How bad will it get?

How bad will it get?

I don't know.

Any one that tells you that they do know, is delusional.

So what is an investor to do in this, shall we say, "challenging environment"? First and foremost, remember that there is always money to be made in any environment.

You can;

1). Buy the dips and sell the rips:

In a consolidating or falling market, recognize that no financial instrument, goes straight up or straight down. Watch and wait for a pause in the down side, buy small amounts and wait for a mini rally. Sell on any positive movement and TAKE PROFITS! This is my least favorite strategy. It is very risky, requires great discipline, constant attention and yields minimal results. Some would argue this last point with me and my answer to them is, "I guess you're just better than me, oh well".

2). Use Put options and short selling to bet on obviously weak sectors.

This is probably the most profitable on a day to day basis but requires great discipline, constant attention, and plenty of research. For me short selling is very risky and should be approached with caution. I don't put on short positions through the borrowing of shares, I buy Put options. Contrary to popular myth, options are not risky investments. (More to come on options in another blog)

3). Identify the next trend, buy into an investment when it is on sale, build a large core position, then wait patiently.

This is obviously easier said than done and also requires great discipline and massive research, but is much less risky.

4). Identify other financial vehicles that are working and work with them.

This requires the most amount of research and tends to be a bit more boring and less profitable and will probably require more self education. It is however a must for any investor to know where to put their money when nothing else seems to be working. This could include money market accounts, bonds, REITs, etc.

5). Do nothing.

While this is rarely necessary in large measure, it is useful in small measure at most times. I know that sounds confusing but remember that "sometimes the best trade is no trade". I am not sure who to credit the latter phrase to, but it is true.



Which approach do I recommend?
All of them.
I even advocate the use of shorting through borrowing, IF and only if, you educate yourself, protect yourself and can demonstrate flawless discipline. I fall short on the discipline side. Which is why I don't short through borrowing. And as Clint says, " a man's gotta know his limitations".

Each of these approaches have their time and place. Most of them apply in all markets, up, down or sideways. This is because within each market there are sectors which move in opposite, complimentary and confusing directions. The common threads between all these points are discipline, research and paying attention. Remember investing is a job, a profitable, fun and intellectually rewarding job, but a job none the less. If you approach it with professionalism and passion, you will be compensated accordingly.



JT

Legal disclaimer: This post is for informational purposes only and is solely the opinion of the writer. Nothing in this post should be considered investment advice. Before investing in anything, the reader is encouraged to do his or her own research and consult with a certified financial advisor. Which John Tompkins makes no claim to be. John Tompkins and Toro Creek Investments accept no liability for financial losses or damages incurred by the reader because of this post.