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HOW
TO REMAIN CALM DURING MARKET CORRECTIONS
by Greg
Silberman
goldandoil.blogspot.com
May 24, 2006
Let’s face it, nobody can consistently Beat the market!
It’s definitely possible to have periods of Out-Performance.
I know many nimble Traders that do.
But to consistently Beat the market, year-in and year-out is just NOT possible.
By and large investment returns resemble the index of assets and risk class that you’re investing in.
One reliable way of doing better than the market is to buy what others are selling, to sit on it until people realize the value and then let them take it off your hands at much HIGHER prices when the Mania sets in.
Buying what others don’t want is a very difficult concept to practice!
Sitting on the item until the Mania sets in is even more difficult.
Take Gold for example. Gold became so cheap at the end of the 1990’s that anyone who discussed it with their broker got shot down for even contemplating it!
Yeah, that’s changed a bit.
But only a bit.
Most people are happily clueless about buying Gold. More importantly, they remain completely unaware of the implications of an ever increasing Gold price.
So yeah, even now, after 5 years of Strong price Action it’s difficult to be a buyer of Gold and Oil stocks.
But you did it! You stepped up to the plate and bought some Resource Stocks.
You’ve been having quite a party lately.
But now you’re beginning to see the other side of Commodities.
A side you’re not accustomed to and frankly a little bit scared of.
The DOWNSIDE.
I’ve sat through a few gut-wrenching corrections in my investing career and I can tell you they’re NEVER fun. Corrections are VERY HARD on the Emotions!
But if you want to make money in the markets, the really BIG money, then its necessary to
always have a stake in the Game. And that means being exposed to violent corrections.
So if you cannot trade your way through the market (most of us can’t) and if you have to be invested at all times, is there a technique to make Corrections more tolerable?
The answer is a resounding Yes.
Here are 2 techniques I use to ‘Keep Me in the Game’ and prevent my nerves from getting Frazzled!
PORTFOLIO ANCHORS:
There is one area of Precious Metals that doesn’t concern me in the least.
Prices can go WILDLY higher only to come CRASHING back down the next day, I won’t lose a moments sleep.
That’s PHYSICAL GOLD and SILVER.
There is certainly something alluring about holding the genuine article in your hands. Call it spiritual, call it whatever you want, Man has some inbred coding that makes him (or her) Lust after Gold.
The benefits of holding physical are clear. IT WILL NEVER BE WORTHLESS. Unlike paper money, physical will ALWAYS be worth something. It’s such a strong plus that investors of physical Gold don’t even require being paid interest for holding it.
There are many different ways of ‘holding physical’:
• You can buy the metal outright. You can buy American Eagles or Krugerrands. A coin dealer will be most willing to sell them to you.
• You can buy the ETF through your stock broker. The Gold ETF (GLD) or Silver ETF (SLV) or Oil ETF (USO) actually stores the physical metal or Oil for each share you buy. In other words each share represents and is fully backed by REAL Gold, Silver or Oil (just like Dollars used to be).
• A service called goldmoney.com allows you to buy Metal online. The metal is stored in vaults around the world and you are able to take delivery if you desire (only 400 oz Gold bars are available for delivery). You can use your Gold ‘credits’ to buy normal stuff by converting it back into Dollars or Euros or Yen etc.
• The Perth Mint offers a similar service of storing metal and issuing you with Gold backed certificates.
However you chose to get exposure, Buy some Physical and forget about it.
How much?
It’s a personal risk preference but I’d say 10% to 30% of your portfolio should be ANCHORED by physical.
Speaking from personal experience, Correction or No correction holding Physical won’t trouble you in the Least.
TREASURY HOLDINGS:
Another way of softening the Blow of Corrections is by taking a little bit of money off the table when possible.
That’s quite a nebulous concept.
How do you know when to take Money off the table and when to keep it on?
That’s the same as trading!
Here’s how I do it:
My investment style is to sell half my holdings when a stock rises 50%
PERIOD.
I’ve taken a lot of flack for this approach – many readers point out that if the stock keeps moving higher I miss out on LARGE gains.
It’s a valid point but my answer is always the same.
Trying to be too GREEDY and holding a big position has caused me untold stress and loss. I’ve been burnt before! For my personality and style, taking half off the table gives me excellent peace of mind and still keeps me in the GAME.
What I do with the other 50% is the FUN part.
At the bottom of my office drawer is my TREASURY.
The remaining half goes directly into the TREASURY.
I take delivery of the Stock certificate; remove all prices, alerts, stops and targets from my quote boards (except when I report my portfolio to subscribers).
This is the GRAVY. I can sit on those certificates as long as it takes.
I lose no sleep if they go up or down - I’ve recovered most of my original investment already.
I’m in it for the long haul and it’s the Treasury holdings that get me there.
There’ll come a time to liquidate the Treasury. But that’s at the top of this Bull Market. Which is still quite a way away.
PERSONAL EMOTIONAL ENEMY
Whilst there is no way of completely escaping corrections, there are ways to soften the impacts. One way or another the market will take its Pound of Flesh! That’s what the market is, your own Personal Emotional Enemy.
Sit Tight…
SIDEBAR:
An excellent way to find Contrarian Investment Ideas is to monitor Under Performing Industry Groups.
An excellent source to for that is the CBS Marketwatch Industry
Screener.
It was with interest that I noticed the worst performing Industry Group over the last 3 months was the Water Industry.
Chart 1 - CBS Marketwatch Industry Screener (5/18/06)
© 2006 Greg Silberman, CA (SA), CFA Retired
Editorial Archive
This
article is intended solely for information purposes. The opinions are
those of the author only. Please conduct further research and consult
your financial advisor before making any investment/trading decision. No
responsibility can be accepted for losses that may result as a
consequence of trading on the basis of this analysis.
For
more information on Investing in Australia or on my proposed Closed End
Investment Fund, please feel free to contact me.
CONTACT
INFORMATION
Greg Silberman
USA
Email l http://blog.goldandoilstocks.com/
I
am an investor and newsletter writer specializing in Junior Mining and
Energy Stocks.
Please visit my website for more free articles and analysis.
Click here: http://blog.goldandoilstocks.com/
The
opinions of FSU contributors do not necessarily reflect those of
Financial Sense.
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