How to Win a Bar Fight with the Stock Market

There are a surprising number of websites that will teach you how to win a bar fight. This post translates that 'wisdom' into dealing with the your investments in the stock market with links to previous Chicken Little posts about the stock market. 

Rules for Bar Fight.

1. Prepare.
2. Anticipate the start of the fight.
3. Draw first blood.
4. Survive the counterattack.
5. End the fight.

Investing is a Battle

Is the stock market really a battle? Yes, but it has been a lopsided one for almost a decade. To understand the strange environment of the last few years, start by guessing the level of the Dow Jones Industrial Average on March 9, 2009. Do you remember? Today the Dow sits at just under 25,000.

The Investing Battle is often with Oneself

March 9, 2009 was the lowest point on the Dow in the past twenty years. In the months before the low, individual investors sold hundreds of billions of dollars of stock. In the week before the low, the sales of stock by individual investors set a record - the largest dollar amount of sales in the history of the world.

In other words, at the best buying moment in decades, investors sold record amounts.

If you owned any substantial amount of stock in early 2009, you may recall that it was a battle.

Now return to the question of the level of the Dow on March 9, 2009. The answer is 6,443.27. The Dow has gone up almost every day for over nine years. Between March 9, 2009 (6,443.27) and January 26, 2018 (26,616.71), the Dow added over 20,000 points!

The US stock market has generated enormous returns of over 300%. A decade of easy stock market returns has made many investors soft, complacent, smug, and unprepared for turmoil.

1. Prepare: (Post: Bear Market Operations)

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Did you sell stock in the spring of 2009? The Dow declined by 54% and other stock market lost two-thirds of their value. Many people watched their wealth disappear and, one by one, they sold their positions at lower and lower prices. The Wall Street term is 'puke out their position.'

How do you avoid puking out your position at precisely the wrong time? The most common advice is to simply be tough, and not sell into declines, or not buy explosive rallies (e.g, Bitcoin at $20,000). So standard advice is to fight your human nature.

Chicken Little's advice is exactly the opposite. Rather than try to be inhumanly strong, anticipate your own weakness, and position yourself to minimize the losses. This sort of advice is similar to don't go the grocery story hungry, and do not take money into a casino than you cannot afford to lose.

In the fall of 2017, Chicken Little sold all stocks to get ready for Bear Market operations.

2. Anticipate the start of the fight. (Post: 'This is the Top')

January 25, 2018
Chicken Little called a top in the stock market one day before the highest close in history. The single best predictor of market moves is sentiment. At the lowest level in decades in March of 2009, people were selling stocks at record amounts. Conversely, the week before the top in January 2018, people were buying stocks at record amounts.

The Financial Times reported this record enthusiasm for stocks in on January 26, 2018:

Investors buy stocks in record numbers amid optimism over growth

More money flowed into global equity funds last week than ever before

Global equity funds attracted a record-breaking $33.2bn of money last week, taking their haul this year to nearly $77bn as increasingly optimistic investors around the world flocked to stock markets. The pace of inflows into equity funds tracked by EPFR, the financial intelligence company, is running five times faster than the pace of the same period last year, and ahead of the previous high of $31.8bn set in December 2014.

Chicken Little observed this mass herding into stocks in January 2018 and wrote: "We are built to sell at the bottom and buy at the top -- this is the top."

3. Draw first blood. (Post: First bear market action)

First Blood
In February 2018, Chicken Little opened a small short position in US stocks. Having real money on the line, even a small part of the portfolio, focuses the mind and heightens concentration.

4. Survive the counterattack. (Post: Initial Bear Raid complete)
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The Champ is not going down easily

The bull market that began in March of 2009 is powerful. People have been rewarded for buying stocks for almost a decade. The Skinnerian reinforcement of buying stocks means that it will take time for people to change their behavior. Thus, Chicken Little ended his bear market raid in April 2018, anticipating a market rally.

5. End the fight.

The initial battle will end relatively soon

The final stage is to end the fight. At this point, no one knows with certainty who will win this initial skirmish. There are two options.

a. Bulls win. The Dow sets a new, all-time high above the close of 26,616.71 on January 26, 2018.

b. Bears win. The Dow hits a new, 2018 low below the close of 23,533.20 on March 23, 2018. Chicken Little continues to believe that the bears will win this battle and there is more pain ahead.

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