This is obviously a very tough market in which to get your feet wet. I
am currently sitting on cash and waiting patiently for the
opportunities to evolve over the next 6 months to 1 year. These
opportunities will present themselves but as a conservative investor, I
want to wait until the risk has diminished in the market before I jump
in. The following may sound ridiculous but it works. Create a list of
10 to 20 very simple investment rules and follow them religiously.
Books on day trading will give you a great start on these rules. They
sound simple but prove very difficult to follow as you become
emotionally involved in the market. Having the list and referring to it
before making a trade will keep you disciplined. The market runs on
greed and fear and your advantage over the market is to remove these
two emotions when you trade. Some of my rules are:
-
Don't fight the market. (If the market is going down don't try to stand in its way).
-
Don’t try to catch a falling knife: (This is what is happening right now in the market so do not be a buyer yet).
-
If you get in a trade that does something different than what you
expected, get out. (If this happens, you did not fully understand what
was driving the stock price and you need to take a time out and
re-evaluate or move to a different stock.
-
When you enter a trade,
put in your sell order and your stop loss. (By putting in your sell
order, you will be reminded of your expectations for the trade when you
entered it. This will help you evaluate when to get out of the trade.
-
Buy and Hold is for suckers. (A rule that is definitely not preached by
money managers but has saved me more money than any other rule.)
As
far as company picks, most stocks will get killed in this crisis and recession and
a recession is here. If you must invest, I like
Google and Intel. They are market leaders in their segments and may
pick up market share in a recession due to their cash positions. I
would stay away from the retailers for now. In terms of when to buy
Google and Intel, wait. The stock market usually leads main street by 6
months. That means you want to buy these two 6 months before the end of
a recession. How do you know when this is? There is no one answer to
this question and any answer I give will run counter to what every
money manager will advise you to do. I do believe you can time the
markets and I will be following this market closely to try and pick the
best time to buy. The forces that are causing the market to go down
will drop away one by one until there is one or two powerful forces
that keep pushing down on the market. As soon as these last two forces
show signs of dissipating, that will be the trigger to enter your
trades. Right now I believe we will not see the lows in the market
during 2008. As such, I would not be a buyer of any stock right now.
Watch
the market every day and try to understand why it is behaving the way
it is behaving that day. After a few months of this, you will be able
to identify the forces that are influencing market moves (employment,
VIX, interest rates etc…).