to be soon. Or even more dire, 20% or even 30% decline is already overdue and all but certain why should I not liquidate every investment and go 100% cash in preparation for the fire-sale shopping spree soon to present itself?
What could possibly go wrong? "
I remember reading somewhere…that if you were out of the market for just 10 days over the past 20 years, you would have given up 1/3rd of all the gains in the stock market.
If you think you can tell when to sell stocks, then give us your formula for when you will buy back in. If you are off by a day or two, you likely won’t do as well as someone who just holds good stocks. And doesn’t try to time the market.
Pick your asset allocation (bonds/CDs). Rebalance once or twice a year.
Selling stocks, or funds, ones you have had for a long time, might result in lots of federal income taxes due if held in a taxable account. You give Uncle Sam a big present.
Then, you’ll likely miss the bottom, waiting for further drop. Flip your coin…you’ll never buy back in because once you sell, you’ll be more averse to NOT buying until it is ‘on the way up’…but if you believe your coin toss, you won’t know…maybe 3 ‘ups’…followed by six ‘downs’…
Holding cash at a 1.3% interest rate (or less likely) is not a winning strategy.
You obviously believe the market is going up.
If your money is in mutual funds, the dividends and cap gains will be buying you more shares of stock as the price declines.
On the other hand, Uncle Sam needs your money, so sell!.. .Better you pay more taxes than me!..
t.
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