Profiting from the Slide
By Quint Tatro Oct 07, 2008 10:05 am
Decline doesn't have to mean your downfall.
A few weeks ago, I wrote a piece about profiting from the coming energy slide. I profiled energy companies such as Transocean (RIG), Select Sector Energy ETF (XLE) and Exxon-Mobil (XOM). You would think I wrote a piece bashing Apple, given the negative commentary I received in general, telling me once again that most refuse to accept what a bear market really means.
In 2000, when I officially entered the ranks of professional money management, I had an interesting edge. While most would think that 2000 would be the worst time ever to enter the business, I had just come from a failed technology startup and had an intimate knowledge of the market as it was. I couldn't apply fundamental, technical or even behavioral analysis to my thinking, but I was quite sure the house of cards was coming down and coming down hard.
My pitch for anyone that would listen was simple: Get out and get out now. Some would call it luck; I call it my understanding of pro-forma earnings and basic math. There was absolutely no way companies would even come close to the expectations the market was building in. There weren't many, but those who listened became the building blocks of my rapidly growing fee-based advising business.
Here we are, 8 years later, and once again I find myself lucky enough to have an edge - I know when it's time to get the heck out of Dodge. While I do understand the fundamental and economic backdrop, my current caution comes directly from an intimate knowledge of technical analysis - the visual representation of human emotion, laid out in graphic form.
This time, however, not only am I seeking to capitalize on the current trend -- which is down -- I'm also once again on the offensive for all who will listen about the current reality.
It's a Bear Market. Understand It, Embrace It
Whatever your metric, the first thing all investors must understand and accept is that the market is in a longer term downtrend. It will end at some point, and along the way there will be strong countertrend moves, but ultimately the wind is blowing south. Accepting it is half the battle.
Fire The Optimistic Advisor
I have always considered myself to be an optimist, but, at the end of the day, I fall firmly into the realist camp when it comes to trading and investing. This is your future, not a lottery ticket. Maybe the tough decision is in taking action to can not just a few lagging stocks, but your lagging advisor as well.
It Will End in Hindsight
Seasoned investors have no desire to catch bottoms; most will choose to miss the beginning of a new trend higher. They chose this path for its safety and certainty. It's much better to be late than wrong, and opportunity costs are made up much easier than losses. Stop being concerned with catching a turn, averaging in, or buying low. That's a fool's game, and should be avoided at all costs. Rather than trying to pick a bottom, take the time to study what bottoms look like. Formulate a game plan based on historical data, so that you know how to proceed when the rough times are over.
No, It's Not a Bargain
Investors are learning, and will continue to learn, that trends can last much longer than seems reasonable and stocks can fall much farther than one would expect. Many may be tempted to pick up a General Motors at all-time lows or a Corning under $20, but in reality, these stocks are trading at these levels for a reason. Rarely, if ever, will you outsmart the market. Just when you think a stock can't fall any further, you wake up to see a solid blue chip like Eli Lilly dropping another buck. Avoid the siren call of bargain stocks. When the market regains its health, there will be ample opportunity.
The one thing different about this decline is that never before has the average investor, or investor advisor, had tools at his exposure to profit from it. Despite the over 1,000 stocks currently banned from shorting, there remain a host of vehicles available to hedge or even profit from further declines. A few of my favorites include the ProShares Russell 2000 Ultra Short (TWM) or the ProShares NASDAQ 100 Ultra Short (QQQQ). These are leveraged; however, there are many that aren't as volatile, but still provide exposure and potential profit as stocks slide.
No positions in stocks mentioned.
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