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The Credit Crunch and the Current Market Crisis

In relation to the current market crisis, I must say it comes as no surprise to me. I excerpt verbatim from Galbraith's The Great Crash 'As a protection against financial illusion or insanity, memory is far better than law. When the memory of the 1929 disaster failed, law and regulation no longer sufficed. For protecting people from the cupidity of others and their own, history is highly effective. It sustains memory and memory serves the same purpose as the SEC, and, on the record is far more effective.The market will not go on a speculative rampage without some rationalisation. But during the next boom some newly discovered virtuosity of the free enterprise system will be cited. It will be pointed out that people will be justified in paying the present prices - indeed almost any price - to have an equity position in the system. Amongst the first to accept these rationalisations will be some of those responsible for invoking the controls. They will say firmly that controls are not needed''

How right he was. Those that had witnessed the dot com boom now witness the credit crunch - the details are different, the principles the same.

I cheerfully recommend readers remind themselves of the above paragraph with regularity. It can only serve to make them better investors.

Getting it wrong at the top of the market in 2000

To those of you who have lost substantial amounts in the last few months I have the following words -:

Last week I got stung on Tuesday and bought back very little during the rest of the week. I would rather play it safe than keep losing money on the squeezes. If that means I miss a bit of up then so, as they say, be it.

My worst mistakes were made at the top of the market in 2000. Buy when everyone was selling, I was buying. Problem was that everyone else kept selling. While conditions are not the same as in 2000, I for one do not intend to get caught again the same way. It's difficult to know when the right time will be to buy but in the meantime extreme caution is required. The hardest thing about going into cash is getting out of it again. I got it wrong in 2000 and never want to make that mistake again.

I'm amazed that so many have been caught by this downturn (not meant in a goading way - just genuinely puzzled why it's taken so long for everyone to wake up that it's all been built on sand). FWIW, I got my legs taken out trying to catch this major wave down - I was convinced was overdue last spring and was shorting the backside out of the Dow and Dax (ouch) but I chucked in the towel when they all laughed in my face and pushed on towards new highs (and major websites like msn money were running headlines like 'Bring on Dow 20,000') - I guess the old phrase "the market can stay irrational longer than you can stay solvent" was very applicable in my case!).

Even though stocks look (relatively) good value at the moment - and there will be decent spike up days - I'd expect further lows to be seen over the coming months. Having been in more than my fair share of dodgy stocks, it's a fair rule of thumb that when you think something is ludicously cheap...there's a good reason for it, so lob another 10-15% off! For example, if you think the FTSE is stupidly cheap at 4000 (and most probably do)...just wait until it goes below 3,600!

And yes, the faster and further it falls the better.
The shortest bear market was two months. That was the crash in 1987, where the DOW plunged 36%.
The mildest was the 3 month bear market of 1990, which took 21% off DOW. The average length of a bear market is 18.5 months. But we don't want any of that.
The average bear market sees a decline of 36%.

Preserve your Capital

I think there is a great temptation to 'get back' lost money and therefore get back in the markets with too much money. Really I think the best move is to pare most long positions down to small amounts (only good quality companies), keep plenty of cash in high interest accounts, and consider some small shorting.

I am personally also buying very small amounts in good companies here and there at what I hope in a year's time will seem like bargain prices.

The first thing I did when the s1it hit the fan was to reduce spreadbet exposure to a minimum - I can buy more than a million pounds worth of shares in spread betting accounts if I want to but certainly not tempted. Many people have been wiped out by using way too much "leverage" in spread and CFD accounts.

If you can only afford to lose 10k, only put on 10k exposure with spreads and not 100k!

So my message is for the moment is to "think small". Don't be tempted to use leverage - keep capital intact and wait to play another day.

There is all the time in the world to "get back" lost money and move forward - much better to reduce exposure and wait till the volatility is over. Once the market is back on solid ground I would be tempted back in with bigger amounts. And that time for me is when, for around a week, the FTSE has gone back to moving say only 20-30 points a day instead of 50-150 points.

Of course there are some good volatility players out there for which these conditions are great - but it's not for me - one of the reasons is I want to be able to drink tea, go out and enjoy playing with my son and not be stuck in front of a screen all day... and I think that's also a younger man's game, not for old bastards like me!

Victor Chandler's [a renowned bookmaker] take on the recent banking crisis is: 'If you have four pork chops and one of them is bad and you mix them up and create four sausages and you don't know which is which, then everyone is affected.' The mortgage and loans game ain't straight, guv.

'You can lose any sort of bankroll,' he says. 'You have to take calculated risks. And have trust in yourself. And if you suffer a run of losses you analyse them and if you feel comfortable with the situation you keep on cracking away.'

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