Wednesday, November 28, 2007
One term I hate is "making a list." In various interviews the person being interviewed might be asked about making a shopping list of names to buy for when things get cheaper.
While I am being overly critical it seems that many do-it-yourselfers are in to whatever extent they want to be in and so buying some stock when it gets cheaper probably means selling out of something else that might also have gotten cheaper.
"That being said, I do have some thoughts" (that was Austin Powers' line to Stephen Spielberg at the start of the movie Gold Member).
I have been clear that I think the odds now of a bear market are very high, if I am right it would have already started but who knows? If that turns out to be correct that means the bear market will last however long it lasts, I believe 18 months is the norm, and then it will end.
For anyone who is inclined to make any changes ever to their portfolio, the transition from bear to bull would be one of the times to make some changes. I've probably picked out seven names so far to rotate in to the mix which would probably change the overall characteristics of the portfolio by a noticeable amount.
At this part of the cycle reducing volatility (for me that mean more cash, some double short and a larger cap bias) makes sense. Coming out of a bear I would think it makes sense to increase volatility (so I would have less cash, no double short and have a smaller cap bias).
The next question becomes when does it makes sense to make these changes? There are a couple of easy answers but I doubt it will end up being so simple. My hunch about this bear market (assumes for the time being I am correct) is that it will be normal. Normal is 25-30% and we are already down 9-ish%. At down 20% I might make a first, small step to reduce the defense, maybe a little more at down 25% and maybe a touch more at down 30% if we ever got there.
Another simple idea would be to make changes when the market takes back its 200 DMA after a bear market decline. This is a little trickier because I will be wary of any move higher if this does not devolve into a bear so in a way we'll have to see what the market gives. To be clear this is something that, if I am right, would play out over more than a year.
Since there is no way to know what the market will do or when it will do it I think it makes sense to explore and be ready with a couple of different paths you might take, this is if you do any of this.
I mentioned I have about seven stocks picked out for now, the seven may change and I expect there will be more in the next few months. The names don't matter as that is not the focus of this site. I would say is that I am trying to go sector by sector and exploring ways to add beta for whenever the next cycle starts.