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whiteheron
05-09-2007, 11:07 AM
Now seems to be a good time to reflect on the recent market correction in particular what, if anything , we learnt from it

After considerable reflection and self evaluation I have come up with two factors which led to me giving up considerable past gains and prevented me taking advantage of opportunities that presented themselves

FIRSTLY , I was aware that the market had shown significant gains over a period of time and that at some stage it would be due for some sort of correction, big or small
One thing that caught me out (and I was in good company here) was the enormous impact that the US sub prime mortgage crisis would have on world markets

Two or three years ago I was a firm advocate of using "stop losses", however, after having experienced several painful "stop loss" stop outs I must admit that I went off using them somewhat, especially on long term holds as I believed (and still do) that my long term holds are quality stocks

When the market downturn came it struck quickly, share prices dropping sharply all over the place --- and the price drops were non discriminatory applying to good and bad stocks alike
Consequently a reasonably large portion of my previous unrealised profits evaporated with the market correction over which I had no control
These are now being recovered but I could have done much better if I had religiously used "stop losses " (or "profit protection" orders as I prefer to refer to them)
Had I had "stop loss" orders in place I would have been stopped out on most stocks but would have been able to buy back later at significantly reduced prices, assuming I could have got back in near the bottom and this would have required some skill

The ability to take advantage of the price downtrend would have by far outweighed the brokerage involved and potentially I could have been much better off overall

Maybe this all sounds too simple in retrospect
I realise that executing this strategy may be rather more difficult than it seems in concept

SECONDLY, I found myself virtually fully invested when a degree of liquidity would have allowed me to take advantage of purchasing real quality stocks at bargain prices

I am trying to overcome this but as I only have limited capital and need to live as well it is not proving too easy
I do use margin borrowing to a degree but as I am retired I do not wish to get in too deep
If only I had ten times the amount of funds that I have, but then this could turn out to be a never ending wish

That is my storey, you may like to comment thereon or on what your experience has been

Taking some time occasionally to reflect on matters I believe is good for the soul

Mick100
05-09-2007, 12:18 PM
I'm not convinced that this correction is over WH
We could be in the eye of the storm at the moment

It's always easy to look back and see how we could/should have managed things differently. How would you know where to set your stops? How would you know when to start buying back in? It's all very well to look back at the charts and say to yourself; if only I had sold there and bought back in here.
It's not so easy to do in the heat of the moment.

I did manage to buy some shares on black thursday, but my order was only partially filled and I didn't feel that I should chase those share at the time - I would have had to pay an extra 2-3 c for them. Those shares have more than doubled in price since. So we all have regrets about how we managed things. I also bought some shares on the wednesday of that week - had I waited until the next day I could have got the same shares 20% cheaper.

Overall I'm happy with the way I'v handled things so far
I managed to sell a few shares 3-4 days into the correction into a rising market and I managed to buy a few on black thursday
I'v never bothered with stop losses and i don't plan on using them in the future. The only correction that has caught me offgard in recent yrs is the one that took place in feb this yr - I wasn't expecting that pullback.
,

Ricardo
05-09-2007, 01:42 PM
What I learnt (and should really have known) is that in a downturn nothing is immune.
I sold all my US holdings and a couple of Aussie ones just prior to going off across the ditch for 3 weeks of warm weather. I kept my nickel and uranium stocks without thinking too deeply, but with a view that Aussie and its resource stocks were essentially booming.

The first 2 days of my holiday were at a traders expo in Brisbane. One of the presenters had a live market feed to his laptop, and was showing graphs on the big screen projector. (This was Saturday morning Australian time as the US had finished off its initial plummet)
He clicked on some US charts to show the carnage. Some oohs and aahs from those who hadn't seen the breakfast news.
I was quietly patting myself on the back for selling my US. Quietly confident my Aussie holdings would have held up, I didn't even look at a share table for over a week.
When I finally did it was not a great feeling seeing what I thought would be solid had dropped round 50% overall.

What it has done has made me revisit my business plan. I had a section for action prior to holiday, but didn't follow it. I've rewritten it, and also stuck in some rules for liquidity as I have been hit before holding illiquid stocks.

