Panic Sets In

Another big downdraft in the markets today, as investors sold indiscriminately and headed for the safety of cash. We’re now seeing stocks put up a succession of >1% days in both directions, but mostly down, as volatility makes a comeback appearance. Since the inception of this blog in March, we have been looking for a significant correction in stocks, and have expressed concern about events in China and Europe, but never anticipated this kind of panic selling. Even so, readers have been cautioned to be defensive, so my hope is that you will avoid severe losses.

In a bull market, everyone is an investing genius. Simply pick out a few blue chip growth stocks or a good mutual fund, hold on to them, and watch your portfolio go up. The advantage of active management, and the creation of alpha, is made on the down side, by avoiding large losses. It takes a 50% gain to recover a 33% loss – simple arithmetic – and 50% gains are not easy to come by. Investing success requires knowing when to sell and stay out of the markets.

Now, where do we go from here? In the very short term, tomorrow is a “triple witching” Friday, when stock options, stock index options and stock index futures expire. That makes for volatility in the best of times. In this environment, who knows? There is no reason to be anywhere but on the sidelines for this. In the intermediate term, so much depends on political and central bank actions, and that makes for a treacherous investing environment as well. Some very credible analysts (not only perma-bears) are actually calling for a crash (thank you Cam). We’ll see about that.

The lessons of October 2008 apply here: be patient and be careful. At best, markets will find support and we can buy in again at better prices. At worst, we preserve capital and look for opportunities wherever they arise.

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