Bear market lessons

[AMR]

Where is the excellent thread on "lessons from the crash" that was floating around here last time?

If we can't find it, does anyone have tidbits to share?

[AMR]

Ok, I will kick this off.

Lesson 1 - Follow a backtested and defintive system rather than simply applying a "does it feel like a real buy signal" type filter onto entries. Personally, I had 8-9 stocks giving off proper buy signals that I did not get into because "the market felt like it was overbought."

[Footsie]

1) dont buy stocks that have a lot of debt
2) dont buy stocks whose business model is to acquire lots of companies
3) when the market crashes, wait a few months for the dust to settle then buy up all the cheap +ve cashflow, no debt small caps....then wait for them to double or triple in 12 months.
4) when everyone is in cash, you should be in the market. When everyone is in the market... you should be looking for the nearest exit

[STRAT]

Ignore all the talk of doom along with all the BS of Blue Sky.
Dont allow the talking heads to create emotional responses in you
Trust your charts.
Use the charts for a Macro perspective
There is no Bear and only Bull **** :D

[dartMonkey]

I started investing/trading/throwing money away in August '07 so I think this thread is particularly apt for me. The lessons: -
if it goes down 10 % sell
if it goes down 20 % definitely sell
if it goes down 50 % don't buy more
if it goes down 80 % and you sell don't tell your Mrs

[Dr_Who]

When your local dairy owner and the cab driver starts talking about how much money they have made on the stockmarket and starts giving you investment advice... SELL our portfolio and short the index.

[axion]

When your local dairy owner and the cab driver starts talking about how much money they have made on the stockmarket and starts giving you investment advice... SELL our portfolio and short the index.

I think that needs to be adjusted a bit. It's not necessary a time to sell your portfolio -- the market could still have plenty of legs in it when every man and his dog are talking about it... and your investment decisions should be based on your own strategy* -- but you should make sure you don't get dragged into the hype of everyone talking about how glorious and how much money they have made in the stock market, and continue thinking critically about your investments and when to buy and when to sell.



* Of course your strategy might have a clause saying "sell when everyone is talking about the awesomeness of the stock market".

[wbosher]

I started investing/trading/throwing money away in August '07 so I think this thread is particularly apt for me. The lessons: -
if it goes down 10 % sell
if it goes down 20 % definitely sell
if it goes down 50 % don't buy more
if it goes down 80 % and you sell don't tell your Mrs

I'll keep that last one in mind. ;)

[Footsie]

agreed axion

I remember a corporate workshop I went to in 2006 (in Sydney) and the aussie guys all boasting about how much money they had made and that everyone should invest every spare penny in the stock market.

market ran for a further 14 months i think from that date before topping out.

[TTrader]

When your local dairy owner and the cab driver starts talking about how much money they have made on the stockmarket and starts giving you investment advice... SELL our portfolio and short the index.

This one goes back to the last market crash... Once you hear the taxi drivers talking stocks you know it's time to get out!

[ratkin]

Im a buy and hold person. Only core holding i sold has been Brambles mainly because im concerned about plastic pallets and lack of diversity in the company.

This bear taught me that buy and hold is sound even with this big bad bear as long as you select rock solid stocks which dont have debt problems.

Key is not to be spooked into selling your quality stocks just because their prices have fallen. Rather its an opportunity to add to the quality at cheap prices

[Hoop]

Bear Market Lesson No 1

When there is only Bullsh1t left in the paddock you know the Bulls have been and gone.

[Phaedrus]

Play the 'Devil's Advocate' and look at what you would need to do to maximise your losses in a Bear market :-
(1) STAY IN THE MARKET (Sell nothing).
(2) KEEP BUYING (Business as usual).

To minimise the impact of a Bear market, you need to do the opposite :-
(1) GET OUT (Sell everything)
(2) STAY OUT (No buying)

The Lesson?
ACCEPT THE FACT THAT YOU CAN'T FIGHT THE BEAR!

