Page 331 - How to Make Money in Stocks Trilogy

M = Market Direction: How You Can Determine It 207

A 33% Drop Requires a 50% Rise to Break Even
The critical importance of knowing the change in direction of the general
market cannot be overemphasized. If you have a 33% loss in a stock portfo-
lio, you need a 50% gain just to get back to breakeven. If, for example, you
let a $10,000 portfolio drop to $6,666 (a 33% decline), it has to rise $3,333
(or 50%) just to get you back where you started. In the 2007–2009 bear mar-
ket, the S&P 500 fell 58%, meaning that a 140% rebound will be needed for
the index to fully recover. And how easy is it for you to make 140%? Maybe
it’s time for you to learn what you’re doing, adopt new selling rules and
methods, and stop doing the things that create 50% losses.
You positively must always act to preserve as much as possible of the
profit you’ve built up during a bull market rather than ride your investments
back down through difficult bear market periods. To do this, you must learn
historically proven stock and general market selling rules. (See Chapters 10
and 11 for more on selling rules.)

The Myths about “Long-Term Investing”
and Being Fully Invested
Many investors like to think of, or at least describe, themselves as “long-
term investors.” Their strategy is to stay fully invested through thick and
thin. Most institutions do the same thing. But such an inflexible approach
can have tragic results, particularly for individual investors. Individuals and
institutions alike may get away with standing pat through relatively mild
(25% or less) bear markets, but many bear markets are not mild. Some, such
as 1973–1974, 2000–2002, and 2007–2008, are downright devastating.
The challenge always comes at the beginning, when you start to sense an
impending bear market. In most cases, you cannot project how bad eco-
nomic conditions might become or how long those bad conditions could
linger. The war in Vietnam, inflation, and a tight money supply helped turn
the 1969–1970 correction into a two-year decline of 36.9%. Before that,
bear markets averaged only nine months and took the averages down 26%.
Most stocks fall during a bear market, but not all of them recover. If you
hold on during even a modest bear correction, you can get stuck with dam-
aged merchandise that may never see its former highs. You definitely must
learn to sell and raise at least some cash when the overall environment
changes and your stocks are not working.
Buy-and-hold investors fell in love with Coca-Cola during the 1980s and
1990s. The soft-drink giant chugged higher year after year, rising and falling
with the market. But it stopped working in 1998, as did Gillette, another
favorite of long-term holders. When the market slipped into its mild bear