I have a new Apprenticed Investor column up at TheStreet.com, titled "Why Bottom Guess?"
The premise is that most individuals are poorly served by trying to catch the falling knife. Instead of bottom guessing, waiting until the downtrend is broken will better serve their interests.
Here’s an excerpt:
"One of the questions we get each correction is whether or not traders/investors should try to pick market bottoms. The background music is an orchestra of bottom callers, the vast majority of who are, shall we say, premature. Eventually someone gets it right, but I never have been convinced it wasn’t a function of random luck.
For the vast majority of Wall Street participants, however, this guessing game tends to be rather expensive. [It] is exceedingly difficult. The ideal conditions and circumstances for bottom picking are rare, and the tools necessary to do so are even rarer. Most traders and investors do not have:
* the requisite skill to identify these circumstances;
* the obligatory patience to wait for these conditions;
* or the compulsory discipline to cut losses when the trades don’t work out.
For most people, the risk/reward ratio is simply not worth the capital risk . . .
>
Source:
Don’t Just Do Something. Sit There!
Barry Ritholtz
TheStreet.com, 1/22/2008 9:41 AM EST
http://www.thestreet.com/s/dont-just-do-something-sit-there/newsanalysis/investing/10399641.html
There is a Talmudic maxim that goes:
“Shev v’al ta’aseh adif”
Translated… “Sitting, and not doing anything, is preferred”
The connotation being that actively doing something in that given situation could be more harmful, therefore, one should just stand pat to avoid error…
This is my interpretation…But the overall theme is common sense…
Great advice that hordes will not heed because it’s just not sexy enough. I always ask those in a rush to buy in times like these if they are buying because they only expect a short term bounce, or if they are buying because they expect a long term market climb and are hoping to get in at the bottom. They almost always choose the later. And then I ask, well, if it’s going to be a long term climb, then what’s the rush to buy right now aside from being a greedy SOB who’s hoping to both call which coin toss is the last *and* how it lands?
Barry,
More bottoms on the Street.com than on that TV show Jon+Kate Plus Eight.
…just a few pieces of wisdom during this “storm…”
“Those who have knowledge, don’t predict. Those who predict, don’t have knowledge.” ~ Lau-tzu
“Only in quiet waters things mirror themselves undistorted. Only in a quiet mind is adequate perception of the world.” ~ Hans Margolius
“You must learn to be still in the midst of activity and to be vibrantly alive in repose.” ~ Indira Gandhi
A cautionary tale about bottom picking…
This guy lost $40K over the weekend.
http://highprobability.blogspot.com/2008/01/31k-goodbye.html
Naturally there is a You Tube video.
http://www.youtube.com/watch?v=rCtQL5b_rCM
If you catch the very beginning of the video, apparently he went into this weekend long 10 ER2 futures contracts without hedging in options and without a plan to offset with European futures on Monday.
Oddly enough, the guy’s basic call may turn out to be correct, that there would be an oversold bounce this weekend (the bounce arriving too late to help him). If you listen to the video, his instinct was right- that the market would be down another 500 more points on Monday and that he would be driven to sell his long position right at the lows.
Page B-19 of Tuesday Jan 22, 2008(weekend edition) IBD “Investor’s Corner” has instructive chart with explainations titled “Look for follow-through day to start uptrend”. Part of a new series on understanding market cycles.For newer investors, of course…
I think it is impossible to pick a market bottom but much easier to find bottoms in individual stocks. I like to buy when prices have gotten completely irrational
I love Buffet’s saying. “Price is what you pay, value is what you get”
Some of the comsumer discretionary, retail, and financials are trading at ridiculously low valuations and multi-year lows. So I am happy to buy them right now and just wait. They are all up nicely today.
Couldn’t be more timely. After deciding to exit completely from the market this July, staying idle for this long must have done terrible things to my common sense.
I sensed a wipeout today in the order of 1,000 points drop on the Dow (and 400ish on the FTSE). Who didn’t you’ll say…
Well, I did something about it. Something really, really stupid. I was watching spreads on Dow Futures for today yesterday morning. They were around 11,800ish. I decided that if there ever was a day to profit from a crash, this is it.
So I got started in setting up a spread account with IG Index, and by the time I had arranged the money transfer, futures had dropped to 11,400.
This is the crucial point. Instead of realizing the extremity of shorting at 11,400 VS 11,800, I went for it this morning (GMT) prior to the London guys getting on their desks. Signs were still there….especially when London started selling like crazy. I thought to myself, we’re just getting started.