[Lizard]

To minimise the impact of a Bear market, you need to do the opposite :-
(1) GET OUT (Sell everything)
(2) STAY OUT (No buying)

The Lesson?
ACCEPT THE FACT THAT YOU CAN'T FIGHT THE BEAR!

Back in 2004, I took a very close look at the NZ sharemarket from 1987-1991 and came to much the same conclusion as above. It certainly made me fear the market more and place less trust in my own abilities to save me! Knowing this, it is interesting to observe my own mistakes during this bear.

The first trap is that I had failed to appreciate how dependent our family had become on my sharemarket earnings for income. I also discovered that my "plan B" (diversified into other types of income producing investments) was not very robust, with parallel meltdowns in bonds, finance companies and (eventually) term deposit yields! Furthermore, there were obvious times when I should have sold investments but could not bring myself to stomach the large spreads and lack of liquidity. Top it off with becoming "too busy" because I'd resorted to working part time for that extra income and the "ostrich approach" took hold for a large chunk of my investments.

Now filling in my tax return, it is interesting to look at the results - the FIF results make interesting reading...

Shares bought during the year and held at 31 Mar 09 - up 26%
Shares held at start of year and sold during year - down 0.1%
Quick sales - up 12.3%
Shares held from start to finish - down 43%

Going back to Phaedrus' "Get Out, Stay Out" message, I'd probably want to do the former (and I need to think about how to make sure that happens next time!), but I wouldn't place quite so much emphasis on the "Stay Out", as many of the purchases were surprisingly successful.

[Halebop]

...The first trap is that I had failed to appreciate how dependent our family had become on my sharemarket earnings for income...

Liz, this is a good problem to have, albeit still a challenge in a low return envuironment. Having that capital in the first place means choices - including the choice to spend some of it...

Anyhoo, during this correction I took time off. Certainly hurt my returns as money in the bank hasn't been that flash but my results have remained positive even if it was the worst results since my investing career began. Not sure I learned anything from that but enjoyed doing not much for a while!

Have not benefitted from the sharp sharemarket recovery as have not yet ramped up my equity exposure. Personally I think we have another correction to come. The Baby Boomers aren't yet past it though so another bull leg is possible, am just not betting my money on it at this point. So my lesson may yet to be learned - that I missed the early, "fast money" part of cycle.

In terms of the cycle just passed, it's all happened before and will all happen again. One of the clearest indicators to me was the casual disregard for risk exhibited by professionals and small investors alike. By the end of the cycle many had convinced themselves that cycles didn't exist at all.

[pedro.nz]

It's interesting in that there is a perception that the Baby Boomers are going to have a big impact on the investment scene in the near to medium future.
I would have thought that the baby boomers, who, having spent a lifetime growing their nest eggs are not very likely to blow it all at once and will continue to invest in equities, especially if inflation takes off.
Is it the fact that there will be less "New money" being invested that is at the heart of this.
Your thoughts appreciated...

[Halebop]

I would have thought that the baby boomers, who, having spent a lifetime growing their nest eggs are not very likely to blow it all at once and will continue to invest in equities, especially if inflation takes off.

There is a clear behaviour change towards risk aversion as we age. Aside from some well documented physiological reasons as to why we tolerate less risk as we age, the psychological are probably more profound (Since many of us don't have a clear handle on risk in any case - how else could you explain the demographics of finance company investors?).

Retiring on a fixed income with a finite (and often insufficient) capital pool to generate income requires most to live off capital (ignoring the large portion who have little or no capital saved!). Combined with rapidly diminishing prospects and energy to earn an income from their labour, retirees tend to become more defensive in their investment behaviours. Income generation, low beta and capital preservation become an enticing alternative to low yields, capital growth and higher volatility.

Couple this with a smaller gen x generation coming up behind the boomers and we have a large pool of higher risk capital that will need to be swapped out for lower risk or at least higher yielding investments. Vending the stuff to a smaller and poorer demographic will have to cause some volatility and (hopefully for us vultures) mispricing.

