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I Was Wrong... What to DoBy
Saturday, January 8, 2011
"It's Finally Time to Sell Stocks," I said on December 20.
But since then, the stock market has continued a bit higher.
Did I get it wrong? What should we do?
Well, here's what I wrote in the December 20 essay:
Over the next three months or so, the risk is not worth the potential reward. The smart play is to pull back your leverage and move to higher ground. So in True Wealth, we're selling a good number of positions.
I stand by that advice.
What I didn't tell you, though, was that in my True Wealth newsletter, we sold our riskiest (meaning most-leveraged) holdings... but we KEPT a lot of speculative positions, too.
We kept gold and silver stocks, a fund of microcap stocks, and more... So we didn't just turn tail as soon as we saw the signs of a market top.
I left something out of Thursday's DailyWealth, too...
My conclusion was:
I've made my biggest gains when investors are terrified and things are stealthily getting less bad. That's the recipe for big gains. We're in the opposite situation today. Trade accordingly. Here's what I didn't say:
I've found that when investors are terrified, it really is time to buy. Hurry, get in there, and go big. But when investors get optimistic, there's no hurry to sell.
It's almost always a buy signal when investors get terrified. But it's not a "sure thing" sell signal when investors get overly bullish, as they are today. The market could crash... or not. It could move sideways, or even a just a bit higher.
"It's Finally Time to Sell Stocks" is the simple story. But it's not the whole truth.
When times seem too good in stocks (like they do now), sell your leveraged positions. Reduce your overall level of investment. And simply watch your trailing stops on everything else.
By doing this, you could capture much more upside. Things could and may go higher, even when they shouldn't.
This may sound simple, but staying in at a time like this is hard. Just keep in mind, to make money investing, you actually have to be invested. You have to stay invested. You have to stay in as long as you can stand it.
Be wary now. Sell your most leveraged positions, but stay in everything else... Tighten your trailing stops and watch them closely. You want to stay on board for as long as you can. But if a trailing stop is hit, don't hesitate to move along...
It all feels rosy out there... like risk is gone in stocks. It is not.
Today's advice is a small but critical thing to understand... Be in a hurry when times feel terrible in the stock market. But in times like now, when we know investors are optimistic, there's no hurry to sell.
Just back off on your speculating... Watch your trailing stops closely, and you'll be fine.
Good investing,
Steve
Further Reading:
"This isn't exciting or fun," Dan Ferris says. "It's not the glamorous '2011 investment guide' you're seeing everywhere else... But I believe it's better than losing a big chunk of money in a dangerous market." Find out what Dan's recommending for the New Year here: A 2011 Investment Forecast Unlike Any Other You've Read.
Market NotesA CLASSIC "SPENDING STOCK" IS SOARING This week's chart is another example of how the market is saying "things can't be that bad."
One of the biggest debates in the world right now regards the question "Is the economy getting better... or worse?" Big chunks of television time and newspapers are devoted to the topic.
As we noted with Cummins last month, we say go ahead and form an opinion. But always mind the market for clues on what's really happening. One of the most amazing "happenings" to note is the surging share price of world's largest cruise line operator Carnival (NYSE: CCL).
Carnival is a classic "spending stock." If the economy is in the tank, folks won't have much money to spend on Caribbean cruises. If the economy is doing well, they'll have plenty of money to party on the seas. As you can see from this week's chart, the market says the latter. Carnival shares have climbed 47% in the past year… and struck a new 52-week high this week. The market's message here: "If the world's largest cruise operator is enjoying solid profits and a soaring share price, "things can't be that bad."
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Stat of the week
59%
Gain in Apple's share price in the past 12 months. The company is now valued at over $300 billion, over 50% more than Wal-Mart. In The Daily Crux
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