Buying When There’s Blood On The Streets
There’s an adage that you should buy when there is blood on the streets (I believe that Rothschild coined the phrase). This means that the best trades are made when everything looks the blackest, just before a recovery. How do we choose the right time to re-enter the market?
Warren Buffet, Peter Lynch and other great market masters made their money through the ups and downs of the market. Market volatility is a fact of life for the trader. As Benjamin Graham wrote:
The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored. …He would not be far wrong if this motto read more simply: “Never buy a stock immediately after a substantial rise or sell one immediately after a substantial drop.”
On the surface, there are some great buys, and the market appears to be rebounding. After every major fall of this magnitude, astute investors have made windfall profits.
How can we tell for sure when the market is recovering? Historically, following the crowd or listening to the media is a sure way to lose. Well there is no way to predict the future, so we need to either look at the underlying value (which means going back to basics and evaluating the underlying businesses), or look at what the market has already done (that is looking at the trends).
These two approaches are not mutually exclusive. The best analysis uses both fundamental and technical analysis.
To determine whether a particular stock is trending upwards or downwards, you can do what Jesse Livermore did and stand on a chair and view the chart, or you can use a smoothing approach. I recommend Loess smoothing (this is discussed elsewhere on this site). This is a noise filter that separates the trend from the random ups and downs of the market.
The main point to consider is that you’ll need a sound analysis approach to avoid falling into a bear trap, or conversely missing the opportunity for substantial profits.
