Page 330 - How to Make Money in Stocks Trilogy

206 A WINNING SYSTEM

given few days. Relying on these primary indexes is a more direct, practi-
cal, and effective method for analyzing the market’s behavior and deter-
mining its direction.
Don’t rely on other, subsidiary indicators because they haven’t been
proven to be effective at timing. Listening to the many market newsletter
writers, technical analysts, or strategists who pore over 30 to 50 different
technical or economic indicators and then tell you what they think the mar-
ket should be doing is generally a very costly waste of time. Investment
newsletters can create doubt and confusion in an investor’s mind. Interest-
ingly enough, history shows that the market tends to go up just when the
news is all bad and these experts are most skeptical and uncertain.
When the general market tops, you must sell to raise at least some cash
and to get off margin (the use of borrowed money) to protect your account.
As an individual investor, you can easily raise cash and get out in one or two
days, and you can likewise reenter later when the market is finally right. If
you don’t sell and raise cash when the general market tops, your diversified
list of former market leaders can decline sharply. Several of them may never
recover to their former levels.
Your best bet is to learn to interpret daily price and volume charts of the
key general market averages. If you do, you can’t get too far off-track, and you
won’t need much else. It doesn’t pay to argue with the market. Experience
teaches that second-guessing the market can be a very expensive mistake.

The Prolonged Two-Year Bear Market of 1973–1974

The combination of the Watergate scandal and hearings and the 1974 oil
embargo by OPEC made 1973–1974 the worst stock market catastrophe up
to that time since the 1929–1933 depression. The Dow corrected 50%, but
the average stock plummeted more than 70%.
This was a big lesson for stockholders and was almost as severe as the
90% correction the average stock showed from 1929 to 1933. However, in
1933, industrial production was only 56% of the 1929 level, and more than
13 million Americans were unemployed. The peak unemployment rate in
the 1930s was 25%. It remained in double digits throughout the entire
decade and was 20% in 1939.
The markets were so demoralized in the prolonged 1973–1974 bear mar-
ket that most members on the floor of the New York Stock Exchange were
afraid the exchange might not survive as a viable institution. This is why it’s
absolutely critical that you study the market averages and learn how to pro-
tect yourself against catastrophic losses, for the sake of your health as well as
your portfolio.