In a Bad Market, Clarity Is Key

Style is knowing who you are, what to say, and not giving a damn.
-- Gore Vidal

When the market is acting well, the differences between various styles of investing and trading aren't that great. To some degree they all involve buying a stock and riding it upward. Time frames and entry points will vary, but to some degree all styles involve buying and holding on to stocks for a period of time.

In a poor market, like we have now, the differences in investing styles become much more stark. At one end of the spectrum are those who will stay heavily invested at all times in hopes that a turn is coming; at the other end are those who go to cash and stay there until they see a change in trend.

Where many investors get in trouble is that they try to use the same style that works in a bull market in a poor market. They are seduced by the idea that there is always a bull market somewhere, and they pursue trades that just don't have good odds in a bad market. While there are always a few good stocks in even the worst markets, the truth is that the vast majority of stocks move with the overall market trend. You are almost always fighting the odds when you are trying to make upside trades in a downtrending market.

The most important thing an investor can do in a difficult market is to be very clear about the approach you are going to take. If you have a very short-term time frame then you will have lots of opportunities to make moves as news and events unfold. If you are a longer-term investor, however, I strongly believe the best approach is to simply sit and cash and wait for market conditions to turn.

Unfortunately, many longer-term investors have a very hard time doing little in a downtrending market. They are itching to buy their favorites that have been trending down, and they worry greatly about not being heavily long at the exact moment that the market bottoms.

The media greatly contributes to this impatience to jump in and do something with its constant proclamations that the worst is over and that you have to hurry and buy cheap stocks while you can. It is very hard to resist the pressures to put money to work even when the market is acting poorly.

For quite a while now I've been steadfast in my observation that the market is downtrending and that it is not the time to build longer-term positions. That doesn't mean there isn't good short-term trading, but I'm much more concerned about investors deploying large amounts of capital too early.

More than anything right now, you need clarity of style. If you are going to play the volatility you can be highly aggressive, but for the average investor who is not watching the market every day and who prefers to hold stocks for periods of weeks or months, cash remains the place to be.

We have a bit of a bounce going to start the day, but given the swings we have been seeing lately, it is hard to have much faith that we won't see several reverses during the day.

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James "Rev Shark" DePorre is the author of Invest Like a Shark: How a Deaf Guy with No Job and Limited Capital made a Fortune Investing in the Stock Market. He is founder and CEO of Shark Asset Management, an investment management firm, and he also operates sharkinvesting.com, an interactive online community that serves and educates active investors. DePorre holds business and law degrees from the University of Michigan, is a member of the Michigan Bar Association and a former tax attorney and CPA. He lives in Anna Maria Island, Fla., with his wife and two children. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Rev Shark appreciates your feedback; click here.