Online Stock Trading

(This first paragraph was written with intended complication—to avoid the hassle, you may skip it and still hit the main course starting in the second paragraph—new traffic persuades me to go fishing).

I think different kinds of people react in widely different ways to objectively bad situations. Did you catch the nuance there? I placed it at the end after we all got thinking about differences. But the moment some of us might snag that nuance, even fewer of us would see the kind of hidden joke. First, what’s an objectively bad situation? Having both arms blown off? That would seem to be objectively bad. There shouldn’t be any question. The fact that there shouldn’t be any question makes the scenario of widely differing reactions kind of the silly part. But we all know this is going to have to come full circle to the stock market, after all, the title of this article indicates precisely what we’re going to talk about—presumably, an objectively bad stock market: one where values fall and where the future seems uncertain. I hope to defeat these seemingly objectively bad “situations.” But by doing that, I’ll be introducing reasons for widely different reactions, which is opposite of how this got started. .

So how do we win in a losing market? The first and obvious way is to “short” stocks. On one hand, I’d like to be able to talk about this more, but it’s not something I know much about. I won’t start to pretend to know something about which I know little. My instincts are wired for stock price appreciation, for finding value which is improperly assessed by the market. In all honesty, a “down” market is my long term dream come true. In a consistently gaining market, I find it harder and harder to find stocks valued at less than I think they should be. Right now I see hundreds.

So now, one obvious way to “win” in a “falling” market is to not actually expect to make significant gains in that market (I buy for price appreciation when prices are falling), but rather, to escape that market sooner, to be the first out of the gate when the ashes blow away. Another way to think of it is that, should the market fall by 20%, and you start buying heavily after it falls 10%, by the time everyone else who got scared away from buying starts breaking even (when it retraces that 20% loss), you’ll already be earning gains. And then, when they start making serious gains, you’ll be making really, really good gains. That’s one way to trounce them.

Another way to “win” is to modify your strategy to more accurately reflect the realities around you, in other words, to reassess risk. In a rapidly growing and highly optimistic economy, small, newer companies stand a far greater chance to succeed than in bad economies. Once everyone starts to clam up a bit, start tightening belts, those companies will be the first to suffer if not disappear altogether. To combat that you can become strict in your selection—you can look for fallen giants, instead of hopeful midgets.

Finally, one of my growing favorites is what I call making a “dividend play.” This should not be confused with outright dividend investing, though it can encompass many of the same benefits. The dividend play involves continuing to look for undervalued companies, but instead of basing your selection on the premise that “if they can grow, introduce new products, etc, their price will likely go up”, introduce another premise that “because this dividend yielding stock’s price has fallen so much, so that their yield has risen so much, if they can maintain their dividend, their yield should normalize causing their price to go up.” Now, assuming they do in fact keep their dividend (and many do during poor economic times), we’ve removed the vast margin of our risk. Now we don’t even care how they grow or perform, all we care about it their long-term survival. In the meantime, while we wait for market conditions to improve, we could earn some of those dividends, which would offset share price losses, and if we accumulate in bits and pieces as the market falls, we lose less and less as time goes on and will earn more and more when it recovers.

So in the end none of these strategies force us to completely rethink our game. We can still buy good companies. Those who really want to wait it out on the sidelines could end up performing the classic mistake of waiting too long, and when they get back in, they might be buying at the top then soon selling at the bottom. By always buying, we can always be at that bottom.