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Friday, 11 April 2008
How I Deal With Market Corrections!

I really thought about writing up another stock this evening.

Regular readers know that I like to write about stocks that I think deserve consideration based upon their price movement and underlying fundamentals.

But more important to me right now is dealing with the difficult trading environment and responding to market conditions within my own portfolio.

Many of you will have noted that I haven't been posting many "trading transparency" entries.  Because I haven't been trading.  My remaining six stocks haven't hit any sale points either on the upside or the downside.  And without a signal to do anything, I haven't.

When markets correct and stocks decline there are multiple courses of action that are motivated by fear and greed.  We believe we should justify our past decisions by buying more of the same stocks that have now declined on us and are thus 'better values'.  At the same time, we may act in terror at a market decline and simply 'throw in the towel' and sell all of our positions swearing never to buy another stock again!

It is obvious to me that it is difficult to know exactly what to do in these trading environments.  Is the market about to drop 200 points, or is it ready to climb 300 instead?  Sentiment changes by the moment.


I have talked about the "Zen of Investing" elsewhere. Many people have also written about this "Zen" concept from Motley Fool to Zenway.com where they pledge to "hear the 'grasshopper' even in the midst of Wall Street thunders and storms.

James K. Glassman has also written about "Zen investing: smart and calm"   For Glassman this means

"In the end, the best qualities for investors are the same ones Aristotle admired: moderation, common sense, restraint, modesty and integrity. Maybe, instead of five days of investor education, we should all sit down and read five days' worth of the ancient Greeks."

But somehow that doesn't get at what "Zen" is all about. 

Barry Ritholtz probably gets it best when he writes and quotes Buddha:

"Do not believe in anything simply because you have heard it . . . Do not believe in traditions because they have been handed down for many generations. But after observation and analysis, when you find that anything agrees with reason and is conducive to the good and benefit of one and all, then accept it and live up to it.-Buddha"

Jon Kabat-Zinn has described the role of 'mindfulness' in becoming more aware of our worlds, whether they be investment worlds, or worlds full of people and family.  He writes:

"Mindfulness is the other major classification of meditation practices, known as vipassana, or insight meditation. In the practice of mindfulness, you begin by utilizing one-pointed attention to cultivate calmness and stability, but then you move beyond that by introducing a wider scope to the observing, as well as an element of inquiry. When thoughts or feelings come up in your mind, you don't ignore them or suppress them, nor do you analyze or judge their content. Rather, you simply note any thoughts as they occur as best you can and observe them intentionally but nonjudgmentally, moment by moment, as the events in the field of your awareness."

For me, I have chosen to combine this "Zen" calmness, with the Robert Lichello automatic investing ideas, and the O'Neil CANSLIM observations on the "M" of the Market.  In other words, I have chosen to listen to my own portfolio and observe the actions of the market and to respond to them without judgment and analysis but with understanding and appreciation.

Within my own portfolio, when stocks hit sale points that I have previously set to limit losses, this represents not only a sale of a poorly-performing holding but a 'message' to me that demands my attention.  For all of us, stocks that end up being sold for poor performance or are behaving poorly without being sold are 'talking to us', telling us something about the state of the markets in general.

It is this observation, this mindfulness about my own portfolio, that has led me to set up my system of moving between 5 and 20 positions, setting my portfolio size in response to the actions of my own holdings rather than in anticipation of any market move which may or may not occur.  

This system has worked well for me.  I am currently at 6 positions, and shall wait for either a message of encouragement resulting from a sale at an appreciation target, and thus add a new position, or a message of discouragement, with a sale on a decline letting me know that things aren't well at all and instead I should be 'sitting on my hands.'

I don't know if this 'strategy' will work over the long haul.  I am but an amateur investor after all.  I do know that it seems to working now and I have been listening.  

Maybe we all need to be listening more to our own holdings, the stock market, and the news that is occurring all around us.  Instead of perhaps listening to the wide array of 'talking heads' that direct us to act on passions instead of mindfulness.

Yours in investing,

 

Bob 

 


Posted by bobsadviceforstocks at 11:50 PM CDT | Post Comment | Permalink

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