Taming the Bear - how I handle Nasty Markets…

This is a rather strange Blog for me to bash out as I feel like I have already written this but when I look through my Blog list, I haven’t. I suspect I have already written this in bits spread throughout my Blog Collection so I guess a lot will be repetition, but I thought it would help Readers to have it all in one place.

I was inspired to produce this recently when we had a pretty nasty drop in the Markets on a Wednesday and I could sense the Fear getting into peeps on Twitter and I wanted to be able to send out a Blog that might help everyone keep things calm and cool. This was when I discovered that I lacked such a Blog in my Warehouse. 

You may think my timing is rather strange for this Blog, as Markets just seem to go up and up. This is a fair observation, but it needs to be appreciated that Markets do not move upwards in a Straight Line - sooner or later we will get a Nasty Correction and this Blog will be of real value (I hope). I expect to be Tweeting a link out to it many times in the coming years !!

We are at a key point of the year where Markets tend to fall - the Seasonal Effect (“Sell in May and head off until some Horse Race in September”), is very well established and rarely does it not occur. In addition, the Risk of Greece accidentally leaving the Euro (Grexident) is very high and the General Election on May 7th is the most uncertain in my Lifetime. The Markets have plenty of ‘excuses’ to explain the normal Seasonal Sell-off which would happen anyway !!

Do Markets follow the News or does the News follow the Markets?…..

Be Prepared
For me, the key to coping with tough times is to be ahead of the game. Regular Readers will know that I am very much someone who thinks forwards and looks at likely Scenarios a couple of months out - I am flexible with my Approach but I do not want to be unprepared for outcomes that are fairly predictable and have a high probability of occurring. For instance, the Seasonal ‘Sell in Spring and Buy in Autumn’ pattern is well established and it is dead simple to have this in my thinking as I approach these points in any given Year. 

In a similar way, Santa Rallies are very likely so it is best to be ‘Long and Strong’ going into mid December. This is also the case as we get into Autumn - October and November often suffer big Market falls.

If you can think ahead in this way, then you can be ready to Sell as we head towards Spring and you can get some Shorts on to Hedge your Long Term Portfolio of Stocks. This is exactly what I have done this year, and I feel very well positioned to ride out any Seasonal Spring weakness and any jitters caused by Greece and the General Election. With the Hedging I have in place, the Risk is that I miss out on Upside if Markets Rally, but this is extremely unlikely as the recent Run has been very strong.

Missing out on some Upside does not upset as much as suffering Downside. In a Dream Scenario for me, my Portfolio would gain as Markets move up (and I have been Buying near the Bottom) and then Flatline as Markets Fall because of my Hedging and Selling activities - imagine a Staircase with Vertical Up moves and then Sideways Horizontal moves before more Vertical Up moves - oh, I can dream……

Anyway, my current level of Hedging (FTSE100 Shorts and a bit of Cash) meant that on the recent scary Wednesday when Fear was clearly all around, I was as happy as Larry and ended up losing just 0.2% of my Portfolio Value on the day - a great outcome when the FTSE100 fell around 1.5% or something.

When Markets move up, I appear to lose out on a Daily basis, but in effect I am just holding back Gains that will come to me when Markets fall - it is just a matter of time. In addition, I am still biased slightly to the Upside - so I still gain a bit as the Markets rise.

Markets have been looking Toppy on the Technical Indicators for some time, so a pullback really should surprise nobody. The simple fact is that many people do not look at simple Technical Analysis (TA) stuff like RSI (Relative Strength Index) - I find this amazing, people are really missing a trick. The simple fact that loads of individual Stock Charts have ‘Gone Vertical’ should be shouting at people that this is not natural and Mean Reversion will pull things back into line soon enough. It has simply been far too easy to make money in the last few months.

If I fail to anticipate a Market Fall and Sell some stuff and get Hedges on, then as soon as the Panic starts, I will be looking at the Charts and taking avoiding action - usually this means Selling some Long Spreadbets as it is the Leveraged stuff that can really hurt bad. However, the danger is that once we are in the Sell-off, you can end up Selling too late once we are near the Bottom - see my Example below of where I got caught out in 2014.

Anyway, even if I do get Shorts on late, the key is that Hedging protects me from Downside (think of it as Insurance) and I am more worried about Downside than Upside - Upside doesn’t sting like Downside does……

Quality is the way to go
In line with the above Section about being prepared, holding the right kind of stocks is vital to cope well with Bear Markets. If you buy exciting Hype Stocks like the usual Oil and Resource plays and the tiny Microcaps, you will find Bear Markets pretty painful - or even Bankrupting. Stick to Quality with Dividends, Cash, Profits, Growing Revenues, Fair Valuations etc., and you will have a Portfolio that is resilient to Storms. Speculative Junk gets killed - this has been really noticeable in recent weeks with many of the ‘Story Stocks’ of 2014 getting butchered as their lack of Revenues, Profits etc. becomes clear.

