Page 323 - How to Make Money in Stocks Trilogy

200 A WINNING SYSTEM

should never in the future find your investment portfolio down 30% to 50%
or more in a bad bear market.
The best way for you to determine the direction of the market is to look
carefully at, follow, interpret, and understand the daily charts of the three or
four major general market averages and what their price and volume
changes are doing on a day-to-day basis. This might sound intimidating at
first, but with patience and practice, you’ll soon be analyzing the market like
a true pro. This is the most important lesson you can learn if you want to
stop losing and start winning. Are you ready to get smarter? Are your future
peace of mind and financial independence worth some extra effort and
determination on your part?
Don’t ever let anyone tell you that you can’t time the market. This is a
giant myth passed on mainly by Wall Street, the media, and those who have
never been able to do it, so they think it’s impossible. We’ve heard from
thousands of readers of this chapter and Investor’s Business Daily’s The Big
Picture column who have learned how to do it. They took the time to read
the rules and do their homework so that they were prepared and knew
exactly what facts to look for. As a result, they had the foresight and under-
standing to sell stocks and raise cash in March 2000 and from November
2007 to January 2008 and June 2008, protecting much of the gains they
made during 1998 and 1999 and in the strong five-year Bush bull market in
stocks that lasted from March 2003 to June 2008.
The erroneous belief that you can’t time the market—that it’s simply
impossible, that no one can do it—evolved more than 40 years ago after a
few mutual fund managers tried it unsuccessfully. They had to both sell at
exactly the right time and then get back into the market at exactly the right
time. But because of their asset size problems, and because they had no sys-
tem, it took a number of weeks for them to believe the turn and finally reen-
ter the market. They relied on their personal judgments and feelings to
determine when the market finally hit bottom and turned up for real. At the
bottom, the news is all negative. So these managers, being human, hesitated
to act. Their funds therefore lost some relative performance during the fast
turnarounds that frequently happen at market bottoms.
For this reason, and despite the fact that twice in the 1950s, Jack Dreyfus
successfully raised cash in his Dreyfus Fund at the start of a bear market,
top management at most mutual funds imposed rigid rules on money man-
agers that required them to remain fully invested (95% to 100% of assets).
This possibly fits well with the sound concept that mutual funds are truly
long-term investments. Also, because funds are typically widely diversified
(owning a hundred or more stocks spread among many industries), in time
they will always recover when the market recovers. So owning them for 15