One of the biggest issues we face as traders and investors is the issue of timing our entries into the market, or back into the market following a period of drawdown, as we have experienced of late. This is when the sustainability of our trading system will be fully put to the test, and when we as traders and investors need to have the strength of mind and conviction to trade within the rules of the system.
There is no doubt that the current bear market will eventually end and share markets will bottom out. Share markets may rise immediately or may then consolidate for an extended period of time before the next uptrend or bull market begins again at some as yet unknown point in the future. The question of how to time entries back into the share market will then be at the forefront of everyone’s mind as they try to decide whether or not to re-enter the market, and on what basis.
The problem is that just about everybody has experienced drawdown in their portfolios during the downturn. Not participating in the inevitable rise will guarantee that portfolios remain in drawdown.
In a recent article in the New York Times, Warren Buffet had the following to say about timing the market. It makes wonderful reading and all traders and investors need to give some thought to what Buffet is saying in this article, and to their personal interpretation of his words.
Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.
Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.
Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”
The full article can be found by clicking on this link “Buy American, I am”.
Whilst it is obvious that we can’t and don’t all invest as Buffet does, the important points in this article are the ability to have a set of guidelines to follow for trading and investing in shares, rules for timing your decisions to re-enter the market, and the fact that some exposure to the market in times of absolute fear is not a bad thing.
The SPA3 system covers all these aspects within its overall trading plan. We have a definite and precise set of rules for entering and exiting every trade, our overall timing decisions are based around market risk parameters – buying during periods of low market risk and reducing overall exposure during periods of high market risk. And, depending on the risk profile under which you are trading, perhaps maintaining a reduced exposure to the market even during a bear market in order to be in some stocks when the bear market ends and the market turns up again and thus effectively being ‘first cab off the rank’.
It is important to maintain cool, calm and collected, or put another way, consistent and objective, during these turbulent times in order to be prepared to participate in the ‘good times’ in the share market when they inevitably return. The key is to have a rigorous process that keeps you engaged, even if your exposure is very little or nothing, such that you get a call to action from your system when the market does turn.