Likely outputs:
Companies distribute more profits to provide an enticing yield
More hybrid securities that distribute both earnings and capital as a proxy for higher "income"
More selling pressure on historical "growth" assets
More buying pressure on historical "yield" assets

...and ultimately:
Higher tax rates on both personal incomes and corporate earnings to support the lower wage earner to retiree ratio
Less risk capital and risk taking
Less innovation
Lower real growth
Lower returns
Higher deficits and debts
Higher inflation

...or pretty much the opposite cycle to the last 20 years.

[pedro.nz]

Thanks for your thoughts Halebop. Some good points there.

I was skimming through an article today (unfortunately have now lost the link as I wanted to read it properly) that was suggesting that the Aussies are the heaviest investors in the share market in the world, something like 80% and that those that are just retiring are probably going to have to draw down on their capital much sooner than expected.
Given that a good deal of their investments are possibly locked into the various super schemes that are available in Australia and therefore, by default, have ridden the market down, I have been wondering what affect this will have in the medium term when more of the boomers retire and start living off their investments.
Crystal ball stuff to a degree I know, but I guess I am getting to the stage when I will have to start thinking about my own retirement and wondering "whats my next best move"

[Phaedrus]

Originally posted by Phaedrus :-
To minimise the impact of a Bear market, you need to :-
(1) GET OUT (Sell everything)
(2) STAY OUT (No buying)
The Lesson?
ACCEPT THE FACT THAT YOU CAN'T FIGHT THE BEAR!

Back in 2004, I took a very close look at the NZ sharemarket from 1987-1991 and came to much the same conclusion as above. It certainly made me fear the market more and place less trust in my own abilities to save me! Knowing this, it is interesting to observe my own mistakes during this bear.
(Shares held from start to finish - down 43%)

Going back to Phaedrus' "Get Out, Stay Out" message, I'd probably want to do the former (and I need to think about how to make sure that happens next time!), but I wouldn't place quite so much emphasis on the "Stay Out", as many of the purchases were surprisingly successful.

"Stay Out" means "Stay out while the market is showing signs of weakness", Liz. It is not meant to be a permanent injunction! Many successful trades
were entered during the rallies that were part of the primary Bear market. Such "countertrend" trades need to be very tightly monitored, though. To buy at such times and then hold through any subsequent downtrend is ill-advised.

Lizard is one of the very best stock-pickers on ST. Her 43% loss through "buying and holding" is likely to be better than average, I'm afraid. You can't fight the Bear.

This chart combines the signals from multiple indicators featured in my previous NZSX50 charts into a single plot and obviates the need for multiple charts to cover the differing needs of different groups of investors. This is the simplest way I can illustrate my idea of using the Index to mediate the degree of market exposure desired. It's my best shot, so I hope it is self-explanatory!

http://h1.ripway.com/78963/NZSX50610hightlight.gif

[Stranger_Danger]

I'd agree with Phaedrus on bear markets. They certainly are an ego deflater when it comes to one's stock picking ability.

I haven't done the sums yet to the degree Liz has, but my results are going to be

Held 80% cash the majority of the time, still holding significant cash - great!
Shares purchased towards the end of the carnage and, more specifically, at the first signs of upturn - awesome!
Shares purchased near the middle - coming right, in profit mainly
Shares purchased at the beginning - bad
Shares held the whole way through (a few "superior" shares not sold despite the fact I feel I saw the downturn coming - not the extent though - because they were fundamentally superior/some other rationalisation) - awful!

All up, I am happy with the last 2 years and my net worth figure today is higher today than at the start of the downturn - I'm happy with that when I see friends and neighbours in bad situations at present.

However, the vast majority of this is due to the extent I "sold out and got out" - any attempts to be clever tended to reduce rather than improve returns. I was saved - fortunately - be the fact my tinkering was limited and my rationalisations were small when compared to my cash position and general paranoia.

That said, if something is wrong "big" then it is wrong "small" too, and I was not rewarded for "cleverness".

