The market officially entered a new Bull Market closing 20% above the most recent low. I’m sure that arbitrary metric is not very comforting to people’s minds after seeing their portfolio values during the market high set just one month ago. Considering the market is still down 20% from its peak the real question is: Is it time to buy?
This question is a fool’s errand. Timing the market is nearly impossible so we’ll start by focusing on the five-step plan, discussed in “What I learned Losing a Million Dollars”. The first step is to decide what type of market participant you are going to be. For our purposes as a retail investor, we must assume the position of an investor. What does this entail? Well, an investor is a market participant who has a very long time horizon.
The next step is to decide our type of analysis. Considering our position as an investor, a focus on fundamental analysis is probably best suited to our needs. This means focusing on the underlying fundamentals and the company’s ability to profit and grow their earning power over time. With this criteria analysis, how should we proceed? Well the first question to ask is “will the company in question be fundamentally changed by the Coronavirus pandemic?” If the answer is no (think Google), then ask “is their stock priced attractively?” If the answer is no, then continue to look for other opportunities, if yes, then we’ll continue to step 3.
Step 3 is developing rules. Our rules as an investor are simple: if the security is priced attractively with regards to their underlying business, we will hold the equity, if not we will terminate the position. This rule can easily become more idiosyncratic to the position with more information, however, the rules should largely follow the general one set above.
Step 4: Establish Controls. Setting parameters once rules have been set allows for the easy termination of a position if there is a change in the underlying fundamentals. By setting rules, the controls follow naturally for whether to keep the position or not. For example, if we decided before, that a drop in operating profits warrants the elimination of a position, then we will eliminate it once it drops below the predefined threshold.
Step 5: Celebrate. This is the final step. Relax and keep tabs on your position to ensure that it still fits the rules set beforehand. If it doesn’t then exit that position.
The markets have been wild. Setting a plan and adhering to it before entering into a position ensures predictability in an unpredictable situation. It may be impossible to know how the market will react, but you will know exactly how to act regardless of the market. Developing a plan is about the reallocation of power away from the market and into your own hands.
Hi Christopher,
I recently joined your email distribution and have been enjoying reading your blogs, they are very well written, thoughtful and informative. I am extremely impressed with your knowledge in investment and your writing skills. You come across as a very seasoned and mature investment professional and nobody can tell you are still in high school. I wish you lot of success in whichever career you choose to pursue and I will continue to follow and read your blogs. All the best and cheers!!