Page 332 - How to Make Money in Stocks Trilogy

208 A WINNING SYSTEM

correction that summer, Coke followed along. Two years later—after some
of the market’s most exciting gains in decades—Coke was still stuck in a
downtrend. In some instances, stocks of this kind may come back. But this
much is certain: Coke investors missed huge advances in 1998 and 1999 in
names such as America Online and Qualcomm.
The buy-and-hold strategy was also disastrous to anyone who held tech-
nology stocks from 2000 through 2002. Many highfliers lost 75% to 90% of
their value, and some may never return to their prior highs. Take a look now
at Time Warner, Corning, Yahoo!, Intel, JDS Uniphase, and EMC, former
market leaders in 1998–2000.

Protecting Yourself from Market Downturns
Napoleon once wrote that never hesitating in battle gave him an advantage
over his opponents, and for many years he was undefeated. In the battle-
field that is the stock market, there are the quick and there are the dead!
After you see the first several definite indications of a market top, don’t
wait around. Sell quickly before real weakness develops. When market
indexes peak and begin major downside reversals, you should act immedi-
ately by putting 25% or more of your portfolio in cash, selling your stocks at
market prices. The use of limit orders (buying or selling at a specific price,
rather than buying or selling at market prices using market orders) is not
recommended. Focus on your ability to get into or out of a stock when you
need to. Quibbling over an eighth- or quarter-point (or their decimal equiv-
alents) could make you miss an opportunity to buy or sell a stock.
Lightning-fast action is even more critical if your stock account is on mar-
gin. If your portfolio is fully margined, with half of the money in your stocks
borrowed from your broker, a 20% decline in the price of your stocks will
cause you to lose 40% of your money. A 50% decline in your stocks could
wipe you out! Never, ever try to ride through a bear market on margin.
In the final analysis, there are really only two things you can do when a
new bear market begins: sell and retreat or go short. When you retreat, you
should stay out until the bear market is over. This usually means five or six
months or more. In the prolonged, problem-ridden 1969–1970 and
1973–1974 periods, however, it meant up to two years. The bear market that
began in March 2000 during the last year of the Clinton administration
lasted longer and was far more severe than normal. Nine out of ten investors
lost a lot of money, particularly in high-tech stocks. It was the end of a
period of many excesses during the late 1990s, a decade when America got
careless and let down its guard. It was the “anything goes” period, with
stocks running wild.