Go look at Berkshire or Leucadia's results in 2008 - both are run by long term investors with superb reputations, who also speak plainly and honestly. Both found no escape being anywhere close to fully invested in 2008.

[AMR]

I didn't lose any money (still made 20% in 2008, 15% in 2009) but I lose my nerves and have let dozens of opportunities go by :(

[winner69]

Liz, this is a good problem to have, albeit still a challenge in a low return envuironment. Having that capital in the first place means choices - including the choice to spend some of it...

Anyhoo, during this correction I took time off. Certainly hurt my returns as money in the bank hasn't been that flash but my results have remained positive even if it was the worst results since my investing career began. Not sure I learned anything from that but enjoyed doing not much for a while!

Have not benefitted from the sharp sharemarket recovery as have not yet ramped up my equity exposure. Personally I think we have another correction to come. The Baby Boomers aren't yet past it though so another bull leg is possible, am just not betting my money on it at this point. So my lesson may yet to be learned - that I missed the early, "fast money" part of cycle.

In terms of the cycle just passed, it's all happened before and will all happen again. One of the clearest indicators to me was the casual disregard for risk exhibited by professionals and small investors alike. By the end of the cycle many had convinced themselves that cycles didn't exist at all.

Halebop --- this about intergeneration cycles seems up your ally ,,,, health warning for others though ... not good reading for long term investors as mentions a 20 year bear market

This Howe fella seems quite prophetic .... and has mnay things you allude to quite often
http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2009/06/29/a-20-year-bear-market.aspx

[Halebop]

Halebop --- this about intergeneration cycles seems up your ally ,,,, health warning for others though ... not good reading for long term investors as mentions a 20 year bear market

This Howe fella seems quite prophetic .... and has mnay things you allude to quite often
http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2009/06/29/a-20-year-bear-market.aspx

Cheers Winner, an interesting read. ...and I do love this big theme star gazing stuff. Don't agree with all their assumptions but then correctly predicting everything for the next couple of decades is a big ask for anyone. I'm picking we only need to get general themes roughly right to boost our investment returns though.

[beacon]

Brilliant thread, spectacular posts by almost everyone, and a very entertaining and informative read.

My view: the tide has turned. All global effort is towards creating asset reflation. even with inflation risk. I think it is the right direction to take and kudos to Bernake for taking the lead as well as taking the right actions at the helm.

Crystal ball: Despite all the current doom and gloom, we will witness euphoria within 5 years again - the mother of all bubbles.

Status: Confessing the sin of losing capital big time last year as remained fully invested and net added to positions despite an unbelievably large (for us) number of switches within asset classes. Derivatives were killers. It was a year we learnt humility.

Learning: The bear market respects no rules, no values. Respect it and beware.

[Kookaburra]

Interesting postings. I remain very much a bear and out of the market but diversified in currencies (USD, NZD, AUD, JPY).

We still have a major risk of asset deflation as credit continues to be hard ot obtain. This means cash is appreciating in value, even if nominally you make no gain. So I am happy to be in cash without net returns. In fact my currency position has given a small profit for the year. In my view assets are still overpriced. I am not a trader so am not looking to short term profit.

[whirly]

OK So a few of my ASX shares have triggered sells. Do I sell into the fear on opening Monday or further the risk and see what happens through the day?
Tuesday is I believe Australia Day. I guess if the DOW has a stinker Monday and Tuesday nights it could be double whammy for the ASX on Wednesday.

I think I've answered my own question actually but please comment anyway.

Whirly

[bambi]

If the shares have triggered sells then sell them. What is the point of having a trigger if you don't act on it? If the trigger is set correctly (based on ATR or support etc) then it's likely the shares will drop further. Holding onto the shares now when you should be selling is gambling that your trigger is wrong.

If the shares go up in the long term and your trigger was incorrect then investigate why and alter how you set your triggers in future. Sometimes your system will tell you to sell incorrectly, I don't know of any system that works 100% of the time.