I think stop losses (trailing) is the way to go, because just selling everything could be just as painful if there was a sustained rally just after selling up for a stress free holiday.

The key thing is when you make a mistake, learn from it and do something so it never happens again.

whiteheron
06-09-2007, 09:12 AM
Thanks Mick and Ricardo for your useful comments which I have taken on board

The object of reflecting back, particularly on mistakes made is to make us better investors/traders
I hope that others have taken some time to reflect what they have or could have learnt as well

The learning process is or should be never ending

Stranger_Danger
06-09-2007, 09:48 AM
I'm semi happy with how I handled the situation.

I have spent the last 2 years slowly selling stocks which I considered at risk, mainly financials. Was completely out of mining, financials etc - most of the shares I held on the day I was more than happy with, and most are trading roughly where they were.

I went in roughly 65% in cash, a good chunk of it not NZD.

My big regret is roughly a week before the fun started I came extremely close to making a huge bet on the yen, and didn't.

Can't win them all I suppose :(

Phaedrus
06-09-2007, 11:29 AM
You are quite right, Whiteheron, corrections like this do provide learning opportunities. Unfortunately it is only too easy to learn the "wrong" things.

You could have set too tight a stop-loss on a volatile stock. It could have been triggered by transient weakness, you sold, and the stock then continued on upwards. From this you could "learn" that "stoplosses don't work" and vow never to use them again.

You could have observed sound stocks falling as much or more than unsound stocks and "learnt" that fundamentals don't matter and should be ignored.

Stranger Danger has "learnt" that it pays to "bet large" when faced with increased market volatility.

You could have "learnt" that corrections mean nothing and should be ignored. Say the market dropped 10% and then over the next few months it climbed back to where it was. "Buy and Hold" advocates would see this as vindication of their "conservative" approach and proof that they were right to do nothing. That is not my view. Significant corrections generally mean something and when they begin, we have no way of knowing just how far they will go. If your mindset is such that you are determined to "ride out" smaller corrections, you have pretty much programmed yourself to ride out big ones as well. No matter how far the market drops, you are going with it all the way. To me, this presents an unacceptably high risk. The worst aspect though, is that when the market does stop falling and starts rising again, you have no money with which to take advantage of the depressed share prices. (For most of us here, there can be little or no buying without first selling.) Selling accomplishes two things. Firstly it protects your capital from the risk of an on-going correction. Secondly it frees cash so that you will be well positioned to avail yourself of the buying opportunities that will eventually present themselves. The only significant risk is that of buying too soon.

Without prior selling and a clear exit strategy, you are in no position to gain from market corrections - whatever you do, whatever your system.
A sound selling strategy should pretty much look after itself at times like this. In my case, as a trend-follower, any stocks I held that weakened were quickly identified and sold. Some people seem to think this would automatically result in a mass panic sell-out. Not so. For example stocks such as FBU, POT, TPW, etc still have unbroken uptrends and I continued to hold them throughout this correction. Others such as AIR, RYM, GPG, KFL and many others gave clear trend-based exit signals and some are now starting to present buying opportunities. Some stocks dropped over 30%. To "tough out" drops of that magnitude is not brave, staunch, conservative, sensible or profitable.

I am interested in why you (and others) think that trailing stops are the way to go. They are certainly better than nothing, but do not perform anywhere near as well as most any trend-based indicator. I accept that the use of trendlines may not suit everyone, but moving averages can make a nice compromise between the two - quite apart from the many other trend indicators that are available.

Stranger_Danger
06-09-2007, 01:23 PM
Re "Stranger Danger has "learnt" that it pays to "bet large" when faced with increased market volatility."

Nah, definitely not. Risk being repriced was a when, not an if, in my book. The time to "bet large" was *before* the volatility. Thats why I was slightly miffed to not have been positioned quite as I should have been.

I have a clear exit strategy for every stock I own, although I'm quite sure it won't appeal to you. Every week or so I ask myself "do I want to own a part of this company now?" and then I think about the question and answer it.

(horrified Phaedrus?)