I keep repeating this, but I think far too many people ‘shape’ their Portfolios only for Sunny weather - but Portfolios need to be constructed in a way that means they can cope with whatever the prevailing weather conditions happen to be - this is why I have a very Diversified Portfolio and why I hold a lot of Cash and a With Profits Bond with the Pru. Just because we have seen loads of Sunshine in the Stockmarket lately, it does not mean that Torrential Rain is not just around the corner……..it is, and it has Claws…..(and a furry brown coat).

As I have mentioned before, I get my ‘Risk’ (and therefore Reward) by using Leverage on my Safe Boring Portfolio - I have found through many years of bitter experience that this approach to Long Term Investing works far better for me than any other - and it is great for a Lazy Life and I can Sleep like a Log.

For more details on how I use Leverage in a Safe and Controlled manner, please see my Blog series starting at: http://wheeliedealer.weebly.com/blog/how-to-use-leverage-safely-and-successfully-spreadbetting-and-cfds-part-1-of-5

It’s also worth noting that Part 5 of that Blog Series includes a specific section on how to handle Leverage in Nasty Markets - there is a link to this Part further down this Blog.

Ignore the Markets
When we actually get into a Bad Day, the main thing to do is just keep away from the Markets. If you constantly look at your Portfolio on ADVFN or Yahoo or your Trading Account or whatever method you use, it will just scare the sh*t out of you. Don’t do it. There is no need - find the discipline to turn off your Laptop, hide the iPad and take the battery out of your Smartfone. Go out for a run or go shopping or wash the car or something - just go away and do something else.

There was a truly brilliant Tweet about this today from Mike (@webmichaelf on the Tweet machine), which simply said;

“If the markets drive you nuts take a walk with the dog!”

…..and it included a Piccie of a lovely white Doggy on a beach, looking very pleased with its lot…..

It’s a simple sentence (just 11 words - go on, count them*) but so much more important than most people will realise. The essence of its Wisdom is that if you cannot drop the Markets and go off and enjoy yourself, then you are either taking too much Risk or you are behaving like a Trader rather than an Investor. Do you really think Warren Buffett is unable to go off for Lunch (Ice Cream, Steak and Coca Cola no doubt), because he is stuck to his PC Screen?

In addition, if you are trying to hold down a Full Time Job, it’s a bit silly if you have to say to your Boss, “sorry, can’t make the meeting as I gotta watch my Stocks as they collapse through the floor”.

Taking ‘Time Out’ is vitally important when Markets are in a Grizzly Bear mood, but it is also massively helpful in good times. I often find that I am basking in the Sun out in my garden when decisions relating to my Portfolio can formulate in my grey matter - freeing myself to think is extremely beneficial and calming.

Even for Traders, taking a break away from the PC Screen can be massively rejuvenating - especially after a run of losing trades. If you see yourself as a Long Term Investor, but are scared to drop everything and take time out, then it is probably very important for you to do some serious thinking at the Weekend (hopefully you can get away from the PC at this point) and determine whether or not you are doing things in a way that is likely to make Money or even if this is the Lifestyle you really want. As an Investor, you should never feel stressed - if this is not the case, you are probably doing something wrong.

If you identify a problem, go back to basics. Probably the best action you can take is to re-read the Naked Trader’s Book and there is plenty of stuff on my Website to help you. Feel free to ask for ideas on how to adjust your approach, to take away the Fear, Stress and Anxiety - none of these emotions are helpful to you in Investing.

To understand the distinction I make between and Investor and a Trader, please refer to this Blog:
http://wheeliedealer.weebly.com/blog/are-you-an-investor-or-a-trader

Turn off the TV
I say this all the time, but I am going to repeat it and repeat it. The worst possible thing you can do is watch CNBC or Bloomberg TV - they are horrible things that will make you lose money. They prey on your emotions. When the Markets are good and going up, they wheel in the Bulls and tell you how everything will keep going up forever and how Stocks are great value and how we are making new All Time Highs and blah blah blah.

In Good Markets, they feed your GREED.

When Markets are bad, they don’t use their Bull Guests, that would be boring. No, they phone up their Bear buddies and drag them in to the Studio - so as the Markets tumble, they have people saying “we are doomed”, “Stocks are toast”, “Sell everything”, “Bird Flu”, “Grexit” etc. etc. etc.

