Know What to Buy When Putin Comes Knocking
So Putin rolls a bunch of tanks up to the Ukrainian border and the market slides a percent or so. In any other market that would be considered a yawn. But here in the good ‘ol US of A, where the average active investor can barely remember the dog days of ’08, few traders seem to have the skill set necessary to maneuver in a down market. Having done this for 20+ years, I thought it would be helpful to share my trading tips for when war comes knocking.
Rule #1 : Always Have Plenty of Firepower
I see too many novice traders leveraging 2:1 on any given day. Forget it. You can’t predict some of these gyrations, and there are times that stocks simply have no bids. Look at today’s trading in World Acceptance Corp (Nasdaq: WRLD). I watched in horror as the dip buyers came in down $4, only to get killed when it promptly gapped down ANOTHER $4 when no new buyers materialized. Moves like that become common when war rumors are making the rounds. Don’t get caught over leveraged until the all-clear sounds.
Rule #2 : Listen to People’s Actions, Not Their Words
Last week the New York Times penned a quasi-editorial masquerading as front page news when the Paper of Record boldly declared that Putin essentially conquered the Crimea by accident. Don’t be fooled for a second. People like Putin have a lengthy history disappointing the optimists. Ignore any and all popular press that proceeds to explain to you why someone on the world scene is acting out of character. They’re almost always wrong and it’s a great wary to lose money – betting that the all-clear signal is closer then it really is. In other words, observe what people do, not what others tell you they will do just because, hey, we all want to go home and get back to making money.
Rule #3 : Stocks that Lose Money Always Get Hit the Hardest
Sectors like social media, new age energy sources, and the biotech market have been red hot. But underneath all the sizzle are corporate shells burning cash. And when the cash runs out the lights go out. Investors are quick to assume money losing firms will need to come back to the public markets to raise cash sooner or later. In down markets pulling off well-placed secondaries is almost impossible. As much as you love your local spec public company with “blue sky” promise, if the cash on hand isn’t enough to last for at least two years, make sure you aren’t full boated in the name. Odds are, you’ll have the chance to buy it lower, probably much lower.
Rule #4 : Bid for Stocks, Don’t Chase Them
There is a time to buy stock higher, and that isn’t now. The prospect of war can cast a long shadow. If Putin is serious about grabbing even more of the Ukraine, we’re going to have plenty more days like yesterday. If you own a stock at, say $15 and now its $18 and you want to buy more, don’t. Chasing stocks in down markets is a quick way to end up with an upside-down cost basis. Lay low, and let the prices come to you.
Rule #5 : Draw up a Wish List
This is probably the most important rule out there next to #1. When markets slide, they go down fast. If you follow rule #1 and have a good cash cushion, make sure you have a buying list in place so that you can act on pre-meditated decision-making, not weak-handed fear. Far too many investors panic when the market gets hit hard. Don’t be one of them. Know what you want to buy, and at what price you want to buy it at. Stick to your rules, and let your discounted purchases average you down in names you love. On this I always remember Warren Buffett; he was want to say that you buy big in names you would be glad to own if someone suddenly announces the stock market is closing for two years. When buying stocks into selloffs, think of them as businesses you happen to own fractional pieces of. No better way to build wealth then owning high-quality businesses at fire sale prices.
Rule #6 : Put it Away When the Closing Bell Rings
Far too many traders go nuts after prolonged selloffs. They come home dejected, upset at themselves and quite possibly the world. Remember its’ only money and be sure to invest your time outside of market hours in things that make you a better person. You can’t spend your entire waking day thinking about the next tick in the S&P. Frustrated, on edge traders make for poor decision-makers. Rejuvenate yourself daily by immersing yourself in what brings you joy outside of the stock market. Ultimately you’ll be a better trader for it.