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TheDumbMoney (58.47)

Excellent Practical Advice for the Crash...Yes, Crash

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August 19, 2011 – Comments (16) | RELATED TICKERS: SPY

I'm a regular reader of  Josh Brown ("The Reformed Broker").  He has a great post up today that I highly, highly, highly recommend:

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"Pay attention because my entire career has been spent against the backdrop of one big slow-motion crash amid the secular bear market that began in the spring of 2000 and probably won't end until later this decade.  I've had my ass kicked a million times by crashes but have gotten better at avoiding these things with each successive postmortem I've conducted.

You want to survive this crash and the next one?  Then follow Downtown Josh Brown's Rules for Surviving a Crash:

[see the link below for the rules]:

Downtown's Rules For Surviving A Crash

Maybe it just feels so apropos because my "investing career," such as it is, overlaps so totally with his.  I bought my first stocks in 1997/1998 in college and started paying attention to the markets regularly in 2001.  It's excellent advice no matter where you are on your investing journey though.

16 Comments – Post Your Own

#1) On August 19, 2011 at 3:29 PM, TheDumbMoney (58.47) wrote:

I should add that I don't follow it all, as I'm more of a long-term holder and less a 'trader,' perhaps to my detriment.  For example, instead of going low bet now, I went low beta a year or more ago, with intentions to hold those stocks forever as a portfolio base.  And although I'm higher risk on my EM ETF positions, I have no problem just holding and holding and holding through a crash and rebound on those. 

 One thing I really do think though is it's important not to get too excited about the drops.  I always tell myself this, and then I go do something like yank up some SODA because it drops 40% in one day.  Well, if we go into a recession (or if we already are, as subsequently may be realized), it may sell for $30.  And the whole market may be much lower. 

That's not to say it's bad to dip one's toes as it goes down.  I guess I can characterize what I have been doing as that.  It's just that I think experience likely teaches one that it's better to lose some points by buying too late on the upturn than to risk the loss of more by buying too early and finding the bottom is much lower than one can reasonably anticipate.

Just ruminations.

DTAF

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#2) On August 19, 2011 at 4:10 PM, chk999 (99.98) wrote:

Those are dang good rules the guy has!

Thanks for posting that. 

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#3) On August 19, 2011 at 4:20 PM, catoismymotor (66.27) wrote:

Frankness without a hint of being a fearmonger. Thanks for the link.

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#4) On August 19, 2011 at 4:24 PM, EnigmaDude (96.95) wrote:

Good stuff, indeed. I think this sums it up nicely:

"The deal with crashes is that extremes are the norm, not the exception.  Things tend to overshoot through reversion to the mean trendlines or fair value estimates on their way back to stasis."

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#5) On August 19, 2011 at 4:54 PM, TheDumbMoney (58.47) wrote:

Thanks all, I think he is very smart.  He is often linked to by Abnormal Returns, which is a daily-read finance aggregator for me, the best on the web that I have found.

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#6) On August 19, 2011 at 5:04 PM, KommanderKhaos (71.18) wrote:

Very good advice. Thanks for the link!

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#7) On August 19, 2011 at 5:14 PM, skippyfx (71.36) wrote:

I liked it, thanks for sharing!

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#8) On August 19, 2011 at 8:01 PM, TSIF (99.96) wrote:

Good stuff...sometimes it's hard to accept what you know is true.

I've invoked my prenuptual with a few of my equities the last month or so.....a few I extended the cutoff date, but not much more!  ;)

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#9) On August 20, 2011 at 6:14 PM, Frankydontfailme (27.47) wrote:

Agree 100%

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#10) On August 20, 2011 at 7:59 PM, truthisntstupid (95.80) wrote:

Some good rules to go by.   But why do they call them 'crashes' instead of 'sales?'

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#11) On August 23, 2011 at 9:56 AM, beadnell (49.95) wrote:

Good link.

#5 puzzles me: "Make sacrifices by reducing stock exposure by beta and volatility." If you originally wanted the stock, why don't you want it now? I can only guess is that the volatility is being taken as a clue to vulnerability of the company to a squeeze in interest rates, input costs or sales: am I right?

If I try to rebalance, I might even end up wanting to sell the blue chips, and buy more of the cheap stocks, as long as you remember that it may be a long time before the institutional investors want more of them.

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#12) On August 23, 2011 at 12:49 PM, TSIF (99.96) wrote:

@10  Truth, in a crash you don't think, you exit the airplane out the windows and using the slides....you don't worry about your personal possesions.  ;)

@11  Beardnell, you are missing the part about the plane being on fire. You wanted to get to your destination, but at this point you want safety so you can have the option to try to get to your destination later. If you don't protect your capital (your arse), then you can't try again later.  ;)

It's not the company's vulnerability to every day events, it's the stock prices vulnerability to a market panic.  In the middle of the crash is NOT the time to think about rebalancing.  Would you rather buy the "cheap stocks" during the crash in mid-air at $.80 on the dollar, or at the bottom at $0.50 on the dollar??

Of course no one knows where the bottom is, but it's usually best to let the smoke clear a little bit, enter in after it appears to be safe and be ready to jump out again if the upward movement was a head fake. I'd rather miss a little upside than get caught when the fire flashes back up and the exits are too far away.

Good luck.

TSIF

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#13) On August 23, 2011 at 1:08 PM, TheDumbMoney (58.47) wrote:

There is a bit of a disconnect in the comments between a trading mindset and an investing mindset, at least if one construes the latter as meaning "buy and hold."

