If only we were this eager to share in kindergarten.
column last Tuesday outlined a few smart strategies to use when the next market bubble comes, and it must've made many of you reflect on the tactics you used during this recent Internet craze. We got loads of responses. Readers included not only the lessons they learned, but also incorporated some sound tips that will help you weather the next bubble.
You Know It's a Bubble When ...
Before you can apply any preventive tactics, you have to be able to identify the enemy. So being able to spot the next bubble is half the battle.
gave us a few tips on just how to do that.
You know it's a bubble when:
- Your hairdresser gives you a stock tip.
Your landscaper is on his cell phone buying stocks.
Your cab driver is reading
Investor's Business Daily.
Your brother-in-law buys an IPO and makes $100,000; you buy it and lose $10,000 the first day.
Your health club has all the TVs tuned to
Any other bubble-spotting tips? Let us
know and we'll add them to the list.
Sticks and Stones
Here's a lesson the Bill Gates-like nerd in your high school science class knew: Being boring actually might be beneficial.
"Throughout the frenzy I stuck with large-cap blue-chip companies that were trading at low P/Es, had a high book value and a nice dividend," says reader
. (Price-to-earnings multiples tell you how expensive the stock is relative to its market capitalization and after-tax earnings. A low P/E would mean the stock is cheap by historical valuations. Book value is what's left if you tally all the company's assets and subtract out its liabilities.)
"I carried no margin debt," continues Barker. "At the time, I was laughed at by others who said these stocks were extinct. I may have missed the run-up and am still down a little bit over the past 12 months (although still up 2 1/2 fold over six years) but was able to weather the storm while staying fully invested. Sounds boring, I know, but I survived."
Hey, survival is key in this market -- and it takes stamina to survive. "I never throw for the long bomb," Barker says. "Three to five yards a carry is OK with me. Eventually I'll score. As
says, the first rule of investing is don't lose. The second rule is don't forget the first rule. In this game, the market is judge, jury and executioner. All verdicts are final and binding. There are no appeals."
Know When to Fold 'Em
Knowing when to throw in the towel was also an important lesson, our readers discovered.
says, "I learned to limit my losses to 30% on any one position. A smaller limit is likely to cause you to lose a good position; any more and you lose too much money. Whether 30% is right for any individual depends on how many positions he carries, but the most important point is have stop-outs."
Investor Business Daily's
recommendation of selling a position that is down 7% or 8%. What's the logic with using such a small trading range? If one of your holdings is "down 7%-8% from a recent peak, or from your buy price (assuming it started south right after your bought the turkey), the idea is to limit your loss, and preserve your limited capital for another day," says Robins.
"A stock which loses 50% of its value will need to double in order to break even! And how many doubles do you have this year?" adds Hunter.
Granted, having a selling point is a very important element of your investment philosophy. But unless you're a daytrader, there is no golden rule of thumb. It depends most on your risk tolerance.
Your sell point is not just for your losers. "Not only do you need to know when to sell when a holding is down, but you also need to know when to sell when it's up," says Dee Lee, a certified financial planner and co-author of
Let's Talk Money. So create a stop point at the top
the bottom of a security's range.
But be realistic: "The range of 7%-8% may be too narrow. That's more like a daytrader's range," says Lee. These days, stocks can move that much or more in one trading day. Remember what happened to
, when the company
warned late on Oct. 21 that its third-quarter revenue would fall short of forecasts: Intel's shares plunged 20% in after-hours trading.
With a 7%-8% range, you might dump stocks too often and your tax bill would reflect it.
But Hunter also reminds us that "hindsight works; use it."
He suggests that each quarter you review your winners and losers. "Patterns and mistakes glare at the investor who does due diligence in retrospect! Learn from your mistakes and change your evil ways! Falling down isn't the problem; it's not getting back up."
That's great advice.
It's Not Over Till It's Over
Is this bubble even over yet? "The fact is, the air has not been let completely out of this one," warns reader
"We are in for much greater volatility because these markets, especially the
, are far overvalued. The effect of
interest rate hikes is just now being felt, with more to come."
Granted, no one knows what to expect in the upcoming months -- I know my crystal ball has been in the shop for some time now. That's why it's more important than ever to create an investment philosophy and stick with it.
Don't forget to send your questions, queries or comments on to
email@example.com. And please be sure to include your first and last names. Investor Forum appears Tuesdays, Thursdays and Saturdays.
TSC Investor Forum aims to provide general investment information. It cannot and does not attempt to provide individual advice. All readers are urged to consult with a professional as needed about their individual circumstances.
TheStreet.com has a revenue-sharing relationship with Amazon.com under which it receives a portion of the revenue from Amazon purchases by customers directed there from TheStreet.com.