That period of profitability proved to be very short-lived indeed.
Fed cut came, along with that terrible spike on my screen, and then I realized I have to find the best windows to close ALL my positions.
Well, no convenient opportunity came, and I ended up 140,000EUR poorer.
I really can’t explain how greed made years of common sense track record just vanish…
Well, looks like the U.S. markets avoided what the rest of the world experienced yesterday (for now.)
Thought I’d lose more today on my gold holdings. At least the side effect of the Fed’s rate cut is helping me go green today!
Still, it’s hard to believe that we’ll avoid a “day of reckoning.”
Additionally, sit and do nothing is just prudent. It’s the “do no harm” approach.
>>>Fed cut came, along with that terrible spike on my screen, and then I realized I have to find the best windows to close ALL my positions.
Well, no convenient opportunity came, and I ended up 140,000EUR poorer.
I really can’t explain how greed made years of common sense track record just vanish…<<< I empathize. Been there before and know what it's like.
People way to willing to jump completely back in having things are “safe” perception. Meanwhile bond insurers are not reporting such good news.
The volume is low now on most stocks into the afternoon. Are there buyers?
If AAPL comes in light this afternoon the cycle will start again tommorrow.
Good morning folks,
We need to redefine the words PANIC and FEAR when applied to the markets. There was PANIC and FEAR maybe for 30 minutes, it’s gone so time to go long right? 75bps and everything is fine now, real estate prices will go up, laid off folks will find new higher paying jobs, retailers will have their stores full of customers, price of gas will be down to $2 per gallon, etc. And you guys lost faith in Bernanke huh?
The fact that the worry is all about subprime and a US led recession and yet the US market is the one holding up the most just makes me doubt this market.
Globally, that puts us at ground zero. So what gives? Is it denial? Relative strength?
Michael C do a search. I believe China started this off on Sunday. Look at articles about China real estate. Look at articles about China banks writeoffs. Look at articles about China companies missing earnings by up to half the expectations.
I believe China started the ball rolling Sunday evening.
Great column BR. Amen, brotha!
PS – Hey Suge, WTG on the rate cut call. Hope you profited one way or another on it.
PPS – Hey MS, you see ECB cutting? They look to be in trouble but are still talking “strong fundamentals” this and that (kinda like GW, lol). I still think they’ve basically tied their own hands. They might cut, but it will be too little and basically to keep within the FED rate. Prof NR is right, EU is next. What are your thoughts (MS, ED, P Davis, Suge, others)?
People also need to realize that uncle Ben has access to the forward data that’s due to come out.
I remember the OTB commercial – “Bet with your head, not over it.”
Just wanted to point out my S&P call from last Thursday when you asked us what the market would do. It’s the only time I’ve ever posted a comment here but I read all the time. Listen to the waves…..
————-
If the S&P closes lower tomorrow, it would strongly suggest a 1250 target for the S&P in short order.
AT
Posted by: Andy Tabbo | Jan 17, 2008 8:04:22 PM
————
Note that the S&P futures bottomed at 1255 locked limit down. It should have hit 1250!
John Borchers,
There isn’t much data out in the next few days, which is what BB would likely get early access to. The biggies are late next week, and it may be a bit early for those.
My guess is the only forward data BB needed to see was S&P futures.
Barry, you hit the nail on the head.
According to the Wachovia conference call this morning, homeowners that have the capacity to pay their mortgage are walking away because they have negative equity.
http://calculatedrisk.blogspot.com/2008/01/wachovia-homeowners-just-walking-away.html
How could anyone think that this is the bottom?
Currently there are roughly 5.6 million homeowners with negative equity. If home values decrease 10% in 2008, approximately 10.7 million homeowners will be underwater. HUD projects up to 2 million foreclosures.
Two million foreclosures is the “contained” forecast.
v, yes I did profit from today’s performance (so far). I have to give props to Bernanke and his gang though, to cut 75bps like that is nuts. I’m going to call this event the MOST ANTICIPATED BOTTOM in the history of the markets, now the easy part, it has to hold to be a true statement.
I say we get another 75bps tomorrow morning, why not?
Now that everything is FINE, I’m calling for Dow 16,000 and Nasdaq 4,000 by year’s end. Going long on margin all the way, loading up my portfolio with homebuilders, financials and retailers baby!!!
