Are You Afraid Of The Market??? Are You Angry At The Market?? Good Read!!
Jubak's Journal
Resist the home-run temptation Sorry, slugger, the market won't let you come all the way back with one swing. Here are four rules for hitting singles and avoiding those strikeouts.
By Jim Jubak
"Can't hit a three-run homer with nobody on base."
That's a sage piece of baseball advice meant to keep a batter from trying too hard to win the game in one swing. It's based on a solid understanding of the tradeoff between risk and reward. Odds are that if a batter is trying too hard to hit a home run, he or she will strike out. And even if the batter does manage to clear the fences, with no one on base, the homer counts for only one run. The team is still behind by two.
I think there's a moral here for investors right now, too. I know that many of us got toasted quite badly in last week's sell-off of just about any high price-to-earnings ratio stock left standing. I can easily imagine how investors who owned SDL (SDLI, news, msgs), Brocade Communications Systems (BRCD, news, msgs), VeriSign (VRSN, news, msgs), and Ciena (CIEN, news, msgs) feel because I own Nortel Networks (NT, news, msgs), PMC-Sierra (PMCS, news, msgs), and GlobeSpan (GSPN, news, msgs). If I were working my way down an emotional checklist, I'd certainly mark off fear, shock, dismay, confusion and anger.
It's that last emotion, anger, which worries me most. I certainly understand it -- I'm angry with myself for not making better investments, and I'm angry at the market for having done this to me. I'm angry at it for having taken away my money, and for having made me feel so lousy.
Just let the anger go
But it's important for us as investors -- let alone as human beings -- to find a way to deal with that anger. Let's start by forgiving ourselves. I think it's important, for example, to realize that just about no one saw the Nortel revenue miss coming. None of the folks that I know who raised red flags on that stock said that a Nortel miss would take down the entire optical sector, let alone every high-P/E ratio stock that hadn't yet been trashed. And if you were heavily invested in stocks, instead of all in cash, last week, well, that wasn't stupid. You were positioned for a year-end rally that may still happen now that we've retested the lows. It's by no means clear that there was lasting damage done to the market last week. (Whether some stocks suffered lasting -- or at least, long-term -- damage is another question.) At worst, it was a tactical decision that turned out to be wrong. Time to let it go.
And forget about anger at the market. I say that not because the market cares -- it certainly doesn't, and you're not going to hurt its feelings if you're mean to it. I say it because being angry at the stock market can easily get an investor into more expensive trouble than any he or she may already be in. It can turn you into the investing equivalent of that anxious, tense baseball hitter determined to turn it all around with one swing. And in investing, strikeouts can be very costly.
I saw plenty of this angry swinging-for-the-fences in the Market Talk with Jim Jubak Community on MSN MoneyCentral last week. Let me give you some examples.
There was the investor angry at the stock market for shooting down VeriSign. What did the market want? The company announced 600% revenue growth and still the stock went down. That was just plain wrong. Now that VeriSign was down more than $100 a share from its spring highs, he was going to load up on the stock and prove the market wrong.
Or there was the investor angry that the boobs -- by which I think he meant the great mass of investors who make up the market -- had crushed good optical stocks like PMC-Sierra and JDS Uniphase (JDSU, news, msgs) along with Nortel Networks. He was going to prove that the market didn't know anything by loading up on JDS Uniphase.
Or there was the investor just so angry at his losses that he was determined to get even by buying everything that had gone down on Wednesday and the first part of Thursday. He was fuming because he just didn't have enough money to take advantage of all the opportunities that the "idiots" had given him.
And finally there was the investor who, either in anger or despair, was determined to sell everything he still owned and put it into one go-for-broke stock. He simply wanted to know which of the stocks that the market had sold down in its stupidity would give him the most profitable revenge.
Putting on your rally cap
All this leads me to four guidelines I try to observe in times like these, and that I offer for you to consider.
Don't try to win the game with one swing. If your portfolio is seriously underwater at this point, anything that might be able to get you even with one swing is going to have to be so risky it's almost certain to go bad and put you further in the hole. Even more damaging is the attempt to get even by leveraging your investment through the use of margin or some other form of debt. That's playing with fire in a market like this. Remember how unexpected the bad news from Nortel was to most investors. If you borrow to get even and you get bushwhacked again, you'll be forced to sell at the bottom. Then you'll have reason to be angry -- with yourself.
