How falling markets present tough questions to investors

Thursday, Oct 25 2018 by
How falling markets present tough questions to investors

Share prices have fallen across the board in October, and it’s a reminder of just how quickly fear spreads when stocks start tumbling. My colleague Jack wrote this week about the sense of foreboding that’s hanging in the air at the moment. There’s almost a sense of inevitability that some kind of correction is past due. Knowing how to react to that kind of prospect is difficult.

Ten years into a bull run, and faced with various signs of trouble (in various parts of the world), it’s not hard to piece together a pretty gloomy narrative. While October has been unpleasant, some of the main UK indices - certainly the small and mid-caps - have been trending down since early summer. So for some investors, this experience has been less of a suckerpunch correction and more of a protracted beating.

This week the FTSE 250 has been flirting with correction territory, with the index currently down by just over nine percent for the month. As usual, the UK indices are taking at least some of their cues from price action in the United States. That’s been translating into some sharp and unpredictable intraday moves - days that start well but end up finishing on yet another low.

Profit warnings and bad news

In recent weeks the sharpest falls on the FTSE 250 have been exacerbated by bad news and profit warnings. Among the biggest fallers have been stocks like Keller, ConvaTec, Superdry, Indivior, Inchcape and Victrex. In terms of relative price strength, they’ve all undershot the All-Share index by more than 20 percent.

There are similar war stories over on the AIM All-Share, where Fevertree Drinks - a stock that, size-wise, has more in common with the FTSE 100, has seen more than a billion pounds wiped off its value since the end of the summer. It’s down from £4.23bn in early September to £3.18bn currently.

But it isn’t necessarily all bad news. It’s fair to say that some stocks (a minority) are holding up reasonably well under the conditions. But it’s also the case that investors with at least half an eye on value have been crying out for a meaningful correction for several years. For many, what we’ve seen so far won’t be anywhere near enough. As a result, we’ve…

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67 Comments on this Article show/hide all

gus 1065 29th Oct '18 48 of 67

In reply to post #413034

... and sadly, as JM Keynes pointed out, the markets can remain irrational for longer than many of us can remain solvent (especially if using leverage).


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timarr 29th Oct '18 49 of 67

In reply to post #413074

and sadly, as JM Keynes pointed out, the markets can remain irrational for longer than many of us can remain solvent (especially if using leverage)

Apparently he didn't say that - at least no one can find the source of the quote. But he did create the concept of the beauty contest as applied to investing in which everyone bets on the person they think everyone else will want to win, rather than the person they think is the most handsome.

There's a really interesting paper by David Chambers and Elroy Dimson that charts Keynes' evolution from an unsuccessful top down macro-economic led investor to a successful bottom up fundamentals led one. It mirrors the experience of many people and the research which suggests that more experienced investors are less biased and trade less:

Keynes the Stockmarket Investor


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gus 1065 29th Oct '18 50 of 67

In reply to post #413089

Hi timer.

Fair comment. JMK said a lot of things but in this case it’s hard to stick that particular tail on the donkey. The attached link attempts to explain the attribution.


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mmarkkj777 29th Oct '18 51 of 67

I guess, regardless of the theory and who defined it, we are essentially talking about market sentiment, collective behaviour of share holders, rather than intrinsic economic value. Who was it who said they will 'revert to the mean' eventually.

I honestly don't know whether I am acting or re-acting. All I know is that I feel better in my self for being mainly out of the market at the moment, which is probably a good thing for decision making overall. It also means I have the capital to reinvest when I think the time is right. The big question is, will my opportunity loss (if I get the timing wrong) be greater than the loss I would have incurred by remaining fully invested. Only time will tell.

I'm sure there are many more with the same situation.

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Hot Socks 29th Oct '18 52 of 67

In reply to post #412974

which bit did you disagree with?

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Tradertimes82 31st Oct '18 53 of 67

Just read this article this morning (31/10/18), it couldn't be more apt! As a self taught (not a good idea, but who do you trust? ) novice who has largely traded in the AIM market and two years into trading, this last couple of days has seen my portfolio and my frame of mind hit rock bottom, it's ironic this should appear in my inbox today. Read this, take it in and remember it folks. I guess trading isn't for me.

