Anticipating A Stock Market Bottom

"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful. ~ Warren Buffett.

On January 17, 2008, I wrote that the U.S. stock market was likely in the first stage of a bear market, i.e. the continual volatility and painful decline. The events of the last couple days lead me to believe that the second stage of capitulation and bottoming may be getting close. However, as with many economic events, one doesn't know it has happened until a while later. Since I think capitulation and the bottom are near, here is what I am doing to prepare:

1. Continue to stay calm. We've been preparing for the possibility of a bear market for several months. Our strategy has been to protect our principal, especially the savings we need for the next three years. We (hopefully) won't need the money invested in stocks for the next 5 to 10 years.



2. Identify buying opportunities. I've updated my stock buy list using the Modified Unemotional Investor Growth system and will publish it on Monday, January 28, 2008.



3. Start making small purchases. I have begun making purchases between 25% and 50% of the total position that I want to hold of my updated buy list. I do this for emotional reasons. I realize that the market may go down further, but it may go up suddenly also. Investing only a fraction enables me to feel better if the market declines or to participate if the market goes up.
   
   However, if the market continues to decline after the first small purchase, I won't make any additional purchases.



4. Be patient. The bear market may last several months or several years. However, there will be a recovery. Of course, the quicker the bear market reaches a bottom, the better:-)

At this point, the 2008 stock market feels more like the 2002 stock market with each passing day. In 2002, I made the mistake of continually "buying on the dips" only to have the market fall further throughout the year. In addition, I sold out of most of my positions by the end of 2002, and missed the beginning of the bull market in 2003. By following the four above steps, I hope to avoid making the same mistakes in 2008.

While I hope this will be short bear market, there is a possibility that the decline may be extended. If the market continues to fall through February, I will revise my short term investing strategy and begin looking at individual stocks to sell short.

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This is not financial or investment advice. Please consult a professional advisor.

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