Ricardo
06-09-2007, 03:42 PM
Phaedrus
Absolutely agree a proper exit strategy is vital, and my normal exit is when I get a sell signal. To use a trailing stop as an exit is for me a safety device for periods when I can't watch the market. If we're in an uptrend my stop will follow it up, and if Ive set it correctly, when I get back to my screen I am likely still in the position. I am looking at periods of 2 to 3 weeks only here.
As all charts are based on the same O H L C V data it could be argued that your trend based exit signal is just a sophisticated form of trailing stop. You are following the trend up and exiting when it reverses. The only difference is you have more confidence it is a true reversal than if the stock has just dropped x%.

TimeIsMoney
08-09-2007, 09:53 PM
Some people have described to me a method similar to dollar cost averaging to combat with falling markets. When you see deteriorating conditions, you sell all holdings early taking some losses in gains and buy back at clearer uptrends for a lower price.

The buy back can be done in phases, not all at once. So you can buy 1/3 of the stock and then another third etc. This means if you're wrong about the uptrend you're still not fully exposed, and you do dollar cost averaging at a small scale. But brokerage does bit in, but you do pick up a gap which should more than cover it.

Never tried this, since I am new and wasn't in the market on black Thursday.

fihr
09-09-2007, 08:52 PM
Phaedrus, thank you for your post - your use of longer term moving averages for exit signals really does make sense to me. I used to be a pure buy and hold investor, and would enter and exit based mainly on fundamental analysis. Actually, it stood me in very good stead over the long term, particularly using good financial risk analysis software, plus low PEGs combined with favorable medium to long term outlook in the sector and the share. Although I have sold when future fundamentals no longer met my criteria, sometimes I've really missed the boat when it came to selling, particularly when I didn't see a fundamental change and couldn't understand why the share price was falling. It sounds obvious, but I needed to learn the hard way, and am still learning. I've never liked stop losses because I have a high tolerance for volatility in a fundamentally good share, but the long term moving average indicators really appeal. I'm using shorter term ones now for option writing and trading, and will add the longer term ones to the buy and hold portfolio.

ratkin
11-09-2007, 05:20 AM
I learnt to trust my instinct. As black thursday developed it had all the makings of capitulation , i took a calculated risk that certain stocks had fallen too far and were unaffected in real terms by the crisis. MTS (4.30) winz (1.33) MCU .90c. Winz being a currency play

Part of the reason stocks fell so far was lemmings all trying to exit asap as one by one their stop losses were triggered. This provided great opportunities for thise prepared to use their own instincts rather than being tied to some mechanical system.

Stop losses are ok but when everyone uses them they are open to manipulation and also increase volatility as they fall like dominos.


Maybe your one problem was being 100% invested in the first place.
Seems your main complaint is you had no cash left to pick up the bargains , i think the answer wasnt to sell stocks , it was to have more cash !!

Phaedrus
01-02-2008, 10:34 AM
Whiteheron began this excellent thread last September with a view to discussing what we had learnt from the previous market correction. My comment was "Unfortunately it is only too easy to learn the "wrong" things." I believe that in some cases, that is exactly what has happened.

From the recent correction........

Whiteheron learnt that having a mechanical exit strategy is important and that it is good to build up a significant level of liquidity at such times. He would have been much better prepared for the next correction.

Mick100 was unsure that the correction was over (dead right there!) and was both buying and selling, so we don't really know how well this approach panned out for him.

Ricardo learnt a lot - but it was all stuff he already knew. He already had a sound, very comprehensive trading plan. What he learnt was the importance of following it!

Stranger Danger appears to have a sound system in place but regretted not "making a huge bet". I presume that the Yen trade he considered would have been very profitable so he has probably learnt that at times of market corrections it pays to bet up large. A very dangerous lesson!

KW has a sound, proven system that has served him well and will continue to do so. Nevertheless, like so many of us, he does ignore his own rules sometimes. This correction taught him (yet again) to keep to his rules.

SectorSurfa "learnt" that the best course of action was to "buy in panic, the best stocks with the best forward potential (LOW PEGs) eg BPT, ADY, PSA, PEM" I presume that SS didn't actually purchase any of these stocks, but lets look at what would have happened if he had bought them that very day. BPT down 1%. ADY down 35%. PSA down 12%. PEM down 57%. Clearly, SS learnt the wrong thing from the September correction.

