Tuesday, March 24, 2009
At 822 the S&P 500 is down 8.9% YTD. Someone doing well thus far might be able to see breakeven versus December 31 and anyone struggling a little might be down low double digits. With that sort of range, anyone prone to emotion is probably in a less emotional state than they were two weeks ago. The sigh of relief I'm describing could promote some clearer thinking.
It would have been reasonable to see a stock owned trading at an absurdly low price and to wonder why it was still in the portfolio and to further think "geez if it gets back to $X I'm going to sell it." For most stocks, selling when it gets back to $X is probably the wrong trade for the long term.
One of the two mining stocks in my ownership universe (both are down a lot) got down to a sickeningly low number before bouncing 60% in about ten minutes (intentional hyperbole). Quite frankly, most of the stocks that you or your friends or your neighbors are worried about are going to survive and go on to make new all time highs. This is a point I have made before with the caveat that the time needed may end up seeming like too long or not be that bad, we'll see.
Let's pick a name at random that I do not own and have no plans to own; Deere & Co. (DE). At the current price it is down close to 2/3's from its high. At its worst it was down 3/4's and is now up 41% off of the low. According to Yahoo Finance it has earned $4.38 in the trailing 12 months and is estimated to earn $3.23 in 2009 and $3.07 in 2010. Even if you slash those estimates dramatically because you distrust the analysts the company is still very likely to eek out a profit while being able to service the debt--it does have a lot of debt BTW.
I'm not making a case to buy the stock, I'm making the case that it won't go to zero. Won't go to zero is not a reason to buy. I'm sure there is a bull case for the name but this is really just an example. Many of the people who own this stock are down a lot as you probably are with most of your stocks, as I am with most of the stocks I own personally and for clients. In my opinion there is no question that DE will work back to that high again as will many stocks but I have no idea if DE will make it back faster or slower than the market.
More important that stocks being down a lot now is defensive action taken hopefully early on in the bear cycle.
The point of all of this is selling a stock just to sell because it is down a lot is very likely the wrong trade. This is not to say that you shouldn't adhere to some sort of defensive strategy or consider reducing exposure after a a big rally in this environment. This is subtle and I may not articulate it well but the mind set of if ABC gets back to $X per share I'm out is more about emotion than logic as opposed to after an X% bear market rally I will reduce my net long exposure by adding an inverse fund or reducing exposure to something that bounced on emotion not reason or both. Hopefully that distinction is clear.