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fransgeraedts (99.92)

The slow motion crash is over; start buying

Recs

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October 28, 2008 – Comments (7)

I have been a bear since i started as a CAPS participant. I made my points betting the financials down, gold up...and then betting the shops down..and then betting the commodities down.

I think that a bearish stand is no longer warranted.

Stocks are cheap now. They are cheap for the first time in a decade.

YES, i think we will get a severe recession. No, i do not think it will become a depression.

I think however that in most of the cyclicals the recession is now factored in.

NO i do not think that the credit crisis is over. We have still a lot of bad credit to work through. And there are still many systemic risks at large with regards to the global trade in derivatives.

But i think a lot of that pain is already in the price of the financial stocks.

NO i do not think that this marks the beginning of a great bull-market. The technical damage in the market is to big for that. And the great dying season of hedge funds has only just begun. 

But i think a signifact low has been formed. Two resistancepoints are of special significance.

The S&P 500 has not broken the low it made in the last bear market. That low is around 800.  

The banking index (KBW) has not broken the low it made in july  ..even though armageddon was declared in the financial markets.

Both have held in the last two weeks.

I do not know of course wether or not those lows will be broken. But it seems to me that it could well be that they will hold for the foreseeable future.

A rational strategy at this point is to begin buying the stocks of quality companies. Stocks you will want to hold a long time. Do not chase them. If the market rallies buy them at the new higher lows. If the market moves sideways, buy them everytime it reaches this bottom.

Only use a part of your capital. Work slowly.

If the market breaks through the lows that have been made in the last weeks wait till a new low has formed and buy the same stocks again. This time with more capital.

At this point in time this strategy cannot fail. It is not impossible that the S&P falls another 200-300 points. But because stocks are now so cheap they will over the next ten years bring easily 10% a year. Its possible that the next two or three years will yield much less. But that only means that after that they will yield more.

fransgeraedts

 

 

 

 

7 Comments – Post Your Own

#1) On October 28, 2008 at 11:49 AM, goldminingXpert (29.55) wrote:

"strategy cannot fail"

Famous last words. This market can and will go lower. Ever heard of "multiple contractions?" 

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#2) On October 28, 2008 at 12:27 PM, fransgeraedts (99.92) wrote:

dear GoldminingXpert,

 

i know i know..did you hear the tongue in cheek?

but..but..i really do think that a strategy as i outline here will not fail.

let me explain.

What i am suggesting is not that you go out and commit all your capital to the stockmarket now. On the contrary. I am however suggesting that you should begin to buy now. Lets say with 10% of your capital. And that you should add new capital slowly but surely...upto maybe 20%?

I expect  (but i am not sure) that the lows that are now forming  -if they hold- will be tested again in 2009.

If that happens and they hold again i would commit another 20%.

If they do not hold i would wait till the new lows have formed -and then i would commit not 20 but 40%. Bringing the running total to 60 %.

You have to look at the historic perspective.

The bear market of the past year is already comparable to those of the twenties and seventies. They were a bit steeper still but not much. Now imagine the market going down another 25% from here..in the S&P 600 range. That would mean that stocks have become a screaming buy.  

Contrary what you seem to suggest i would welcome a second contraction because it would make it possible for me to invest my second tranche of capital at even better prices.

By committing a first tranche now..if the lows i mentioned hold...i am however making sure to lock in some of the bargains already available now

Fool on

fransgeraedts 

 

 

 

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#3) On October 28, 2008 at 12:36 PM, MaskedMan2007 (99.36) wrote:

Very good recommandation for a long term buy and hold strategy.

I think that you did your homeworks and you know the different possible path that the market could go trough.

Good luck

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#4) On October 28, 2008 at 6:32 PM, nuf2bdangrus (< 20) wrote:

I want to.  I wish.  But I have gotten BURNED every time I have tried to buy dips and DCA.

 

To many unknowns

 

leveraging

government interference

 

Knowns--S&P earnings estimates way too high.  Fair value under 800.  I am almost all out, and missed the rally.  I will short any subsequent rally.

This market is unhealthy.  

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#5) On October 29, 2008 at 3:52 AM, fransgeraedts (99.92) wrote:

Dear Nuf2be

i agree wholeheartedly. This market is at the moment unpredictable. This market reflects an unhealthy state of affairs in the financial markets and in the economy.

But...over the long run stockmarkets are predictable. They rise.

I have always disliked and distrusted the simple "buy and hold" rethoric. It is of course true that by picking quality stocks and holding them forever you will in that very long run be able to profit handsomely from the general rise. But in the more realistic timeframes we mortals have to work with -say 30 years- the point of entry, the moment you buy stocks makes a huge difference. If you for example bought a basket of stocks of quality tech stocks in 2000 ...you would still be looking at major losses. Japan in 89, the best banks of the world a year ago, the best commodity stocks 4 months ago...you get my drift.

If you diversify your stocks some of these problems can be avoided -true. But not in great bear markets like the ones around 1929, 1974, 2002 and 2008. Buying a diversified basket of quality stocks in the years leading upt o these great disruptions and then holding them would put you underwater for a decade or more.

So timing matters. It matters hugely. True buy and hold believers counter that by saying that it is not possible to time the market.That sounds reasonable and seems to be validated by the experience most of us have in trying to predict movements. I would be happy to concede that indeed on a day to day basis the markets are unpredictable, their movement random. But, again, in the long run, with regard to the big movements, timing is possible.

In a nutshell: in a buy-and-hold-for-thirty-years perspective (buying stocks for retirement, buying stocks for your children) this period of time is actually one of the safest in history to make an entry.

I am not saying that the market will not go lower from here. It could. It could significantly. What i am saying is that the largest part of the drop is behind us. We are down in the S&P from1600 to 800. Lets say it will drop another 200 points. The difference is is between a 50% drop and one a bit over 60%.

What i am saying is that if i buy the S&P around 800 and it is at 1200 in ten years i will have made 5% a year ..without the dividends.

Waht i am saying is that if the S&P drops to 600 and i buy again..bringing my cost down to 650...i will have made almost 10% a year..without dividends..if the S&P reaches 1200 in ten years.

I am not suggesting however to buy the S&P. I am suggesting that people shouldl buy the best companies near their lows now. With a part of their capital. And buy again if the market drops again. This should reap even higher profits.

You can time the market most easily after a great breakdown. That time is beginning.

 

fransgeraedts  

 

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#6) On October 30, 2008 at 5:16 PM, filiavocis (97.40) wrote:

Right on brother

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#7) On November 03, 2008 at 4:52 PM, BigFatBEAR (29.20) wrote:

It's nice to see someone else in Fool Land esposing my exact view of the opportunities and strategies for this current market! Well thought-out and written.

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