Tuesday, July 08, 2008

Avoiding Investing Mistakes I Made In 2002

The 07/08 bear market will test how much I learned from the bear market of 00/02. Here's a summary of what I did in 00/02 and what I'm doing now.



Lesson Learned

07/08 Action

I continued to buy on dips, which worked until late 2001. However, in 2002, the market just kept going down, as did the stocks I owned.Buy on dips only when the market is in a long term upward trend. Using market indicators such as the ratio of new highs to new lows, I think I am better at recognizing a short term pause in a bull market versus a declining market. Currently, I believe we have a declining market.
Expensive stocks became cheaper and appeared to become value stocks. After going from over $100 to $10, it appeared that up was the only direction some of these stocks. Wrong! Many of these stocks proceeded to $1 or nothing.Avoid value traps and make additional purchases after a clear reversal and uptrend has occurred.I no longer dollar cost average positions that I have. If a stock goes down right after I buy, I continue to hold it, because I believe it is a good company. However, in case I'm wrong, I wait for it to resume an upward trend before buying more.
At the end of 2001, I didn't sell any losses to offset gains. I believed that the stocks would rise in 2002. Instead they declined further.Losses often get bigger for a stock in a declining market.In 2007, I sold all my losses that could offset taxable gains, and therefore, minimized my income tax.
At the end of 2002, I sold all the stocks in our personal accounts. As a result, we missed out on the 2003 market gains.Always have some exposure to the stock market. In 2008, I will continue hold the majority of our current investments, and occasionally sell small portions (e.g. less than 5%) during rallies to raise cash.

In the 00/02 bear market, my only investing strategies only involved owning stocks, not owning stocks or options. From 2003 to 2004, I experimented with shorting stocks, which focused on companies with poor business performances and extended declines in their price. This approach to shorting had enough success that I plan to use it again in 2008.

For more on Ideas You Can Use, check back every Tuesday for a new segment.

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

Copyright © 2008 Achievement Catalyst, LLC


Christian D. said...

Long time reader (weekends mainly!) and I've enjoyed your posts.

This one is particularly interesting to me. Do you have a system of some sort that your following to determine when to buy and when to sell?

I've been following Point and Figure and so far it's been great. Haven't made a ton of money off of it, but as I go through the market gyriations it's helped quite a bit!

Super Saver said...

@ Chris D.

Thanks for your comment and kind words.

I currently use the buy and sell signals from the Unemotional Investor Growth system, with some modifications based on market indicators and personal judgement. I've just started using 50 and 10 day moving averages as an additional confirmation.

Thanks for making me aware of the Point and Figure approach in your comment. It looks like a good system for identifying entry and exit points.