How we eluded the bear in 2000

The date October 13, 2000 will forever be embedded in my
mind. It was the day after our mutual fund trend tracking
indicator had broken its long-term trend line and I sold
100% of my clients’ invested positions (and my own) and
moved the proceeds to the safety of money market
accounts. Some people thought we were nuts, but I had
come to trust the numbers.

The shake out in the stock market, which started in
April 2000, had all major indexes coming off their highs,
violently followed by just as strong rally attempts. The roller
coaster ride was so extreme that even usually slow moving
mutual funds behaved as erratically as tech stocks.

By October, the markets had settled into a definable
downtrend, at least according to my indicators. We sat
safely on the sidelines and watched the unfolding of what is
now considered to be one of the worst bear markets in
history.

By April 2001 the markets really had taken a dive, but Wall
Street analysts, brokers and the financial press continued to
harp on the great buying opportunity this presented. Buying
on dips, dollar cost averaging and “V” type recovery were
continuously hyped to the unsuspecting public.

By the end of the year, and after the tragic events of 911, the
markets were even lower and people began to wake up to the
fact that the investing rules of the ‘90s were no longer
applicable. Stories of investors having lost in excess of 50%
of their portfolio value were the norm.

Why bring this up now? To illustrate the point that I have
continuously propounded throughout the 90s; that a
methodical, objective approach with clearly defined Buy and
Sell signals is a “must” for any investor.

To say it more bluntly: If you buy an investment and you
don’t have a clear strategy for taking profits if it goes your
way, or taking a small loss if it goes against you, you are
not investing; you are merely gambling.

The last 2-1/2 years clearly illustrate that it is as important
to be out of the market during bad times, as it is to be in the
market during good times. Want proof?

According to InvesTech’s monthly newsletter it turns out that,
measuring from 1928 to 2002, if you started with $10 and you
followed the famous buy-and-hold strategy, that $10 would
become $10,957.

If you somehow missed the best 30 months, your $10 would
only be $154. However, if you managed to miss the 30 worst
months, your $10 would be $1,317,803! Thus, my point:
Missing the worst periods has profound impact on long-run
compounding. There are times when you end up better off by
being out of the market.

Interestingly enough, if you missed the 30 best months and
the 30 worst months, your $10 would still be worth $18,558,
which is 80% higher than the buy-and-hold strategy. This all
comes about because stock prices generally go down faster
than they go up.

Wall Street and most people tend to overlook the value of
minimizing loss, and that is exactly why the bear demolished
more than 50% of many peoples' portfolios while I and those
who trusted my advice escaped the worst of the beast's
rampage.