JANUARY 15, 2016

Don’t Go Chasing Market Lows … they just keep getting lower!

Biotechs represent a sector with tremendous potential. At the same time, it’s a highly volatile sector and quite sensitive to market conditions.

As we experience a resetting of market expectations following a change in the Federal Reserve policy, it’s quite tempting to attempt to “trade” the market. For the fleet-footed experienced trader, it may be a great time to alternate between pressing “Buy” and “Sell” multiple times during the day. But for most of us investors, this period becomes a time for picking the lows. It’s a natural tendency for an investor to get a stock that they feel strong about at a lower price than it was a week before.

“Hey, if I liked it at 50, it’s a deal at 40, huh!”

This kind of thinking has gotten me into trouble many times. There are situations when such thinking makes sense, and fundamentally we well-understand the prospects of a company. But when the overall market trend is unfavorable, this kind of thinking will most definitely get us into trouble. For if market conditions are unfavorable, instead of reducing my exposure, I just increased it further. And the stock is now heading into the 30s.

Now stress levels begin to climb. The frequency of checking the price quotes increases exponentially. Our day and energy starts getting consumed by trying to determine if the stock is now turning around or not.

“Well, I’m investing for the long-term.”

That’s great, if the company you’re investing in is fine and the market is experiencing a short-term decline. But if it’s a deep correction, or even worse the beginning of a Bear market, then it just leaves an investor in a miserable state to see their holdings sink lower-and-lower every week.

There is no easy solution to the temptation of picking the market lows.

The only way I try to avoid such an investing quicksand situation is through a disciplined investing system that I must continue to follow even when temptation suggests otherwise. If I’m wrong, I missed the absolute lows, and I’ll join the rest of the uptrend 10% late. But if I’m right, I’m not stuck in a quagmire with a depleting portfolio. That’s why our Prudent Biotech portfolio has been entirely in Cash for January.

Trend is your best friend. Use it to determine your timing for entry and exit. There are times to be on the sidelines, just thanking your system for keeping you away from the misery of eroding positions. And don’t worry about not being able to time the stock bottom. Remember the words of legendary investor Bernard Baruch,

Bernard Baruch

Don’t try to buy at the bottom and sell at the top. This can’t be done–except by liars.

Bernard Baruch Legendary Stock Market Investor