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goodgoff 31st Oct '18 54 of 67

My view on this article? I am now even more unsettled. Should I be like the ostrich, stay invested and then see what's left in a year or so? Maybe wealth preservation should be my priority at 79 years so shove what's left in a gold ETF.

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Ramridge 31st Oct '18 55 of 67

The mathematician Sir Isaac Newton invested heavily in the South Sea Company and lost in today's terms around £3m.

Apparently, the great scientist took a philosophical view of his losses. He said ruefully, “I can calculate the movement of the stars, but not the madness of men.”

Of course the notion of behavioural investing came a lot later.

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Bonitabeach 31st Oct '18 56 of 67

In reply to post #413859

Hello Tradertimes82,

"Trading" isn't for most of us. Try "investing" instead. The AIM market is particularly risky with only a little wheat amongst the chaff.

Who do you trust? Only yourself. There are some good fund managers if you want funds but not that many. There are some good managers and management teams in companies, but the median will be disappointingly poor.

In respect of this UK market sell-off we were here before as recently as April! The "value" orientated stocks I hold have been hit too but my dividend expectations remain undiminished. I think the shares I avoided as "over-valued" have been hit hardest along with the fundamentally poor business models and the over indebted.

Sometimes it's about avoiding the losers rather than picking the winners. Investing with a longer-term outlook is much easier and more rewarding than trading short-term. I bought LON:(RDSB) at £14, I see no reason to sell at £25 while they pay me 10.75% on my investment cost. Chase shares that could double in 12 months, not today thank you; I have learned to be grateful for the 10.75% and the share price will bob up and down with the market.


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Frankyboy 31st Oct '18 57 of 67

In reply to post #412049

Well said!

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timarr 31st Oct '18 58 of 67

In reply to post #413874

Of course the notion of behavioural investing came a lot later.

Earlier, actually.  Joseph de la Vega wrote Confusion de Confusiones in 1688, 30 years before the South Sea Bubble.

People follow gurus without thinking:

“There are times in which the powerful investor is followed by many, even at the cost of losing money”

People seek confirmation from others (and, of course, often react violently when opposing views are offered):

“It is not important that the basic value of the shares be practically nothing as long as there are other people willing to close their eyes and support those contradictions”

People will trade for no obvious reason other than their own overconfidence:

“They will sell without knowing the motive; and they will buy without reason. They will find what is right and they will err for fault of their own.”

De Vega came up with four principles of investment that are as true today as they were then:

  1. Don’t advise anyone to buy or sell shares.
  2. Accept your profits and your regrets without looking back.
  3.  Profit in the stockmarket is transitory.
  4.  To succeed you need money and patience.

True 330 years ago, true now and, no doubt, true in another 330 years.


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mmarkkj777 31st Oct '18 59 of 67

In reply to post #413859

Hi Tradertimes82

Firstly commiserations on your losses, but I guess not many were completely unscathed (funds have gone down too).

I turned to cash, but not before the fall before many my stop losses were triggered, so still down around 7%, but now that I feel it was a mere correction, not an impending crash, I am missing some upside as the markets spring back (which of course doesn't mean a major fall wont happen, but nobody knows), as I start to carefully reinvest, with the inevitable dealing costs and stamp duty, etc.

Don't let the recent correction cause lasting damage to your frame of mind (your portfolio will fix itself if you are patient enough!). Its all learning and nothing should be catastrophic. One thing is to think about risk management as you rebuild. What is the worst thing that could happen? It's a phase and will pass. Strategy (stay in or get out for a while). Tactics e.g. stop losses. Maybe using a temporary short of the market as a counterbalance (then selling it again when the correction has finished). The fund £SUK2 shorts the FTSE100 to the power of 2 and can be used as a counterbalance to your long investments and you only need half the capital to have the same effect ( short term fix only, though). Look at the Stocko conservative stocks, maybe, while we are in these volatile times.

