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QualityPicks (34.25)

Bear market? and the next bull



August 14, 2007 – Comments (4)

I have been waiting for the housing bubble to burst for 2 years. It finally seems to be getting some traction in the last 3 months. I keep checking my area for prices and inventories, and certainly inventories are high, houses stay on the market for very long, and prices are coming down.

My investing psychology was permanently altered with the tech bust in 2000. As an investor, I used to never get nervous and would always welcome corrections. However, after the tech crash, I can't help but panic every 5% drop in the markets. I have learned all I can about the markets since the crash. The real estate market bubble has made me so nervous for the last 3 years that I can't really "invest" in anything. My stocks seem to go up 10% and then drop 20%, then I panic and sell with a 10% loss :) then they jump up 40%. I can't help it; I'm always thinking the housing bust will cause a major bear market.

I'm so tired of this psychological problem, that I really hope that the bear market I have been so scared of is finally starting right now. I just want to get that over with.

Nobody knows for sure what will happen. But I still remember the way the markets behaved during the tech bust. And things seem to be following a similar script.

Tech boom got out of hand with the dot-coms. The housing boom got out of hand with subprime and arm loans. The tech debacle started with the dot-coms going bankrupt. The housing debacle started with the subprime lenders going bankrupt. Tech stocks topped in March 2000. Housing stocks topped in August 2005. Everything tech started to come apart starting March 2000 but the rest of the markets (for example, the DOW) threaded water for a year or two. Then everything fell apart around March 2002, almost two years later. Tech took the rest of the economy down with it and the markets did not really bottom until 2003. It has now been close to two years since the housing debacle started.

I work in the technology business, as do a lot of my friends, so I lived the tech bust first hand. While we are now doing well, the bonanza years have not returned and probably won't return for many more years. Sure a few companies here and there like Google and Apple will always thrive, but I'm talking overall.

I don't know if the rest of the housing bust will end up being the same as the end of the tech bust. There are some differences. I know home builders valuations were really low at the top, which is in stark contrast with the tech bust. A lot of mutual funds were heavily invested in tech in 2000, so the contagion was obvious and much more serious. During the crash, most professional money managers learned their lessons, and later, saw the housing bust coming and stayed away from it (mostly). That is probably what caused the low valuations in housing related stocks.

However, the fact that most mutual funds are not heavily invested in housing does not necesarily mean that the housing market bust will not affect the rest of the economy and markets. Consumer spending will be down significantly as we put an end to the home equity withdrawals (who didn't use equity out of their house to purchase a car or do home improvements?). Also, mortgage related securities were re-packaged and re-sold, so a lot of people don't know their exact exposure to them.

Once we have a recession and a bear market, the next bull/boom will probably be related to the "global economy". That one has been going on for 3 years now, but has not gotten all played out. We are only at the middle of it I believe. There has been no bubble there, only a great run so far. A bear market would certainly take a lot of stocks to bargain levels.

It has been interesting so far how this plays out. In CAPS I have seen my score go from the top 5% to the bottom 5% several times. Pretty wild rides I would say. I think I need to use the red thumb more often to weather volatility. But I know markets bottom when I'm at the bottom 5% and they top when I'm at the top 5%. There you go, a timing model! Just kidding, timing does not work when you try it with real money.


4 Comments – Post Your Own

#1) On August 14, 2007 at 6:19 PM, StockSpreadsheet (67.84) wrote:

If you keep selling for a 10% loss when the markets are down, you might want to consider investing in mutual funds and then ignoring their prices except for rebalancing once a year or so.  It might save you from locking in losses, (and then missing out on those 40% gains that happen after you lock in your loss). 

And as the Motley Fool is always saying, if you invest regularly, don't worry about a bear market.  It just gives you a chance to buy stocks on sale.  (This is assuming that you still have 10+ years until retirement.  Otherwise, other factors, (such as protection of principle), can come into play.) 

Just a suggestion.  Have a nice day.


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#2) On August 14, 2007 at 6:28 PM, FourthAxis (< 20) wrote:

I would tend to agree with Craig.  If you just can't stomach the moves of individual equities, then invest in funds or ETFs, they can't go to 0 and buying on drops will work no matter what if you don't need the money now. 

If you really want to keep investing in individual companies, try using stops.  Once you get your initial gain, just put in a reasonable stop to protect your gains.  A gain should NEVER turn into a loss.  If you get stopped out and the market goes back up, that just means you didn't make as much as you could have.'re already there so you may as well keep dancing till the ship goes down.

Good Luck!

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#3) On August 14, 2007 at 7:19 PM, QualityPicks (34.25) wrote:

I invest in good mutual funds long term, no sweat there. Individual stocks and specialized ETFs are a different beast though.

I mainly wanted to point out the similarities and differences in the tech and housing boom and bust, and get the valuable opinions of the CAPS community.

During the tech bust a lot of individual stocks dropped 90% or more and didn't comeback. Using ETFs is also not as easy as it seems. The QQQQs are still more than 50% down from the top, even after 7 years.

Anyway, I understand long term and the Fool's philosophy. I look for stocks with growth prospects, decent valuations, high insider ownership, etc. But it still not easy. Small cap stocks often drop 50% for no good reason. That means I need a 100% to break even.

I'm not giving up on stocks, I know their potential (both ways). I was just "wishing" that we had a bear market so my mind would stop playing tricks with me :) Thanks for the help guys.

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#4) On August 14, 2007 at 10:09 PM, Imperial1964 (95.47) wrote:

I agree with you that a bear market is coming before long IMHO, but despite my belief I am putting money into the market perhaps at the peak.

1) I don't think the bear market will come for at least another few months.

2) I'm keeping about 1/3 of my money in cash (at 5%), so I'm doing OK either way.

3) I am confident enough in my picks and believe them to be somewhat conservative  or non-corrolated enough that I expect them to outperform the market anyway.

And if I'm wrong, it will be a cheap lesson early in my investing career.

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