Fihr realised that his solely FA based longterm "buy and hold" approach had an Achilles heel and learnt the need to supplement this with a little basic TA - in his case, moving averages. This "composite" approach is used by many people and should serve him well.

Ratkin learnt to trust his instinct, buying "stocks that had fallen too far and were unaffected in real terms by the crisis". He saw such corrections as "great opportunities for those prepared to use their own instincts rather than being tied to some mechanical system." Lets see how well this has worked out for him to date. MTS down 4%. WIN down 7%. MCU down 8%. To me the lesson here is not to trust your instinct.

Stranger_Danger
01-02-2008, 11:02 AM
Phaedrus - you have neglected to tell us anything you have learnt?

I am generally happy with how I have handled the market correction. The causes of the correction were visible in advance to anyone who was watching, and I spent 12 months beforehand cleansing my portfolio, primarily of previously profitable financial sector holdings.


I went into the most recent correction 70%-75% cash. Ugh! Sure, *hindsight* says it would have been nice to have been 100% cashed out, but the risk of that is you never buy another share again. Frankly, 70%-75% cash is a bad enough feeling for me, but I have had a growing sense of caution, as I suspect you have.

I respect your contribution to the forum and enjoy your rationality - your approach clearly works for you, and you stick to it tenaciously.

Telling others how to suck eggs on a regular basis grows old, however.

Phaedrus
01-02-2008, 12:18 PM
I learnt, yet again, the importance of keeping to your system. My system copes pretty well with market corrections - all I have to do is keep to it.

Case in point :- I bought FPH because it looked like a bargain and was giving Buy signals at a time when the market was in a "Caution" zone and my overall system prohibited buying.

Placebo noticed the incongruity and asked if this set up a conflict for me.
My reply :- "Sure does. My rule is to pass up these opportunities until the overall market shows signs of improvement. Occasionally I do break this and other rules. Generally this is followed sooner or later by regret, and a vow never to do it again".
Sure enough, yet again I has cause to regret straying from my plan and sold out of FPH at a loss.

AMR
01-02-2008, 12:45 PM
I've learnt several things:

1. Even a significantly undervalued company with excellent prospects (i.e NZO) can get hit.

2. Don't fall in love with a company and ignore the sell signals.

duncan macgregor
01-02-2008, 01:09 PM
I know and if only i would stick to it is sell at my pre determined stop losses, and only buy on my clearly determined buy signals. Did great up to knowing best buying PEM in a downtrend. Still i missed most of it of late with very few buy signals and stopped out early with my others. I might have done better if i had not been so stuborn. Macdunk

Kookaburra
02-02-2008, 05:22 PM
I learned that the indications of trouble occurred well ahead of the market response to this. It meant that I sold out a little too soon and profit was lost compared to what it would have been had I just used stop losses. However I expected a very rapid collapse when it would happen. Interesting though, the correction has already taken prices down to where I sold out and I believe they have further to fall.

lakedaemonian
03-02-2008, 03:58 PM
I learned that although I was right about the potential for a significant market downturn, that my timing probably has as much(and possibly more) to do with luck than anything.

I sold off everything(mostly US/Canadian/Chinese based equities listed in US) with the exception of NZR and my freebie NZOOD options quite some time ago.

I have no plans on re-entering the equities market anytime soon.

Although there are several equities I'm keeping a close eye on(Canadian Oil & Gas Royalty Trusts, Ebay, and USEC on downturns).

I always keep in mind the case of Microsoft...going public right in the middle of the 87 storm. I'm sure their are future Microsoft needles in the haystack right now but I'm happy to let otheres find them first. I'm not happy with the risk/reward proposition offered right now in equities.

I think we are looking at an equity bear market for the foreseeable future.

Other than that my focus continues to be further accumulation of commodities(precious metals, agriculture, energy) and researching a future shift away from Kiwi cash into foreign currency as the Kiwi peaks.

Commodities don't suffer from management incompetence, collective worker action against the company, or shareholder lawsuits.

