How To Handle Market Volatility..... History is Your Guide

On August 2, 2007, in a Trident Confidential Flash Alert I wrote……

 "Six months from now, this correction will look a lot like what we saw in February 2007, so hang in there. If you have money on the sidelines, prepare to capitalise on weakness. But drip feed it in, don’t invest it all on one day, just pick your mark and buy each position in halves and thirds. The best time to buy is when there is blood on the streets and things are at their bleakest. I think that time is almost with us. Above all, remain calm, the world is not coming to end and in a couple of months from now you’ll wonder why you were so concerned and worried. I’ve seen this nonsense on many occasions, and it always passes and new highs are reached within a relatively short space of time…….. Look at this time as your chance to buy some bargains rather than to panic and sell”.

On August 13, 2007, in a further Trident Confidential Flash Alert  I wrote ……

"I have been successful in picking up some great bargains over the last few days by employing this “cheeky” strategy (explained earlier in the Flash Alert - not printed here). Check the Trident Confidential Model Portfolio and you can see our entry prices and buy below prices. These prices are still good except for XXXX, which has let us down with a not so good earnings result, but all the rest are still great stocks for the medium term.

It’s imagining what the share price will be in 6 months from now and not focusing on what it will look like at the end of the week. Don’t chase anything, the price will more than likely hit your cheeky buy price at some stage over the next few weeks until this “credit crisis” settles down as it ultimately will. It always does.

A bad day will come along soon enough and you’ll pick them up. I believe most of the “damage” has already been done, so I don’t envisage too much more downside. Some people are talking about the Dow hitting 12,000, but I don’t think that will happen. There are too many positives macro-economically speaking, such as low interest rates, good corporate earnings, stable economies in the US and Europe, booming economies in Asia and no major military conflicts. However, I would be a little cautious about holding too many financial and insurance stocks until the full extent of the sub-prime issue is fully known. This could be a few months away.”

Well, there you go…. Guess, what happened? I shouldn’t be smug, but it just goes to show you, be a keen observer of history and people’s emotions and you just about have the stock market worked out. All you have to do is ignore the “gurus” who run around telling everybody it’s “different this time” and ”the sky is falling”. It just won’t happen.

I’m not saying for a moment this is all over and the worst is past. It may not be. There are still problems coming. There are more sub-prime loan defaults on their way over the next year and they will hurt the financial sector mainly with a smaller impact on the wider community. Why do I say a smaller impact on the wider community when everybody else is saying it may be a recession?

Think about this, these people have borrowed on houses they couldn’t afford and now they are having to sell them as their interest rates on the agreements they signed increases, forcing them to sell into an already flooded US real estate market. The result is they lose money and become bankrupt because they have negative equity in the home and the banks lose money because “you can’t get blood for a stone”. The banks take the loss and the people go off and rent somewhere. They don’t die! If they died I could understand that retail sales would be affected, but these people have probably improved their cash flow by not having to pay a mortgage they could never afford and they still have to eat and use services. So, I think only the banks, corporate investors like insurance companies financial services companies will be hit badly with some major losses.

So, be a little cautious about holding too many banks and the like until the losses are fully realised over the next 6 to 12 months.

On a brighter note, despite the market volatility, we are back around record levels on most major markets and the Trident Confidential Portfolio has had a great 3 months, with an average increase of 25.5% (over 100% annualised).

This edition we are introducing another group of stocks that have solid international growth potential, so, regardless of what the US$ does these companies will profit, but will do even better with a soft dollar. This means, for Australian investors, any FX losses will be more than offset by increases in the stock prices of these companies.

Expect more volatility to come for sure, so stick to our trading strategy rules (in the Trident Confidential Users Manual) and keep on imagining what things will look like in 6 months, not next week. Invest in solid companies with fundamentally superior stocks and you’ll do just fine.

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