Question & Answer: Losing Money Fast

As a relatively new investor I thought the summer would be a reasonable time to develop and test some sort of strategy, how wrong was I! Talk about baptism by fire. Well, I've decided, fool hardy or not, to ride things out - praying for bouncing cats or something like that. Spent most of the week selling small losses into (I hope) stronger positions whilst hiding behind the sofa (haven't done that since William Hartnell played doctor who - scary).


Dead Cat Bounce - Bouncing Cats are not Good

The summer is traditionally not a good time to be in the stock market. History, which of course does not predict the future, tells us that May-September does not return as much as October-April. Then again, quite a few crashes have happened in October. In my view there is no right time to start, you just have to wade in and get started.

In my view investing/trading is not about luck or faith or sofa's but about having a trading plan. I don't think in the wider scheme of things that what one buys matters very much, it's all about how one manages one's money and risk.

Bouncing cats are not good and you must cease praying for one immediately. Immediately, do you hear me ;-). Why? Because more often than not they are dead cats that bounce and what appears to go up then comes down with something of a bump. Why? Because those who 'fool hardy or not' decided not to sell the first time see a chance, say phew, come out from behind the sofa, and whoosh they all decide to sell at once.


Evidence of this can be seen in all the double bottoms (where the chart prints two lows broadly in the shape of a W. One should have sold at the top left hand corner of W but one didn't, one kicks oneself at the bottom of the W but it starts to go up and one sells, relieved. Everyone does same so we get the second down. Previous double bottoms of this Bull Run have resulted in a resumption of the up-trend (see some of my earlier charts where the double downs are shown) but until the W is fully formed it's impossible to say which way it will go. One of these double downs will fail and the market will continue down.

What we will then see is all the behind the sofa people come out with white flags flying and they will start to sell in panic and capitulation. Only when these people have sold will we know whether the bull market will resume (after a correction) or whether the money will stay out of the market and a bear market will start. Of course, maybe we will see a fast re-bound, the brokers' wall of money will come in and we'll see another surge up to new highs, with or without a double bottom (but double bottom more likely than not).

So here are some thoughts: interest rates are rising, that's not good for business. The dollar is weak, not good for UK business with exposure to the dollar. Bottom lines are showing the the RNS's "in-line with market expectation despite dollar weakness" appears over and over. What will happen next year if dollar stays weak?

The weather has been difficult all over the planet, food prices are going up, fuelling world inflation.

We buy cheap goods from China but China is also putting up interest rates, will those goods continue to be cheap forever?

Japan has had low interest rates so 'smart money' is borrowed in Japan and invested in parts of the world with higher rates (known as the carry trade but in concept pretty much like borrowing money on your credit card at 1.99% and putting the money into your mortgage at 6% and then paying it back at some point,the difference being yours to keep) but Japan is also putting up interest rates so at some point that money will flow out of the rest-of-the-world and back into Japan. The Japanese stock-market is just starting to recover...will all the money invested in rest-of-world stockmarkets stay there or will it 'go home'. The numbers are big, the threat is real.

Inflation is bad for stockmarkets because interest rates have to rise, and when interest rates rise people take flight to the safety of cash. what is going to fuel a new high?

Well, there's always the presidential cycle to fall back on - markets rise in the 3rd year of the US presidential cycle and this is the 3rd year. Hmmmm.

What else? Well, if interest rates continue to rise then we may see more buy-to-let people throwing in the towel. Property will come down in price and the money will have to go somewhere.

I read that stock valuations are high here but low in US. Then I read they are good value here and high in US. Difficult to draw a conclusion one way or the other.

Well, that was a ramble and just talk. A nice intellectual (not that I present it so) exercise but what matters to me is my money.

I therefore had no hesitation liquidating at what might be the start of a W and I will have no hesitation buying back at the bottom of the W (which will be a mistake but a system is a system) and then I will sell again and buy again and maybe all will be OK and maybe it won't.

The buy and hold (BAH) investor will be fine if things go up but may have to wait a very long time if things don't. It's a personal issue and each of us has to decide what is right for us but I think even the long term BAH would benefit from having a plan. A plan that says that they will not lose more than x% of their wedge.

The trouble with that is that people typically say 5%, 10%, 15%, 20% and 25%. Is it any wonder that big market falls tend to be around these numbers.

So what would be better, in my opinion, would be to look at the chart of each stock you hold and sell each and every as it falls through support. The use of a trailing stop, as this is known, protects your capital and takes into account the strength (or otherwise) of your portfolio.

Well, I'm babysitting, not that there's a baby in sight but the boys have just finished on the Nintendo and I think I'm due a spell of footie in the garden.

So after all that 5 rules stand at:

Rule 1 - Have a plan
Rule 2 - Bouncing cats are bad - avoid at all costs
Rule 3 - Don't hide behind the sofa
Rule 4 - Don't believe anything you read
Rule 5 - Market makers are not your friend

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