When the market is up for over 2 months straight, people can become complacent. So to remind us of our infallibility, the market dropped smartly yesterday.
The 1.5+% down move across indices felt bigger than it was for 2 reasons – 1. emerging markets and speculative things actually fell much more than that (Asian markets have given back 1/3 of their 2012 gains) and 2. we hadn’t seen a down day like this since last year:).
Now, is this the flash crash that I thought might happen? I like to look at past charts to get ideas and it’s possible that if we get a bounce here (looks like it this AM) that the market could move higher with buyers emboldened by such a short “correction” setting up for a real flash crash like scenario – which I think would actually set up for decent gains after that.
Again though, these are just possible scenarios and all we can do is observe. I caution my readers to have an investing/trading plan often, so in following that up, I’d like to share the 3 general areas in which I break down my investing/trading focus for FYI purposes:
1. Fundamental picks – which I hold, buy on weakness, and plan not to sell for years (or unless signs of another 2008 crash are coming:)
2. Trading positions – typically stocks or indices I find undervalued showing upward trending.
3. Discovery – small, almost VC type stocks that require much more research and typically much smaller position sizes with sizable payoff potential.
Having a Strategy – Like Buffet Did
I have plans and continue to work to improve my efforts for each of these areas. I suggest my readers have their own investing plan. Even Warren Buffet had 3 areas he’d focus on in his early partnership years (see here for his partnership letters). One such area was what he called “workouts” which was mainly merger arbitrage. In his partnership years, his fund would often earn over 20% annually from this segment of investing and it’s what he would do with cash if he couldn’t find value in the market.
Note: with mutual funds now offering “merge-arb” it’s darn hard to earn 20% annually on this. better market information has reduced the informational return of this strategy tremendously. In fact, I often see stocks, which are the subject of buyout offers, trading above the buyout price. The effects of money printing. In a ZIRP (zero interest rate policy) world, people will settle for 3-6% in a merge arb strategy vs earning close to zero in the bank.
FYI: I wrote about merger arbitrage on my company blog in 2010. Read that article HERE.
At the time of this writing, I or my clients own the following investments mentioned in this column: None
Note: this article is meant to be some helpful thoughts to share and not investment advice specific to you. Please consult your own advisor regarding investment and financial decisions. See our disclosures page