Saturday, 26 January 2008

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Bear Market Mistakes Offer Bullish Lessons

Here is a little bear market wisdom from the archives:

"Made a mistake or two in the recent downturn? You're not alone. From succumbing to the lure of "cheap" stocks to holding on to those past their prime, there have been scores of opportunities in the past few months to take a wrong turn. "I think buying stocks as they're falling, or buying stocks that are really beaten up and thinking you're getting a good value, has to be the No. 1 fault that individual investors make," said Dick Gould, portfolio manager of Rockland Growth Fund. While stocks that have broken down are cheap, there's a good chance they'll get cheaper. And there's no guarantee they'll recover. "I will only buy things breaking out to new highs," added Gould, whose fund returned 109% last year. "I won't do any bottom fishing, but I would bet that 99% of investors are going to go after stocks that they think are a good bargain." Mike Doran, president of Sierra Capital Planning in Shingle Springs, Calif., echoed the sentiment. "There's also the emotional attachment that's related to you've done all this homework and looked into the fundamentals," he said. "You kind of lull yourself into complacency." But a stock with great sales and earnings won't do you any good in a bad market. A stock that drops 7% or 8% from your purchase price should be sold, no questions asked. If it's made some gains, you need a plan in place to nail down profits. "You have to have some rules," Doran said. "The easy part is the buy side. Then you cross into the emotional aspect of how long to hold it and when to sell." Stick to your sell rules religiously - no matter how enamored you are of a stock. But even pros sometimes break their vows. "I had that happen with Web-Trends. I was going to cash, but I really liked its fundamentals," Doran said. Among other things, the Internet software maker had racked up triple-digit profit and sales growth in recent quarters. A leader in its industry group, it also withstood the market's slide - at least initially. Though Doran had sold all his other positions, he held onto Web-Trends as it eventually tumbled. In the end, he avoided a loss when he finally sold near the stock's bottom, but the nose dive wiped out nearly all of his paper gains. "When the stocks talk to you from a selling standpoint, they talk to you on the technicals," he said. "If the stock is talking to you, you need to listen, and the way to listen is with the price-volume action." A stock sinking on heavy volume is usually saying that mutual funds and other big investors are unloading their positions. It pays to be patient, especially when a correction is in full gear, as it is now. "Some people are buying without getting really strong confirmation from the market that a bottom has been made," said Greg Kuhn, a hedge fund manager who also writes for "Really, it's so important at times to be able to just walk away in a bad market environment, to just sit back and make observations.""

Christina Wise
IBD, May 12, 2000

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