Capitulation playbook – big picture

Yesterday’s market drop brought the S&P 500 down more than 18%; NASDAQ now exceeds 27% from its peak and Russell 2000 is up 28%.

However, it is not too early to start preparations Surrender Occurs and The market is low The end is created, whether they happen yesterday or six months from now.

Over the years I have had some good luck (and a few disasters). Here are some ideas that have worked for me over the last few decades. As you begin to build a wish list and start thinking about how to take advantage of this drawdown, consider whether any of these might work for you:

1. Start politely: We never know how far these drawdowns will go or how long they will last. Is this a shallow 20% pullback? A 30% crash? Bad? (We don’t know). The 34% crash of 2020 lasted just one month, the 2008-09 GFC lasted 18 months and the 1966-1982 bear market was 16 years long.

Start your plan by acknowledging that you are venturing into the unknown. Never bet on a farm or take so much risk that an entire portfolio can be destroyed if the underlying foundation goes wrong (aka “early”).

2. Find the inequality: Look for opportunities that have a lot of ups and downs in terms of potential negatives. Traders never know which of their positions will work or not. Even if you only bet .300, there is value in creating net profit potential.

3. Automatic: Well-intentioned bottom buyers often fail to run the business due to fear and passion (despite their own desires). Remove your limbic system from the process by deciding on a series of entries and then automating them.

4. Buy over time: Instead of estimating a specific “ideal” entry date in the middle of a sale, consider spreading your purchases throughout the month. Choose six dates for next year with your discretionary trading capital portions. This guarantees that you’ll be both early and late – but it also creates a high probability that your average purchase price will be significantly lower than the six-month period of market recovery.

5. Buy across price levels: Another way to avoid guessing below is to make multiple purchases at different price levels: Example: Set GTC Limit Purchase Order to buy a broad index of 19%, 26%, 33%, 42%, even 53%. (I want to avoid round numbers). If only half of your orders were executed, that means the markets matched the worst recession of the last 20 years – but you were still a buyer at a reasonable price.

6. Favorite stock: As much as I like broad indexes, some people have companies of their choice. Consider that the last cycle that you want to be the long-term owner may escape from you. Whether it’s Nvidia or Apple or your personal preference, follow the same strategy to make multiple purchases across different price levels.

7. Use options very rarely: We keep hearing anecdotes about Robin Hood / Reddit traders who used options for great impact in 2021 but saw terrible results in 2022. Professionals use options as a way to manage their risk – basically defining their losses in advance

Example: Instead of buying a location for $ 100k with a 10% stop loss, they buy 10k on long dated calls. Time loss dramatically separates risk parameters between stocks and options, but can be a useful strategy if used properly.

8. Hard to shorten: To get a short trade right, you first need to identify something whose title is admirably low; Second, take your time and, finally, borrow shares. All of this is harder than it sounds: shorts can be squeezed, borrowed stock goes out, costs freeze, and time can be notoriously difficult.

9. Avoid leverage: Predictable Market Crash A recipe for disaster using borrowed money to buy. Don’t do it! As Gerald Loeb wrote in 1935, it is more than a mere profit, it is a struggle to survive on investment.

10. Be patient + stay in your plan: A correction or buying or crashing in the beer market is a challenge that very few people can do well. It takes planning, patience and a lot of time to unravel.

These 10 ideas have been helpful to me over time; Your list may include 10 completely different approaches. But whatever your approach, to buy a fix or a crash, think through it and make a plan is the best recipe for success, regardless of the specific ingredients.

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