Give your strategy -- assuming that it's a sound one -- time to work. For example, I've positioned my Jubak's Picks portfolio for a year-end rally in technology stocks. That said, I certainly didn't expect to revisit 3,100 on the Nasdaq Composite Index ($COMPX) last week before that rally started. If I had, I certainly wouldn't have put a cent of the portfolio's imaginary money, or a dollar of my own real cash, into Extreme Networks (EXTR, news, msgs) in the $90s. But I think it's too soon to angrily throw in the towel on this strategy and switch into something else that I dream might give me a quick home run. Putting in a bottom in a bear market -- even a temporary bottom -- is a tricky thing with lots of false starts and fakeouts. The kind of sell-off that the highest-flying technology stocks went through on Wednesday, and during the first half of Thursday, was certainly painful. But it did move the market a step closer to a bottom firm enough to support a rally of more than a session or two. To have any real chance of making some money in the last quarter of 2000, I need to play out this hand for a while longer.
Sometimes the market is wrong -- but not always. I firmly believe that the market overreacts, and that means that the sell-off of last week did create some bargains. The trick is picking them out from among the stocks that dropped in price for a good reason. Nortel Networks really did say that the market for telecommunications gear -- including optical gear -- is going to slow in 2001. WorldCom (WCOM, news, msgs), AT & T (T, news, msgs) and Williams Communications (WCG, news, msgs) did all announce last week that they would be cutting their capital spending plans for 2001 -- and in the case of WorldCom and AT&T, the companies announced that they would be cutting spending below the level for 2000. So optical and telecommunications equipment stocks should be down, and they should stay down for a while, since this isn't a problem that suddenly went away at 2 p.m. last Thursday when the sector reversed and rallied. I think we're going to spend the next few months figuring out exactly which companies will be hurt most and trying to calculate what these stocks are worth. Jumping in immediately because, for example, "Juniper Networks (JNPR, news, msgs) sold at $210 a week ago and it must sell at $210 again" is just asking for trouble. (On Nov. 7 -- the day after Cisco Systems (CSCO, news, msgs) reports earnings -- I'm going to begin a two-part series that looks at what's gone wrong in telecommunications and what stocks are likely to suffer the most and the least.)
Finally, try to identify the singles rather than the home runs. I say that because I think the damage of last week changed the logic of the market in the short term. By that, I mean that any year-end rally isn't going to start with the big momentum stocks, as I've thought for the last few weeks. (See my column "3 stages of a year-end rally -- and stocks to watch.") These stocks got crushed last week, and from the price action on Friday, I'd say that the damage isn't completely over. I now think that the ones in this group that are going to rally -- see the bullet point above about how the market isn't always wrong -- will probably follow and not lead. I think these former momentum stocks need a period of consolidation so that investors lose their jitters about owning them. That will happen after some of the solid and already beaten-down names in technology tack on a few bucks a share and establish an upward trend for the market.
I think that process was already visible in the market last week. Totally washed out semiconductor stocks such as Intel (INTC, news, msgs), LSI Logic (LSI, news, msgs), and Cypress Semiconductor (CY, news, msgs) actually moved up on Wednesday and Thursday while Nortel Networks was taking the high relative strength stocks down into the mire. Microsoft (MSFT, news, msgs) is another prominent example of a crushed old technology stock that moved up last week -- but I'm not going to comment on it, since the company is the parent of MoneyCentral. It's not clear how long this crushed old tech outperformance will last -- the PC-related stocks have their own problems, after all -- but there are at least a few dollars to be made here over the next few weeks by traders who can move more quickly than I can with Jubak's Picks. After that time, it's important to see if money flows out of the Intels of the market into the Junipers.
So that's my attempt at preserving my mental health in this market -- at least enough mental health to give me a chance at making a profit.
Next column, however, I'm going to do my best to destroy the little equilibrium you may have left. As part of MoneyCentral's pre-election special report, I'm going to take a look at the odds that a new president, whoever he might be, will have to confront a recession next year. (So that you can sleep, let me say that I don't think the odds are very high -- but it's still worth considering.)
Until then, stay cool, and choke up on that bat. |
