Remember The Last Time

Caller: there is something wrong with my account.
401k Firm: what’s going on?
Caller: my balance went down. did someone take my money?
401k Firm: uhhh…

Today I spoke to a friend of mine regarding the market. The reason why I share his thoughts is because I feel that he represents a fair example of those currently in the market.

He is a 36 year old consultant, a reasonable businessman and someone who has a decent knowledge regarding stocks in general.

“One of the stocks in my portfolio,” he says “was one of the top 10 gainers in Australia for the week. It returned minus 1%. The key is to do better than the market”.

So I asked him if he had sold anything and if he was planning on selling, at what price.

He replied that he had two shares that were recently bought out by Private Equity groups and he was waiting for the check. Once they came he would look for the dogs in his portfolio and sell them to offset any tax gains.

“I wouldn’t get worried just yet. However, if this turns into a full fledge bear market I might sell more.”

Then I asked how far would prices have to drop in order for you to sell. “Well,” he said “I have many dogs in my portfolio and I would see it as a good chance to sell them off and use them as tax write offs”

What I have learned:

1. People aren’t worried yet. They are becoming more observant of the situation at hand but few have acted upon their interests.
2. Investors will begin selling when they realize that this market won’t bounce back as it did in February, or 2003… or even 1987. It’s been a long time since we’ve seen a true Bear Market.
3. Investors call themselves long-term holders, however once they begin to see consistent selling they will be inclined to sell just to prevent further losses. This will be quite similar to buying in the 90s as equity prices rose.
4. If this is it, the Bear Market that will lead to a U.S. recession and a global sell-off, then there are few investors who are aware of what the implications are.
5. The average person will instinctively gamble in the red instead of cutting his losses early.

As Todd Harrison says “Don’t let your bad trades turn into investments”


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