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Making Your Survival Checklist


...those who are protecting capital today will be those that succeed tomorrow.


One of the hardest things to do during a time such as this is to keep your spirits high. The markets are falling apart while the media likes to report every ounce of bad news that is and ever could be floating around.

Chances are you have questioned where even your cash is sitting and contemplated just how big a garden you could build in the backyard if things got really bad. And if all that isn't bad enough, to add insult to injury, we have a hurricane coming.

Similar to when the markets pick up steam and head perpetually downward, our attitudes have a tendency to follow suit. Long passed are the days where I was excited about facing the markets.

Rather now, I am at a point where we even question if this is a vehicle that is properly suited for our hard earned dollars. I mean what does the rule of 72 say?

A CD yielding 5% would double my money in a little more than 14 years... that's not too bad. However, investors and traders can do themselves a big favor stopping the pity party and remembering a few basic but profound tenets.

1) Bear markets are nothing new. Just as we are sure that the sun will rise each morning and set each evening, markets that trend lower for months and even years is normal and healthy during economic cycles. Since the bottom in 2002, the markets have been on a continuous trend higher with little to no pause for refreshing and now are facing what could be a prolonged and deep correction. Understand that this is a normal process and rather than fight it, embrace it and act accordingly.

2) Raise some cash. Despite some negative feedback, I will continue to relay my very strong thoughts that investors who feel emotionally trapped by this volatile action should lighten up and raise cash. Forget the fear of selling at the bottom or the ridiculous media rant about always having to be in the market to participate. If nothing else selling helps to ease the mind and start you out fresh. Regardless of the market environment I often find that the periodic purging of positions helps me to refocus and removes any emotional attachments that could have been formed through my holdings.

3) Leave heroics to the superstars. Sure it would be exciting to jump into a Goldman Sachs (GS) with all your capital just as it was turning and you catch a 50 point short squeeze, but realistically this is not going to happen. The media loves to praise the stock jocks who have taken the biggest risk and occasionally nailed the biggest trade. Let them have their time in the sun and smile with them because if there is one thing I have seen in this business time and time again, it is the superhero stock jock that nails a solid trade one day is the same one going bust the next. It isn't sexy and it sure won't get you TV time, but plugging along each and every day, protecting capital during the bad times and taking advantage of the good, is the only way I have ever seen to continuously and methodically be successful in the markets over the long haul.

4) Take a break. I know that sounds silly, but stepping away from the carnage, assuming you have embraced #1, completed #2 and accepted #3, can do wonders for your emotional stamina. I have always found that stepping out during a chaotic time period for even a few minutes helps to keep all things in perspective. There is nothing like remembering just what is important and doing the old priority check, especially if you find yourself getting a bit too sucked into the action.

5) Watch for bottoming action. Bottoms are not formed in one day and a quick glance at past declines will show you that a patient investor has ample opportunity to redeploy capital once a real bottom sets in. Should you be concerned with missing a turn, simply understanding how bottoms are formed and what they look like will help to ease your mind as well as help you to start formulating a plan for when you feel a bottom is truly setting in.

6) Create your wish list and touch up the action plan. Nothing is more unfortunate than the individual who has weathered the storm with no plan on how to re-enter the game when the time is right. Training during the off-season is great, but when the time comes you better know the play book in order to step in and shine.

When the bottom sets in, will you look to redeploy into fallen American favorites such as Coca Cola (KO) or McDonald's (MCD), or are you one who desires to try and nab some value through the financial fray, picking up a few shares of Bank of America (BAC) or Citigroup (C)?

I for one am more prone to seek out the growth stocks that have been the baby in the bath water and unfortunate victims of a selloff. Stocks that have no real tie to any of the issues facing the current downturn but rather are simply being sold because they are owned by those who want out. So far at the top of my lists stocks like Anadigics (ANAD), Cal-Maine Foods (CALM), Falconstor Software (FALC) and O2Micro International (OIIM) grace my post-carnage wish list. Once you have developed your list, set a solid plan for how you will deploy your protected capital. Since calling a bottom is in my opinion pointless, why not wait to see at least a new uptrend start in some of your favorites? This can easily be seen by watching closely for a series of higher lows and higher highs, rather than the current theme of just the opposite. Develop a plan and stick with it.

As we continue down this windy road of uncertainty, like many I too believe this will eventually lead to some fantastic opportunities, but I humble myself to admit that I have no idea, nor do I care to guess, just when this will take place.

What I do know, though, is that those who are protecting capital today will be those that succeed tomorrow. It is easy to let all this terrible market action get you down, but resolve to follow these few simple steps that will keep you productive and set into place a plan that will allow you to not only protect yourself but to succeed in the future.

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