Hmm…US equities only down a bit over 1% at about 2:00 pm Eastern. Perhaps the US really has decoupled. Wait, wasn’t it the other way around with decoupling: The rest of the world wouldn’t catch a cold because the US sneezed? But then, that wasn’t correct–the US had a bad few sneezes, and finally Asia and Europe started sniffling. But then Asia and Europe catch the bug full tilt on a day when the US markets are closed, and the next day the US only sneezes? Decoupling in one direction perhaps? Asia and Europe can’t bring down the mighty US, even though they will fall if the US does?
Nah, I got a better answer, and a new “truth” for market analysts: Don’t short US stocks on market days following US holidays when Asian and European markets decline by over 5% due to weakness in the US economy. There, I’d say that explains things perfectly. Now, go trade your way to riches.
Good point Estragon. It looks like I did the right thing today (maybe?). I did nothing. Let the short emerging market fund ride (even though it ain’t performing anywhere near where it should be)
QQQQ down 2.47%, S&P down 1.4%, smashing the theory that tech is a safe haven. Tech is very dangerous, as all the top names have ridiculously low short interest that provides buyers of last resort. Of course, QID, Nas ultra-short is up about 30% YTD…it’s had a good three years in the first 3 weeks of the year.
Disclosure: Long QID
“I really can’t explain how greed made years of common sense track record just vanish…”
Some days you get better odds at the cas_ino. At least they don’t change the rules mid game: ‘Folks, we just added 5 more zeros to the Roulet_te’. (stupid spam filter)
“years of common sense track record just vanish…”
I think the same goes for the Fed…
John Borchers,
Me too (doing little). I bought a few IWM puts about 1/2 hour ago, but other than that I’ve been remarkably and unexpectedly inactive.
Ohh good move on IWM. Notice it’s beating most index today, rather odd. Although I did argue during this weekend that Russell 2000 was undervalued.
New bullish sectors: firearms and food
This slow steady decline is exactly what the market needs. It needs to remove all the speculative money.
What happens when you throw a stock market crash and noone comes?
We didn’t even have to use the PPT today…just throw some cheap money out there and BAM…the bond insurers pop 30%.
It’s good to be the king….
Guests don’t normally arrive on time. They trickle in and then all of a sudden the party’s bangin.
Helicopter:
Cramer said the Fed was stupid. What are you going to do to him?
As the late great Bob Murphy used to say:
Fasten your seatbelts, it’s the top of the ninth.
Dow seems to be moving in larger chunks than normal now…is there an indicator that tracks this anyone?
Let me tell you the story bout a man named Jed
A poor mountaineer barely kept his family fed
Then one day he was shootin at some food
He plugged his neighbors steer which was considered rude
Angus that is
New black gold
Texas T-Bone
Geez, what a boring day.
“If home values decrease 10% in 2008, approximately 10.7 million homeowners will be underwater”
Prices will have to fall over 25% just to revert to mean. Those above numbers can easily be doubled.
I don’t see enough volume to say this is any type of strong bottom…if volume picks up and market closes lower than here (-121 on DOW), WATCH OUT.
Gotta Love this picture of Ben..
http://www.telegraph.co.uk/
Does that look like a man in control of his own destiny???
leave it to the brits to put up a picture like that..
Ciao
MS
Looks like Larry Kudlow is going to be spared his hour tonight. Insted CNBC is rolling out a “Market Survival Guide” tonight. I wonder how long it will be until a guest says “Buy and hold for the long term and you’ll be fine.” I guess that means lots of Ben Stein tonight…
If Larry is not a central part of that show, I’d have to say his days at CNBC are numbered.
Apple earnings after the bell…expect an orgasm from on air shill Jim Goldman if they beat at all.
what say you commenter’s. okay, so we have much lower fed rates and probably even lower in 10 days.
Do the lower rates materially and positively impact consumers, leading to better econ conditions in 6-9 months and the market begins to price in that positive info???
or are the rate cuts too little too late and even with low rates banks won’t loan, consumers won’t rebound, house prices still decrease, company margins compress and earnings fall, companies lower cap-ex, less hiring, more firings, etc. and the mkt action rebound today was just short covering???
can the white house fiscal and monetary policy action revive the economy and make it all good again???
i’d love to hear comments on that. btw
Barry:
Your Marathon Man quote is best experienced first person:
http://www.youtube.com/watch?v=dG5Qk-jB0D4