What is good for the goose is not necessarily good for the gander

I read somewhere that Ed Lampart is adding to his stake in auto parts retailer Autozone and buying shares heavily. For those who don’t know him, he is a billionaire hedge fund manager. A couple of weeks ago, Warren Buffett said in a leading US paper that it was time to buy. Does the fact that these 2 people are buying mean that it’s time for everyone to buy? In my point of view the answer is no. Don’t misunderstand what I’m trying to say. I’m not saying that these guys are wrong in their thinking. I’m not even qualified to say so as I have not made a fraction of the money they have made on the stock market. However, they have a peculiar style of investment and if you are going to follow their advice then you need to make sure that your style is similar to theirs.

Since Buffett made his announcement, the Dow index has fallen over 1000 points, some shares have fallen more than 20%. This is a big drop for a trader or investor that is only willing to hold onto a share provided it doesn’t drop more than 10 – 20 % from his entry point. This type of trade won’t be suitable for a short term investor.

You also have to think about risk management. Depending on the school of thought (or should I say risk) that you belong to, it’s been suggested that to survive as an trader (or even investor) you should not risk more than 5% of your capital on one single stock. Ed Lampart and Warren Buffett have billions at their disposal and can afford to buy shares now and hold onto them till the whole turbulence is over. They are concerned about a company’s fundamentals and won’t be moved by a 20 or 30% drop in the value of a share price. They know that share prices are heavily discounted at the moment and they are willing to hold onto the shares for as long as it takes. Just consider the following 2 quotes by Warren Buffett

“Our favourite holding period is forever.”

“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”

To round up, if you are not happy to hold onto the shares for a long time, don’t buy yet. If you are a technical analyst, wait for your charts to give you the signal. That might be tomorrow, next week or next month. Nobody know when.

Happy trading

Is the UK in a recession?

There is a lot of talk around the fact that the UK might be heading into a recession. The UK's Gross Domestic Product (GDP) which measures the output of the UK economy shrank 0.5% in the third quarter. This was a greater contraction than what economists had predicted. We still haven't had two consecutive quarters of economic contraction, so “technically” we are not yet in a recession.
However, government announcements are lagging indicators in determining whether we are in a recession or not. It is a lagging indicator in that the contraction had actually taken place before the announcement.
The stock market indexes are leading indicators when it comes to showing the health of an economy or whether an economy is in a recession. The stock market is “forward thinking” and the future health of the economy of a company is usually factored into the value. The stock market points to the fact that it is very likely we are already in a recession. However the good news is that share prices tend to rise during the second part of a recession. They fall during the months leading into a recession and the earlier part of a recession. Why do they rise during the second part of a recession? They rise because they economy would have started to expand (meaning business would be better) before the announcement is made by government.
Although I haven’t got any official figures to show how the UK stock market has performed during UK recessions, the table below shows the performance of the S&P during the last 5 US recessions.

Bear markets of the past 100 years

The table below shows the bear markets of the last 100 years. The worst so far was the September 1929 - July 1932 when the Dow lost 89%. In the current market the Dow has lost about 33% from it's recent peak at 14,000. This just illustrates that even though share prices have fallen a lot and shares are "cheap", there is still downside potential in the market.

Bloodbath on the Stock Market

September was a rollercoaster month in the major stock markets. Blood was shed, giants got slaughtered, fortunes were lost, and governments were forced to take emergency measures. The largest one day increase in more than a decade occurred in September, ironically, the largest one fall in more than a decade occurred within the same month. While the bulls received a whipping, the bears were smiling all the way to the bank, that is the banks that are still standing.

Personally, even though I knew from the charts the the market was heading down (check my post on the 4th of September http://diligenttrader.blogspot.com/2008/09/why-market-might-be-heading-for-another.html), I stood aside most of the month. This was mainly because volatility was high and it was a day trader's market. Also, there was a lot of suspense with regards to what would happen next, for instance, will the house pass the $700b bail-out bill, will the treasury inject money into the system etc. Most openings were either a gap up or a gap down and the market was driven by sentiment and news.

What does October hold. The daily charts are showing signs of recovery even though the monthly charts are still in a downtrend. I'll be looking at individual shares rather than the indices and look for buying and shorting opportunities. However, it has to be said that this is a market that should be treaded with care and good risk management is essential.









All the best.