Dont panic?

12th Feb '18 by tony777x

13 comments 4657 reads

At times like these when everything seems to tank and the death knell headlines loom large warren buffet says "re-watch your favourite Super Bowl commercials, get ice cream with your kids and say hi to a friend you haven't spoken with in a while."
In other words keep calm. Although nobody knows for sure what the future holds corrections are part of a normal healthy stock market.
Jesse Livermore arguably one of the greatest traders of all time said“After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: it never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!
Minnervini also states " more than 90% of superperformance stocks emerge from bear markets and general market corrections"
Why is he so sure? Simply because although no one can predict markets one thing that remains constant over the years is human behaviour. Panic, greed, etc will always lead to losses but also opportunities.
Its easy to see the opportunity with hindsight eg. market fall after June Brexit referendum but it takes bravery to act.
What do I think?
For what it is worth I believe as the underlying fundamentals are sound it is likely to be only a correction. Having said that volatilty is also the norm and we may get the floor tested one more time.
So for me the time is of an opportunity but we will see.

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Velo

12th Feb '18

Yes, as you say, it all becomes clear with hindsight. But I would be better positioned to handle this if consensus was not forming of only a blip/"healthy correction" which appears to be the prevailing mantra ie., a blip a possible welcome correction.

Well hindsight will be needed for that to be proven will it not?
- If consensus view was always a predictor of future events then investing would be dead easy. I remain on edge.

PS. "Minnervini also states " more than 90% of superperformance stocks emerge from bear markets and general market corrections"

Which can also mean you would need to be in cash to benefit - or at best for buy-and-hold investors just hope for an eventual return to portfolio values as they were before the correction. Buffett always has cash coming in to take advantage after corrections. Buy-and-hold investors may not.

Isn't it true that there are some investors in Japan that are still under water waiting for a return to normal - 20 years after their "correction"?

tony777x

I agree that you cannot go by what people say. Having said that historically a very small percentage of the many corrections turned into a full blown bear market and those had different underlying circumstances.
Having said that no one can be certain for sure and ultimately any buying or selling of shares is someones risk reward opinion.

Oops. Sorry double post - see earlier post 1

I totally agree you would need to have cash to take advantage after corrections. What I was implying was not that you should go with a neutral hold mentality but more that if you are holding a stock which has caught you out for what appears no other reason than market sentiment then it may be unwise to offload now whilst markets are low.
Ideally a good position now is to have cash available to take advantage of opportunities if it turns out to be a correction

Steve L

Has anyone looked at / does anyone actively use models for holding cash at all market levels in order to profit from dips? I know Ben Graham (in "The Intelligent Investor") suggested holding a 50/50 equity/bond allocation at all market levels, adjusting periodically (annually think). Meanwhile a chap called John Kingham (I think he may post as "Value Investor" on Stockpoedia?) uses Schillers CAPE as a model for telling him how much to hold in cash, which I try to do myself. Would welcome other new ideas and suggestions.

I know Minnervini tends to hold cash according to whether the market is behaving as he expects to ie does the stock break out of a base and keep rising would indicate bullish . If stocks tend to fail he would gradually have less exposure. Therefore the model he uses is a flexible one with the market behaviour telling him what to do and therefore how much to be in stocks or cash

pippasfan

I guess that cash reserves, at this time of trading, is governed by budget control. I always wonder if one of the reasons traders go bust in bear markets, is through lack of budget control.

Nick Ray

Has anyone looked at / does anyone actively use models for holding cash at all market levels in order to profit from dips?

The "permanent portfolio" holds 25% in stocks, 25% in bonds, 25% in gold and 25% in cash and rebalances once a year. The idea is to create a very low volatility portfolio which simply jogs gently along regardless of what is going on.

Research supports the fact that the vast majority of traders who lose money is not the fact that they pick poor shares but a lack of budget control. Apparently the single most important factor for losses is lack of risk management. A lot of people fail to sell when losses are huge and the losses they make outweigh the gains. So poor budget control is often because of the failure to let go and free up cash even if it means accepting a loss.The more the loss becomes, for many the harder it is to let go.

Tortoise investor

I thought this provided useful food for thought from Deloitte this morning: "* As equity market sell offs go, last week’s mini panic was small beer compared to the sell-offs that have punctuated America’s nine year equity bull market. The peak to trough decline in the S&P500 index last week was 6%. That compares with a 15% fall in 2010 during the euro debt crisis, a 15% decline following the downgrade to America’s credit rating in 2011 and a 14% fall in 2015-16 on fears of weaker global growth."

jonesj

PANIC ? Why ?

My portfolio is worth roughly what it was worth at my December valuation point (give or take 0.5%).

If it loses 70% of that value, I might not be so relaxed.

13th Feb '18

paraic - a 6% drop as of NOW is not the point. This fall in the UK is as nothing. I've lived through much, much worse, and my portfolios are currently, not too bad, some are just a little off their December highs, others not.

However, some might argue that in 2 or 3 months or before the year is out - or in a year's time, something worse might get underway, and that "old" 6% would be blown out of the water, with hindsight changing to: Investors should have been more guarded after a clear warning back in February.

I'm not entirely convinced this retrace is isolated and unconnected to anything larger.

timarr

That's roughly correct. The actual problem is known as loss aversion - people dislike realising a loss which leads them to taking profits on winners (so they lock in a profit) and holding onto losers (so they don't crystalise a loss). As good stocks keep on doing well and poor stocks keep on doing badly this leads to underperformance - but it's less a technical budgeting or risk management issue and more a cognitive bias.

The key research in this was conducted by Amos Tversky and Daniel Kahneman, who showed that a loss causes twice as much pain as an equivalent gain causes pleasure. That said, other research that's been discussed here before has shown that people trade too much due to overconfidence and that the shares they sell, on average, outperform the shares they hold.

FWIW, some data I've just blogged about has shown that there were 28 corrections of 10% or more in the S&P500 between 1926 and 2015. On every single occasion the market then went on to produce above average returns over the following 1, 3 and 5 year periods. Research for international markets shows the same pattern.

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Tony777x

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