Catching a Falling Knife
So, has anybody checked out the stock market lately? Wow, September and October are turning into real zingers. No doubt people have lost tons of money, many are panicking, some are selling “at any price”. I guess selling is a good thing if you are confident the market is going to fall still further (and you plan to buy back in later). BUT, once you do that – you have permanently locked in any losses you have on paper. While the recent drop is nothing short of historical, dramatical, and gut wrenching – it is not unprecedented (does anybody remember the >20% drop in ONE day in 1987? Market falls and corrections typically happen every 4-5 years and the percentages are typically 20-50%. Then, these corrections are followed by several years of recovery and prosperity. Overall, and “on average” the market returns approx 10%/yr – but “on average” is like putting your head in the oven and feet in the freezer – “on average” the temperature is quite comfortable.
The key to survival is being diversified, understanding your risk tolerance, and keeping a long term view. Think about Jesus’ disciples when they were in a boat and a storm came upon them … and then Peter walked out on water to meet Jesus. As long as Peter believed and kept his focus on Jesus – all was fine. Many lessons can be learned from that story / passage.
Now, regarding the title of this blog “catching a falling knife”. That is a term commonly used when people are referring to buying stock in a dropping market. The point is that it is dangerous to try to catch a falling knife and one will likely get cut very badly if they try. Thus, one should wait until the knife lands/sticks somewhere (and stops moving) then collect the knife using the handle. This can apply to the market too …. don’t try to time the markets … don’t react to day-to-day movements.
While I agree with the basic tennets of the above, I also know that to make money in the market it is important to be unemotional and contrary: Buy when people sell you buy- then sell when people buy. During the past two years I have liquidated a number of stocks to build up cash to pay for college educations. The prices I have received were quite good and overall I am pleased with the outcome – many of these stocks were bought in 2001 and 2002 with the market was last in a funk.
Recently (this past year) I have not bought any stocks / funds except for my normal monthly contributions. Nevertheless, I have been watching the market movements. I had decided some time ago that unless the market fell below 10,000 dow (representing a 30% correction from last October’s high) I would not make any changes in allocations / investments. Well, as folks have seen – this past week the dow dropped below my majic number. At that point, I watched a bit longer … and then started making my move. I’ve made some investments as the dow hit 9,500 (Tuesday) and again at 8,500 (Thursday).
Am I trying to catch a falling knife? Well, in some ways I am and I may get burned. However, at the same time I am buying stocks at a 35-40% discount. If one has confidence in the long term view (which I do) then I have just set myself up for a potential significant (but far from certain) gain in 2-3 years in the future. In the meantime, the market continues to struggle and I expect that foreign markets will further downward correct in reflection on the US market movements on Thursday. I may lose money in the short term – on paper – but need to be patient.
Finally, for the avoidance of doubt, the movements / investments I have made are NOT with the cash that I need to pay for college education for my children. The source is other money – money that I can be patient with and don’t need for many many years. If necessary, I can wait 15 years – until age 65. In other words, while I might be “catching a falling knife” … I am doing so wearing cutting gloves.
*** Other than the above, nothing else to write about today – still waiting for an announcement on my new assignment to be posted, but working in my new position anyway. And, for the avoidance of doubt, THANK GOD ITS FRIDAY !!!!
ciao ciao
