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Jeff Saut: Survival Is the Name of This Game


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I had so many requests to write up last Tuesday's verbal strategy comments that I decided to do so this morning.

I'd like to begin this morning's comments with a quote from author, stock market historian, analyst and portfolio manager, the brilliant Peter Bernstein:

"After 28 years at this post and 22 years before this in money management, I can sum up whatever wisdom I have accumulated this way: The trick is not to be the hottest stock-picker, the winning forecaster, or the developer of the neatest model; such victories are transient.

"The trick is to survive. Performing that trick requires a strong stomach for being wrong, because we are all going to be wrong more often than we expect. The future is not ours to know. But it helps to know that being wrong is inevitable and normal, not some terrible tragedy, not some awful failing in reasoning, not even bad luck in most instances.

"Being wrong comes with the franchise of an activity whose outcome depends on an unknown future (maybe the real trick is persuading clients of that inexorable truth). Look around at the long-term survivors at this business and think of the much larger number of colorful characters who were once in the headlines, but who have since disappeared from the scene."

Clearly my firm was wrong in thinking the lows for the year were "in" back in mid-September. That belief was driven by the sense that our elected leaders would rise to the level of statesmen and pass the original "rescue plan." Silly us - we should have known better, having lived inside the Beltway.

Since that ill-fated Monday (9/29/08), my firm's strategy has been one of survival. "Survival" is the right word: In markets like these, the main thing is to survive. Indeed, participants should remember that it's the second mouse that gets the cheese, since the first often gets caught in the trap; or, as Charles Dow lamented, "The successful investor has to be able to let 2 out of every 3 potential money-making opportunities pass them by." Those investors/traders that have attempted to pick the "bottom" since September 29th have for the most part lost money. Which made me remember Saut's rule number 4: 99% of the time, when the best bargains came, I'd already spent my cash.

This rule was formulated when I began buying banks/thrifts in January of 1982. By May of that year, I was out of money when the real giveaway prices presented themselves in June, July and August.

With this rule in mind, my firm has been telling accounts to be the second "mouse" and conserve cash until we're more convinced of a market bottom; if we don't bottom soon, we're likely to be in "crash mode." Clearly the setup appears right for a bottom: Our proprietary oversold indicator is almost as oversold as it was at the 1974 stock market low, the Volatility Index (VIX) is at fear levels not seen since the 1987 crash, our downside day-count sequence is long in the tooth at session 29 (selling stampedes rarely go more than 30 sessions), and the coupe de grâce - the "Screamer" telling investors to sell everything last week.
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No positions in stocks mentioned.
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