I think inflation and competitive devaluation of currencies will continue and possibly accelerate.

I'm I'm wrong I'll try and learn the most I can from it...if I'm right I'll get a bit more paranoid I suppose ;)

Steve
03-02-2008, 07:38 PM
I remembered what I learnt from the first market correction that I was invested in... :)

duncan macgregor
08-02-2008, 12:47 PM
Now that the market is downtrending across the board its time to take our learning experiences to save us from our impulsive selves. Its hard to sit on the sidelines twiddleing our thumbs after a year of extreme over the top results.
What the next sector to buy into when this market levels off is what i look for. Retail is out, exporters are out before the dollar drops. Farmers not only have a drought on their hands, but a high dollar making farm service companies out.
The only thing in my sights on the NZX is probabely LPC, and POT in the port sector when buy signals front up. TPW and CEN in the power generation sector. I think VCT the lines company if they sort out boardroom squabbles, and probabely FBU when it comes back from being oversold. Money in the bank earning a pittance is a nice feeling watching the investors go down that have no sell strategy knowing that when you come back, it will be at a much lower level. Macdunk

whiteheron
08-02-2008, 01:45 PM
macdunk

Because the next few months (at least) are likely to be volatile I have sold off part of a long term hold that I was considerably overweight in to free up some funds to have a bit of fun with trading short term

Time will tell whether or not this has been a good strategy --- maybe yes, maybe no,
but I have this insatiable urge to have another dab at trading, something I have not been doing much of recently
The share that I sold down (QGC) has been by far my best holding but was making up too large a percentage of my total portfolio, has just had a significant price increase against market trends, and I still have plenty left so I consider that what I am doing makes sence

Heres hoping --- there seems to be the occasional snip buy out there that I would like to tap into, although riskier than just sticking with QGC which must be a real winner long term

soulman
08-02-2008, 06:58 PM
TWD - picked up at $2.56 in Jan, 3.1% yield for the interim dividend alone (anticipated 8%+ full year), now $2.70, just announced a 20% increase in profits and expectation of an 8th consecutive record full year profit, current P/E of 10.

Now what idiot would have sold this just because the market has dipped? And why would you not have bought it just because the market is in a panic?

There are so many of these little gems lying around out there right now.

You don't have a problem with TWD liquidity? TWD is in the housing market. They yield just as much as PPC and DVN. I would rather buy those coy than TWD because of TWD illiquid shares.

Good things about TWD - debt free. Share price was down due to inflation and interest rate rise. Not good for home builder as many people might stay off building new houses.

Hoop
09-02-2008, 08:43 PM
What I learnt from the last bear market (2001 - 2003) was that it is a good time to buy. It will enable you to outperform the market over the next few years. That buying companies with solid fundamentals and consistent financial performance that are cheap as a result of market corrections will reward you in the long run. That selling into a market driven by fear and uncertainty will only mean that you will pay twice as much to buy back in when the market reverts back to hope and greed.

I remember those lessons well :-)

KW it depends on which stock exchange you were dealing in.

The NZX index (different to the one we use now) was bearish because of one stock... Telecom...It is heavily weighted in any NZ index because of it's size and hence has a great influence. In 2000-2003 it was the bursting of the dot com bubble and most NZ shares were not affected and their trend lines were all pointing North. e,g look at FBU chart.

This time (2008) it is different, nearly all the shares are affected, so, unless you have a good bear market investing strategy in place, there is nowhere in this market where you can run and hide from this Bear.

ratkin
10-02-2008, 07:38 AM
I learned that when the markets are down

1) people forget about the long term and worry too much about prices and not enough about quality of investments

2) Certain forumites will come out of the woodwork to tell everyone where they went wrong , and trawl through old posts looking for sticks to beat people with

As an example Phaedrus appears when the market is down to remind me that three stocks i bought at the august lows had declined in price.
Why didnt he point this out a few months ago when they had all risen above their august lows?

All three of the stocks i bought are long term buys and im very happy with them. MCU has risen 20% in the last week or so. They announced a share buyback and a strong result to follow.
MTS are also going along nicely , both those stocks have also paid a nice dividend since august.
WINZ i bought as a currency play and are down from 1.32 to 1.24 hardly a disaster and im sure they will rise when the dollar eventually falls.

