Is the Stock Market Getting Un-BEARable?

The Bear Market is here.

It takes a 20% correction from the peak and both the Dow Jones Industrial Average and the Nasdaq Composite have now reached the bear market level.  The S&P reached bear market territory this past Thursday, a day after the other indices confirmed this benchmark.

So what is the average investor to do?

The value investor, symbolized by Warren Buffett, would likely enjoy a bear market in which stocks were cheap and opportunities for buying abound.

The Motley Fool advises investors to 'stay put'.  As they put it:

"Emotions can prevent otherwise savvy investors from making money in the market. When things are going poorly, we tend to want to hide in a corner, crawl up in a little ball, and whimper. And while I've found that whimpering can be a very effective strategy during an apocalypse, it's a poor investing technique. Dumping your shares in a panic will often mean that you're selling precisely when you should be buying -- when prices are low.

The best way to keep your emotions in check is to have confidence in the value of the stocks that you own. After all, if you're certain that a stock you own is worth at least $40 per share, it won't matter so much if shares temporarily fall from $35 to $25. In fact, you may see it as a major buying opportunity."

MoneyWeek suggested that an investor stick with 'quality growth":

"As equity market volatility increases (both on the up and downside) and sector leadership rotates away from those areas previously benefiting from access to cheap and easily available credit, so investors should reconsider their portfolios, away from value and towards our marked preference for quality growth."

Tim Middleton over at MSN Money thinks that corrections present buying opportunities:

"But this is no time to panic. Market corrections are an opportunity to upgrade the quality of a portfolio on the cheap. In panics, everything gets whacked. Only later, as they sift through the carnage, do investors discover that plenty of good stuff has been thrown out with the bad. The truly bad, meanwhile, gets worse.

If you've been prudent, you've built up some cash to take advantage of a correction that has been widely predicted. If not, the time to act is now. You don't need to take drastic action: A correction is short-lived by its nature, and stocks remain the likeliest assets to perform well in the next few years."

Ken Winans on SFGate thinks that it is a good idea to 'raise some cash' and then look for quality stocks selling at a discount:

"I am following a well-thought-out plan that falls between those two extremes. I have been selling some of my stocks to turn about a third of my portfolio into cash. I'm looking for cheap buys - that is, stocks that have dropped below their 200-day moving averages. Then, I'm researching to see which of those stocks have a history of performing well during bad market conditions, as well as the early stage of new bull markets."

Maybe the British have some better insight on this.

Richard Buxton, as reported on the Times Onlines commented:

""It is too late to panic-sell now because the market has fallen so much already.

"I believe that the market will be higher than it is now in two years' time, so my advice would be to hang on if you can and to take advantage of the weakness over the coming weeks to start drip-feeding some money into the market.

"You will have to be patient, though. I am not expecting the market to turn in the next three to six months.""

So I guess the best they can say 'across the pond' is to 'hang on!'

The New York Times doesn't do much better.  They suggest staying 'diversified' and remember to dollar-cost average. 

"This old-fashioned diversification has demonstrated its value. From the start of October 2007 - around the peak of the domestic stock market - to the end of June, a portfolio of 70 percent stocks and 30 percent bonds fell just 9 percent, according to the research firm Morningstar. The stock portion mirrored the Standard & Poor's 500-stock index, while the domestic bond allocation was based on the Lehman Brothers Aggregate Bond index.

You would have fared even better if you had been gradually putting money into the stock market, a strategy known as dollar-cost averaging. In a falling market, this offers another form of ballast: it means that investors are buying new shares at ever-lower prices, thereby averaging out the returns they earn on each pot of new money.

"Times like these should remind people of the importance of the basics - like having a long-term asset-allocation strategy," said Liz Ann Sonders, chief investment strategist at Charles Schwab."

So Asset Allocation.  hmmmmm

I have been investing for over 40 years....starting in 1967 with five shares of Global Marine (that did very poorly as an investment due to my poor timing at the age of 13.)

There really ought to be a better way than just hanging in there, staying diversified, looking for buying opportunities.  Can we as investors possibly avoid the mauling that is going on to all of our portfolios?

As a blogger over at Stock Picks Bob's Advice, I have been trying to develop my own portfolio management system.  I am trying to float my portfolio between five and twenty positions and to make the decision to move from stocks into cash and back again based on the activity of my own holdings. 

I try to sell my stocks quickly if they decline to pre-set levels that I have determined at the time of their purchase.  In a very unemotional fashion I sell them should they decline 8% after an initial purchase (borrowing this strategy from William O'Neil and the IBD CANSLIM approach).

Initially, I tended to reinvest those funds only to find that I was losing 8% again and selling.  I learned quickly that a sale on bad news, if you have done your homework and picked a 'quality' investment, may well be signalling that the Market (the 'M' in CANSLIM) is 'sick' and one shouldn't be buying at all.  I have firmed this up as a a rule:

After a sale of a stock on 'bad news', don't reinvest, instead 'sit on your hands' with the proceeds, adding to your cash position. 

My only exception is when a sale of a holding is executed when I am already at my minimum (5 positions) exposure.

To balance these sales on the downside, I have chosen to sell portions of my stock on the upside.  Currently I sell 1/7th of remaining shares if the stock hits a 30, 60, 90, 120, 180, 240, 300, 360, and 450% position....and you can extrapolate this series out further!

These sales on the upside are considered 'good news' and a signal that I can add a new position.

Thus sales on the downside mean leave proceeds in cash and sales on the upside mean add a new holding.  (Again of course, if at the maximum, I would not add a new position, but instead would leave those proceeds in cash.)

Has this been working?  Well you can visit my blog and read further.  This is still an experiment.  I am an amateur investor.  But the logic appears compelling. 

Having some sort of system takes a lot of the stress out of investing.  And clearly, there is plenty of stress to go around!