worldlyinvestor.com Wake-Up Call
Weekend Wake-Up: Zen and the Art of Margin Maintenance
By David H. Smith, Columnist
Whatever state of your holdings, now is the time to step back and reflect. And not only on your stocks
Presumably no one will now dispute my call that we are at a turning point.
I can only speak according to my own experiences. I have been in markets since 1985, primarily in the Asian emerging markets. On my worst day I experienced an 11% loss. It was not Friday April 14 2000, and it did me no long-term damage.
This is my fifth or sixth bear market, depending on how one considers the 1997-98 period. No crisis has ever destroyed me; one or two have allowed me to shine.
I did not do well on Friday, but I did not do badly. I had a stock that rose 15%. I was short something that fell. I owned foreign securities that were out of Wall Street's orbit. I am reassured by a small holding in gold that someone just couldn't wait to sell me at historic low prices.
Adults Only
Investment and speculation are games for grown-ups. Are you nursing losses? Please don't cry - no one can stand a cry-baby. And don't blame anyone else - not brokers or analysts, not the media, not newsletter writers, not me, not the bears, not your mother, not some amorphous ``they,' and not the markets themselves. You act upon the markets. They do not act upon you.
It is very existential, in a way that lends value to Sartre and Camus as guides and interpreters. You make your own choices. What is important is that you make them, they are yours, and you are responsible for them.
If you have been wiped out, I am sorry. Your task is now to understand why, so that as you rebuild yourself it never happens to you again. Did you buy vapor stocks in the hope that prices would become ever more rarified? Now you know that conceptual bubbles are easily pierced by the sharp point of hard reality.
Margin Calls for Dummies
Did you have margin calls? Personally I am mystified how anyone ever allows such a thing as a margin call to happen to oneself. I have never had one. If you buy $10,000 of stock with $5,000 down and you experience the draw-down that necessitates the margin call, you have lost two-thirds of your stake. Now you need to triple your money just to get back to break-even. Triple plays don't come easily.
If this is your first market crisis and you have avoided destruction, then be proud. You will have gained a level of sophistication and self-knowledge from the experience. Experience is your invaluable guide in the markets. Consolidate that experience. Reflect upon it.
Sit down with a cup of tea and read - and not only the papers with the screaming headlines. You could do worse than to dust off the Sartre and Camus. Then read and re-read the only two market books that really matter: ``The Money Game,' by Adam Smith, and ``Reminiscences of a Stock Operator,' by Edwin Lefevre. Finally I would commend to you my own infallible guides: the Chinese and Japanese classics, foremost among them ``T'ao Te Ching' and ``The Book of Five Rings.'
Relief Unlikely Monday
How do we go forward from here? Painfully and fitfully, I would suggest. Asian and European markets will fall ahead of our nervous Monday. Our index futures may be higher, but it will mean nothing. Someone may try to rally things at 9:30, but I doubt it. I expect markets will stab lower again early on Monday before any serious rally attempt is mounted.
By the end of the day, we may have a modest recovery, or another drop, though I do not believe any losses will be as punishing as the ones experienced Friday.
At this point your portfolio should hold only cash, bonds, and whatever reduced holding of equities you absolutely believe in for the long term. You should have already performed triage, eliminating the vapor stocks entirely, reducing exposure to the solid stocks you like to raise cash for a buying opportunity ahead, while keeping a portion exposed.
Look to Buy - Safely
That buying opportunity will probably present itself by mid-week, or towards the end of the week. It may not mark the ultimate lows. We are entering the seasonally weak summer market period. But many things will be damaged enough to present the expectation of positive future returns.
It will not be an equal opportunity buying opportunity. You must stick to safety and quality, and buy quality at prices that make sense. Bristol Myers Squibb (NYSE:BMY - news)) is safety and quality in a neat package that you can buy right here, right now. Cisco Systems (NYSE:CSCO - news) is quality at over 100 times earnings; it is not clear that you can buy that yet. Companies with cash flow now are king, particularly if you can buy them at stupid cheap prices.
When you commit, think small. If your normal position size in a security is 100 shares, spoon into 30 shares. You may feel silly buying a 1/4 or 1/3 position, but I bought a 1/6 position in Chinatel (NYSE:CHL - news) late Friday, and I don't feel silly about it. Realistically, it is the only way to make sure you are not wiped out by further unexpected falls but exposed for the turn up. When the turn comes, it will be difficult to recognize, and more difficult to buy.
B2B, B2C Not to Be
Whole sectors of non-quality stocks are still big sells. David Lui, fund manager at Strong in Milwaukee, said on Friday that business-to-consumer and business-to-business e-commerce are not viable concepts in today's market. Unfortunately, since he is the top man in his sector, his is a voice that one cannot ignore. Biotech is finished for this cycle. Any company that needs capital from the equity markets is in dire straits, for the money window is closed. The best investors I know are still selling junk, but preparing to buy good.
If you think these things are too low to sell, remember as a rule of thumb that bubbles correct to the extent of 80% on average. Japanese real estate fell 80%. China concept stocks fell 80%. Biotech shares have fallen 80% in previous corrections of bull market excess.
Choose. Live to fight another day. Learn what the T'ao instructs about having and losing. And take care of the things that matter.
biz.yahoo.com |