Finally, Its great learning. Robbie Burns, Jim Slater and many other fantastic investors (let alone us mortals) served an apprenticeship and lost money in their early days and everyone has spells when they lose from time to time. Its about making more on the roundabouts than you lose on the swings.

The most important thing is to be patient and not overreach. Think as much about minimising your potential losses as maximising your potential gains. Stocko tools help with this. Invest with risk management in mind and do whatever it takes to preserve a good mental attitude, or this will surely affect your investing and decision process.

If necessary, step back, take a break, have a rethink, then, if you chose, come back with a stronger strategy.



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Tradertimes82 1st Nov '18 60 of 67

In reply to post #414094

Thank you for this advice, believe me it is much appreciated, I certainly needed to read another perspective.
Thanks again for taking the time to reply.

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Tradertimes82 1st Nov '18 61 of 67

In reply to post #413919

Thanks for this, another great reply. Yes I am strongly considering whether investing is for me. I thing I need a rest as Markj777 suggested and I take on board both your comments as I attempt to stumble forward.
Thanks again for taking the time to reply.

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PhilH 20th Nov '18 62 of 67

In reply to post #412774

I've increased my position on my DAX short today by 50% due an increasingly bearish weekly Ichimoku Chart. Things that triggered it for me were the price hitting new recent lows (intraday and daily close) and  also note everything is pointing south, i.e. the slow and fast moving averages, the boundaries of the cloud and the lagging line


If the FTSE 100 drops further tomorrow increase my short on that position too. Ideally I'd be looking for new lows (below 6850) and another lower close (below 6984). 

Professional Services: Sunflower Counselling
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PhilH 21st Nov '18 63 of 67

In reply to post #412264

Hi dfs12,

The fantasy fund league is interesting but you need to dig a little deeper when looking at the results.
Many of the top funds run by subscribers have erroneous spikes in their value due to incorrect handling of share splits.

That said if you look at the 3 year returns active fund manager shipoffrogs has very good returns.

Best of luck

Professional Services: Sunflower Counselling
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PhilH 6th Dec '18 64 of 67

In reply to post #420539

Well it took a little longer than I expected but I've increased my short position on the FTSE 100 by 50% today. The way things are heading this week we are looking at the lowest weekly close in 2 years.

I'm still not short on the US markets and personally if they are going to go south I'd be much more comfortable shorting them in a couple of months time. For example to short the DOW as of today I'm looking for a weekly close below 22188 which is currently 2300+ away. So by the time I'm ready to place my short the big moves might have happened. However looking forward in February 2019 I'd be looking for a weekly close below 24148 (442 pts difference) or in March 2019 the price could close around the current level.

Anyway interesting times ahead and whilst Trump is in play there is going to be a lot of volatility so be careful out there.

Best of luck

Professional Services: Sunflower Counselling
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PhilH 17th Dec '18 65 of 67

The US charts are starting to look hairy now ...

S & P 500


Last week's price action close below the cloud and this week's price action is pushing into new 9 months lows and the lagging Chikou is wandering into the cloud. The moving averages that form the cloud are poised to cross turning the cloud Bearish. Even if the price action consolidates at this level it'll be 5 weeks before the lagging line falls out of the bottom of the cloud. Closes below 2500 don't look that far fetched over the coming weeks and that's going to take the lagging line below the cloud and if that happens for two consecutive weeks that'll be my signal to go short on the US market.

S & P 600 Small Cap


Today's lows were a 14 month record and the lagging line is sitting in the middle of a thin cloud (limited support). The cloud is about to turn bearish too.

Be careful out there!


Professional Services: Sunflower Counselling
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Carey Blunt 7th Jan 66 of 67

In reply to post #428193

Hi PhilH,
Did you ever get to the point of shorting the US markets?

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PhilH 7th Jan 67 of 67

In reply to post #433313

Hi Carey,

I've come close to pulling the trigger. I'm looking for the blue lagging line to close below the cloud for two consecutive weeks.


I think the outcome of the China trade talks are going to push it one way or another but I can't decide which way it'll go at present.

Best of luck

Professional Services: Sunflower Counselling
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