To give Mr P more ammunition i would also point out that during the january lows i bought more MCU , BXB , RHC and MFF and am more than happy to buy when the stocks are on sale.

If they are all down in twenty years time then i might admit i made a mistake , however at this stage am more than happy with them all.

Phaedrus
11-02-2008, 09:58 AM
What you are practicing here Ratkin is called 'creative avoidance'. You are tightly focussed on trying to pick up a few shares of "bargain" stocks while choosing to ignore the fact that any small gains made by doing this are eclipsed by the losses your longterm portfolio has incurred.

Ratkin, you and I have deep and fundamental differences in our approach to investing. You believe in "time in the market rather than timing the market" whereas I maintain that you can time the market and devote a lot of effort to that end. You say (23/1/08) that the current market correction is a just "a storm in a teacup". I say it is the most significant event in the history of the NZSX50 Index. To you, therefore, it is business as usual with little or no selling and you are investing new money all the way down. To me it is a time for selling, not buying. (I began selling down in early November and by the end of November had moved to 100% cash).

There are quite a number of knowledgable, experienced and competent investors that post here on ST, Ratkin. They include the likes of Halebop, Winner69, KW, Placebo, Warthog and many others. You can learn a lot from such people. Many of these saw fit to take a significant proportion of their money off the table when the markets weakened. You described such prudent action as that of "nervous ninnys".

Quite a lot of water has flowed under the bridge since then and we can perhaps begin to assess the financial effects of these 2 very different approaches. In an attempt to remove personalities from the discussion, I will compare 2 notional characters, each with a portfolio of say, $600K worth of assorted NZ stocks (as at the end of November), and each saving, say, $1000/week from their regular employment. For the purposes of this simple comparison, we will assume the portfolios track the NZSX50 Index. "A" will do no selling, only buying. "B" will do no buying, only selling.

Let's pretend that "A" has resisted all previous "bargains" and has done no buying at all in the previous 6 months. Furthermore, let's assume that they were lucky enough to have invested their accrued $25,000 at the absolute bottom of the market on 22/1/08. Their Nov 30 $600,000 portfolio is now worth $533,000 and the $25,000 invested at the January low is now worth $25,050. "A" has saved a further $3000 since then, so their total net worth is now $561,050.

"B" cashed up at the end of November for $600,000 (less brokerage) and has saved the same $28,000 so now has $626,800. He is invulnerable to any further market deterioration and when the market turnaround comes he is superbly positioned to take maximum advantage of it, whereas "A" is fully exposed to any further market weakness, and has only his regular savings to invest when the market does turn. It will take another $1200 brokerage to get "B" back into the market, so subtracting that, we can see that "A's" reluctance to sell has, at this point, cost him $64,550.

To me, the conclusion to be drawn from this is inescapable :-

When significant market corrections occur,

SELLING IS MORE IMPORTANT THAN BUYING.

Mick100
11-02-2008, 11:13 AM
I know I'v said this before but I'll repeat it for those people who still don't get it! Most of the contributors to this forum have a very short investment horizon and they, correctlly, sell their shares at the first sign of a trouble in the markets - they are concerned with the prospects of their shares over the next 3-6 months (currently those prospects don't look too good)

On the other hand you have those investors such as ratkin, snoopy and myself who have a much longer investment horizon. Rather than 3-6 months, mine is closer to 3-6 years, so what happens over the next 3-6 months is of no great concern to me as long as I can survive

To sum up: if your investment horizon is less than 12 months you are right to be getting out of the markets at the moment but if your investment horizon is greater than 12 months then you are right to be picking up the bargains at the moment.
/

ratkin
11-02-2008, 12:35 PM
Six months ago autralia was in the middle of a massive drought, some commentators were going as far as saying agriculture was finished due to global warming , the world was caving in.

I was buying agricultural stocks at that time.

Now it raining and everyone wants to own agricultural stocks


The housing crisis / recession will be no different.

Just the usual overreactions that always occur in such times