Tuesday, September 30, 2008

How to play this crisis--Do nothing?

What should an investor do after a day like Monday, when the Dow, S&P, and Nasdaq all plummeted about 8% following Congress's "no" vote on the $700 billion bailout plan? Some say: "I wouldn't recommend anyone sell after a day like Monday but wouldn't be in a rush to buy stocks either." (See article by Aaron Task and Henry Blodget at Tech Ticker)

So, neither sell (if you own stocks), nor buy (if you have cash to buy). In other words, do nothing.

Does this make sense?

Think about the various market views one might have:

Bullish: If you "know" for sure that the stock market will rise from here, obviously you should be invested 100% in stocks, and presumably you would recommend that others buy stocks too (since "knock-on" effects help to fulfill your prophesy);

Bearish: Similarly, if you "know" the market will fall, you'll want to be sidelined, holding all cash and no stocks, and you would recommend that others (at least anyone you care about) sell out too to avoid additional losses;

Neutral: Or, if you just happen to "know" that the market will trade in a tight band, essentially unchanged, you would tell others that it really doesn't matter what they do, since holding stock in your portfolio or not will land you at the same place as cash if the market doesn't move.

In this context, the recommendation to "do nothing" appears to be an implicit statement that the stock market will trade sideways, meaning that, whether you currently hold stocks or hold cash, making no changes to your portfolio (i.e., neither buying nor selling) will not leave you at any disadvantage relative to someone who takes action and switches strategy.

A glance over at Intrade for a popular prediction about where the stock market is headed shows a 50% chance that at year-end (close of trading in December) the Dow will be at or above 11,000, in the opinion of those willing to wager bets on their views. Seeing that the Dow is now (1:55 p.m., New York time, Tuesday, September 30) at 10,700, the benchmark level of 11,000 on December 31 is essentially unchanged from today.

With the financial media being what it is, this match between Tech Ticker and consensus opinion should be no surprise. . . .

However, I also note that anyone holding cash who chose not to deploy it after yesterday's fall is missing today's rally, which appears to be strengthening as I write. At least so far today, the right decision has been to be 100% long this market. So much for doing nothing . . . unless you are already fully invested.


Anonymous Anonymous said...

Being bearish on the market but bullish on the long term would indicate that it is a good time to start terming in investments now to pick up the value bargains. A discussion around this is starting at surviveabear.com

4:38 PM, October 13, 2008  
Anonymous Penny stocks said...

I have a web site where I research stocks under five dollars. I have many years of experience with these type of stocks. I would like to comment about pennys stocks. I would recommend that the novice investors avoid those stocks that trade under 1 dollar on the over the counter bulletin board and pink sheets. These stocks are of very poor quality and very speculative. I would instead recommend that investors in penny stocks stick with stocks that trade on the new york stock exchange or nasdaq between 1 dollar and 5 dollars. Their rare exceptions when a stock under 1 dollar can be very profitable.I purchased a stock called overhill farms 14 years ago for 25 cents a share today the stock trades at 4 dollars a share and I still own the stock.

9:40 PM, October 29, 2011  

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