The piece is clearly written from a trading point of view, but is I think highly useful to both types of investors.  For me, as a *generally* buy-and-hold type, I think it is useful because my tendency is to get greedy on the way down, and buy more.  I did that with my SODA purchase -- I got all excited because it was down 40% in one day, because unlike many here, I like the fundamental business model.  As one All-Star pointed out on that blog, it was likely to see a top around $50, and to go lower.  And it has.  And likely will.  I am so silly, I recognized it at the time and wrote about it, but my greed and emotion got the better of me and I bought.

So I think as TSIF alluded to, that this advice is great for the long-term investor.  Yes, you can view stocks as being on "sale."  But that doesn't mean they can't go on "super-sale" a few months from now.  In a crash, things really do shoot through the mean on the downside, as they did in 3/2009.  And by some measures stocks are still expensive.  Looking at technicals and evaluating sentiment helps.

When I really got serious about investing a couple of years ago, I was obsessed with Graham and with valuation.  And I still will never be a trader trading on the technicals, or a macro asset allocator like the GMO firm is.  But I think even for the fundamentally-focused long-term value-only investor, there is a great deal to be said for timing one's entry points.  Obviously the first frame of reference has to be a valuation analysis.  But at a secondary level, the charts do tell a very short-term emotional story, and I think some value can be added by at least not willfully ignoring them.

For example, while I would love to double my holding In INTC today, I would like it even better if I could double it at $17 in a month or two.  And if it seems like the economy isn't going into recession and people get happier after Jackson Hole on Friday and INTC's margins aren't slipping a ton, I'll make out just fine in the long-term by buying it at some future date at $21. 

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#14) On August 25, 2011 at 1:04 PM, beadnell (49.95) wrote:

TSIF, you said: "let the smoke clear a little bit, enter in after it appears to be safe and be ready to jump out again if the upward movement was a head fake."

I guess I understand the point now, and why I might want to follow Brown's advice to get out of the more variable stocks. So thanks for taking the time to guide me.

The trouble for me is that the price level I jump back in at is likely to be as high or even higher than the price I jumped out at. An unstable stock will always be unstable, even in a stable economy and a stable market, and I, personally, will not be able to judge a time to get back into a biotech or emerging market stock that I like. I guess the "double dip" recession is already priced into stocks, and stocks won't become safer until we start hearing great manufacturing, confidence and jobs figures. By then, capital I moved to safety (cyclicals, bonds, money market) will have less buying power than it was when recession, or fear of recession, was priced into the market.

I should be able to make money I want to spend in the next five years safer, but I don't see any fixes for protecting capital that I want to grow for retirement.

Dumberthanafool: I like your point about timing entry points. I already wrote about my concern when a greedy 60-day limit order bought me some extra equities at the start of the market jitters.

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#15) On August 25, 2011 at 1:23 PM, TSIF (99.96) wrote:

 dumberthanafool  Thanks for clarifying my comments, yes, I was applying the advice to longer term buy/hold. I also agree that it's VERY hard not to jump in and buy more when an equity you hold is falling...if it was a good buy at P$A it must be an even better buy at P$B, etc...etc....  Patience is tough for a long term investor in this market!!!   Charts do help if you can use them ,but when you break down out of the technicals, the "new" techicals are hard to call!

 beadnell  An unstable stock will NOT always be unstable in a stable economy.  Unfortunately, we haven't had a stable economy in a long time!  You can tell when an unstable stock is "feeling" the love and when it's not. It will be the "second" type of equity investors/speculators will  buy when they think it's safe to enter the waters, and the first they will sell when they think it's not.  So buying them back up is really not that hard.  Wait until the mroe stable stocks have set a clear path.

Part of timing an "unstable stock" is the technicals.  How fast did it climb?  How many current stock holders are holding a profit?? Look at the volume that's traded over the current/recent price points. An investor/speculator is MUCH more likely to sell when an equity he owns drops 3-5% if he has more profit to protect.

BIOTECH's and Emerging markets are especially troublesome to "time" and especially unstable. (Yes biotechs are unstable even in the rare stable market). You have to "play them" on data studies/reports, time to FDA hearings, etc.

I think the key on Biotech's and Emerging Markets is to only buy a select few that you have time to research and monitor.  I assume these are what you are calling your five year money, these are NOT for retirement, these are for speculation and it's just as easy to speculate on them when the market is showing decent upward trending.

It's hard to say where to park your funds when the market is unstable. You can try buying something you think has high value when it's beaten down and then IMMEDIATELY set a tight stop. If it sells on you, you can decide when to buy it back.  I don't like stops in a stable market due to the flash crash issues, and my not following as close as I should on earnings dates and other short term catalysts, especially on my longer term holdings where long term capital gains has to be considered.  Stops on a "trading stock, kept tight does work for me.  Bounce it up as the equity moves up and you should have some profit if you get tripped out.

In this market...don't fall in love with your stocks!!!!

Good luck.
TSIF

 

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#16) On August 27, 2011 at 3:57 PM, beadnell (49.95) wrote:

TSIF - that makes a lot of sense. Thanks for tips on stops.

(1) Five year money will be in CDs. It will lose buying power, but if it tanks, we all have bigger problems.

(2) Small allocation of retirement money is looking for growth in emerging market ETFs. Maybe I will reduce the allocation.

Good luck to you too.

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