The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

08 June 2006

Bowel movements, aka stomach-churning declines

I posted this commentary as a reply to the topic below, but feel it warrants its own thread. So I move it here.
The happy talk re the market, and its current decline, continues. Buy, buy, buy; it will recover.

Well, of course it will. But for how low and for how long are you willing to hold positions purchased now (i.e., since this decline began in earnest 4 weeks ago)? Down 5%, 10%, 20%? How about down 30-50%? How about down only 15-20% but the stock requires months, perhaps even years, before recovering to the price you paid? These are questions for which you should know your answer BEFORE you purchase.

Nota bene the willingness to purchase the former leaders; this is a great failing of most investors -- the inability to discern change. This effect can be seem as stocks tumble from obvious up trends into short term down trends. ("Oh my, where did THAT come from?") as well as long term up trends that morph into something worse, much worse, than a decline that endures only in the short term. ("Buy the dips!") Well, yeah, buy the dips, but place those dips within context of its grander pattern. I suppose stated more pithily, I argue to "watch for change".

I am not making predictions, as I am loathe to do so -- there is NO upside, no benefit to the effort -- but this decline appears set to worsen before it improves. Oh sure, it could continue to feint up -- it might even levitate at these levels for weeks yet -- but each of those feints (including one possible from this morning's lows), when considered on their own merits, lack ALL the clues of sustainability, leave alone a reversal of trend. And when you see the support levels you identified give way, if not crumble, then understand one item, if nothing other: this decline is different from others of recent years.

Nonetheless, it is during the throes of declines such as this one that I accumulate my positions. I rub my hands in glee at the lessened-, if not low-risk opportunities soon to present themselves.

-- David M Gordon / The Deipnosophist

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