In Bad Markets, they feed your FEAR.

They have no problem finding these Characters - at any given time on any given Stock or Asset there is a Buyer and a Seller. A Bull and a Bear. That’s how Markets work.

The point to take on board here is that you should be Selling into ‘Good’ Markets and Buying into ‘Bad’ Markets - the Media gets this totally Arse about Face.

How CNBC led me to Lose Money last Year
Around October last year (2014), there were fears over European Growth slowing down and the Markets were taking a pounding. Fear was palpable. I made a really, really dumb error. My mistake was watching CNBC in a stupid attempt to try to understand what was really going on and how I should play things to make sure I came out well.

Anyway, this did not have the desired effect. Instead of becoming hugely Educated with all the wonderful Insights from CNBC, I got really terrified right at the BOTTOM of the Market and put a Short FTSE100 Position on in an attempt to Hedge my Long Portfolio against further falls. If I had ignored CNBC and just use the Technicals to guide me (particularly FTSE100 RSI), I would probably have realised we were at the bottom and not panicked. Lesson Learnt - but it cost me about 0.75% of my Portfolio.

I now barely watch CNBC or Bloomberg - more and more I realise that Robbie Burns (the Naked Trader) is spot on - we must cut out the ‘Noise’.

For full details on this total Balls Up - please see: http://wheeliedealer.weebly.com/blog/should-i-close-my-ftse100-short-hedge

Monitor your Stocks in a way that does not Freak you out
I am adding this Section after a discussion earlier this week with one of my Loyal Readers (Hi, you know who you are !! Thanks for the inspiration) got me thinking. Currently, the Reader looks at his Stocks during the day on his Broker Dealing Platform and on a Portfolio that he has set up within Stockopedia. 

The Reader has identified an important shortcoming with this approach - Top Marks to him for having the Self-Analytical Skills to figure this out - few people can do this and such Psychological Soul Searching is vital to make a consistently successful Investor. The problem is that when he looks at his Stocks, he sees very clearly the Gains or, more worryingly, the Losses. Seeing these Losses gets him anxious and concerned and liable to make emotional Snap Decisions which will lead to losing money.

I often find with my own Portfolios that I go through periods of time where my Stocks are showing some fairly Nasty Losses - this is particularly exacerbated when we have had a good Run-Up in Markets and I have been Selling some stuff. Logically, I have been selling lots of stuff that was in good Profit and this has been converted into Cash. But it means that my Portfolio is holding a Load of Losers - which can look ugly. However, that is daft thinking - the reality is that I have banked some Juicy Profits at the Top of the Market and I have a Load of Great Companies that are currently a bit down but they will be Big Winners for me over time. I also have a Huge Cash Pile that can be used to buy Bargains when Markets fall and I get the opportunity to Top-up on some of the Stocks I already hold, or to nibble on some tasty new morsels. As Buffett would say, it gives me “options”.

It is vital I find as a Long Term Investor (note, this is an important distinction - many more active Traders reading this will strongly disagree and say I should “Cut my Losers” and “Run my Winners” - they are right for Traders but I am a Long Term Investor), to think in a Holistic Portfolio sense - it is not the Value of the individual Stocks that matters - it is the Value of the Portfolio that is Key.

It got me thinking about how I monitor my Stocks during the day. The key thing is that I do not obsess about it and I probably look about 5 or 6 times during the day - and it is the Slow, Careful, Investigation using ShareScope in the Evening that matters most to me. Intraday moves are not something I get over-excited about - they are mostly unpredictable and I like to think ‘Bigger Picture’. I never look at my Trading Accounts during the trading day - even on a day when I have to Buy or Sell something, I rarely look at what the Stocks are doing or at what the Portfolio Value is - all I am interested in is getting the Trade done. I login, do the Trade, logout.

To be honest, I couldn’t tell you how much Profit or Loss I have on any given stock at the moment. If you said “How are you doing on GlaxoSmithkline?”, I would probably reply with something like “not sure really, I reckon I am down a little bit maybe…or I might even be up a little…” That’s it, I have no idea !!

The way I monitor my Stocks during the day is by looking at my Portfolios that are setup on the sublime ADVFN app on my Fone and Tablets. On the Front Screen this just shows the Epic Code, the Stock Name in tiny writing underneath, the Mid Price with the Bid and Offer above and below, then a Box with the % Gain or Loss and the Change in Pennies. The Box is either Blue for a Gain on the day, Red for a Loss or Green for Unchanged. 

