Oh the Sentiment of Man

I was reading through a rather bearish article explaining the coming credit bust and all that good stuff, mostly related to the Bear Sterns fiasco, when I see a rather bearish comment by a rather bearish analyst.

I always wonder how if so many analysts are predicting a bear market, how then can a decline occur. But after reading posts similar in mindset to the following it becomes quite clear that many analysts seem to forget what a bear market is and don’t make good of their senses and wind up losing regardless.

Dresdner Kleinwort’s global strategist, Albert Edwards in How to Survive a Bear Attack says, one should be monitoring the market, with the assistance of technical analysis, being that we are heading into what is the toughest quarter (third) for stocks.

His method for Alpha:

  1. Diversify your portfolio
  2. Seek safety in Government Bonds and Defensives
  3. watch to see if an ordinary market correction – where you buy on the dips – is turning into a full blown bear market where you should seel the rallies.
  4. Once you have incurred 20 per cent losses – sell everything, buy puts, buy vol. And rather than climb up a tree, hide under your desk till the bear market is over.
I would love to see this guys portfolio in a few months time. In my opinion he has created the best recipe for getting crushed by the market. Technical anlaysis never made anyone wealthy and this is because technical analysis tells you what the market did, not what it will do.

He obviously has no comfort in the companies he owns. “Diversification is for those who have no clue what they are doing”.

Buy Bonds
This seems to directly contradict his original mindset – if he ever had one. In a Credit Bust every financial asset suffers – and bonds are no exception. As we’ve seen in the past week the faith in bonds can and may erode fairly quickly with no prior warning to anyone.

Buy on Dips and Watch for Bears
These are the actions of a typical laggard investor who “buys when the price is low and sells when the price is high” having not the slightest clue what either one means. He is simply following a trend.

Sell at -20%
So once you’ve incurred a major loss on paper, go ahead and secure it. This goes contrary to the basics of successful stocks investing, never to even mention investments of any value whatsoever.

It makes no sense. If your issues are worthy why would they decline 20% and then be worthless enough to sell? And if they were worthless to begin with then why did you buy them?

Additionally. most Bears will sink a market by 20-45%. This being the case, the bear market may be over once you are getting ready to sell – the standard Despair Theory. The beginning of a correction is the time to sell and the ending is a time to buy.

Once a stock falls 20% there should seem to be more upside than downside. This is the game that market psychology plays on the minds of its players. They hold when they should be selling, and sell when they should be buying more.

But then again I wonder, who am I to question the logic of Wall Streets Finest?



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