If the mood takes me, I will press the ‘line’ for a given Stock and it then goes to the next screen and what I am interested in here is the Charts. First off I get the Intraday which isn’t that important to me, but then I swipe the chart with my finger and I get a 1 month Chart - I love this because it clearly shows the Daily Candles and I can get a sense of what the Price is doing in the Context of recent moves. To me this Context is vital - it always puzzles me how people can Invest in Shares whilst saying they don’t look at Charts - makes no sense to me at all. I then swipe again and I get a 3 month Chart so the Context gets better and then 1 Year and 3 Years. That’s all I look at.

My Reader is thinking of stripping out all data from his Stockopedia Portfolio that relates to when he bought it and what Price he paid etc. - so the Loss or Gain figures won’t appear. He can then assess each Stock more objectively - in his words, “as if I didn’t already Hold it”. I think this is brilliant thinking. Again, in his words, “less Angst, less Trading, more Long Term Strategy”. This is pure nectar.

Do some Research / Learning / Preparation
On Bad Days for Stocks, the best use of your time (apart from doing something entirely different of course) is probably to use the time to Research Companies you might want to Buy at some point and maybe get on with reading that excellent Finance Book you bought from Wheelie’s Bookshop and still have not opened even though you have had it for 3 months.

Similarly, you could look at the Stocks you hold and think about what would make you Sell. Is there a Target Price for each Stock? Do you have too many in one particular Sector? Is the Portfolio well balanced or is it overexposed to certain Stocks, Geographies, Investment Themes, Market Cap size, etc.?

Another great activity to keep your mind off the Crappy Markets and to use your time well, is to draw up a Short List of the Stocks you want to Buy when Markets have bottomed and are starting to turn up again. This can be a List of New Stocks to add with Prices you would like to buy at etc., and it can also be a List of Top Ups to Stocks you already hold.

Keep on Top of your Leverage
I have discussed this (along with how I use Hedging) in my Epic WheelieBlog series on how I use Leverage / Spreadbets, particularly in Part 5 which you can find here:

http://wheeliedealer.weebly.com/blog/how-to-use-leverage-safely-and-successfully-spreadbetting-and-cfds-part-5-of-7

But I will repeat the principles here again.

Leverage can be extremely dangerous if you do not have it under control, particularly with regards to the Level of Exposure. Make sure you can manage any realistic level of Drawdown on your Long Exposure and if you are struggling, then you need to inject more Cash into your Spreadbet (or CFD etc.) Account and / or Close some Long Positions or add some Shorts to Hedge - although this is probably a bit late if we are already in the thick of a Market that is Tanking.

As ever, the best Approach here is to be on top of your Long Exposure and to be Ahead of the Game at all times - if you are unable to do this, then you might need to rethink whether or not you should be using Leverage. Maybe you just need to reduce your Leveraged Long Exposure to a more manageable Level.

Gauge your Emotions and the level of Market Emotion to identify Turning Points
This is quite hard to do, but with Experience, and by being aware of it, such gauging of Market Sentiment is very possible.

When things are very bad and the Markets just seem to go down Day after Day, then wait until you feel really flippin’ scared and want to Sell all your Stocks and give up Shares altogether. When you think your Leverage is way too high and you are on the verge of outright Panic and Terror, this is the point when the Markets will turn up. The other great sign of this is when the ‘Normal’ Mainstream Media is saying that the Stockmarket is crashing and Newspapers have headlines that proclaim the “Collapse of the Stockmarket.“

It works the other way as well. When everyone you know is utterly complacent and Stocks go up day after day, this is when the Markets are about to drop. We were in this situation a couple of weeks ago and Complacency was off the scale, and as I write this, markets are resuming this upward trajectory. Yet again, Normal Newspapers were talking about the Rally in Stocks on their Front Pages - a sure fire sign that we were on the verge of a Drop. 

The other thing I noticed up until a couple of weeks ago was that Twitter activity was really strong - lots of Peeps tweeting away and saying “buy this piece of Mining Junk” or “buy this tiny Microcap that happens to be in a stinking Downtrend” etc. It is clear to me now that such activity marks a Market Top.

Funnily (and predictably) enough, Twitter in the last couple of weeks has been noticeably much quieter - where have all the Bulls gone?

So, now we know, when Markets are at Key Turning Points, a Noisy Twitter is Bad and a quiet Twitter is Good. We need to look out for an exceptionally quite Twitter coinciding with a really Low Market - that will indicate a Rebound is coming and a Superb Buying Opportunity.

Buenas noches, wd

*got ya !!