Friday, October 10, 2008

Finding Bottom

While the markets continue to walk the plank, I've been trying hard to think of ways not to completely lose my mind. I like to repeat the mantra, It's all about the number of shares, not the dollar amount, the number of shares... Does it work? Uh, not really.

After the Dow cracked 8000 yesterday, I decided to buy in. Because after all, you buy low, right? Honestly, the best thing to do with your money right now is to buy stock. But that is much easier said than done.

The problem with buying low these days is that you never know how low it can go. To make matters worse, to find the bottom of the market is much easier after the fact. Frankly, anyone who tells you they know when this market is hitting bottom has his/her pants on fire they're such a liar, liar. Nobody predicted this. While Buffet warned of the dangers ahead, I don't think that even he thought it would unravel quite like this.

About a month ago I bought some stock that was near its 52 week low. The market at the time, as you may recall, was going apoplectic and I thought I was buying a good company at a bargain. Boy was I wrong. Because oil fell on its ass, the S&P fell on its ass, and today when I logged in to my Scottrade account I found out I too had fallen on my ass-- I lost 60% of my money on that stock in less than four weeks. So what did I do? I bought more. But not of that company. I was so spooked by that loss, even though I know it'll be okay in the end, that I bought an ETF of the S&P 500. If that's alphabet soup, I did a post a while back on index funds and ETFs here.

To be honest, I was torn. I've been casting sidelong glances at blue chip companies like GE. This afternoon it was at $18 and change, smashing its 52 week low. It's now up to $21 and change as I type this. I could lose my lunch trying to pick the moment to strike. And then you have sparkly American companies like Apple and Google offering steep discounts. The risk is that you could find out later that this nice big blue chip is on the brink of bankruptcy, or that the floor of the Dow Jones Industrial Average just collapsed and took everybody with it.

I work for a man who made his money as a successful investor. Today he shook his head and said, "The problem is, all the rumors so far have turned out to be true." So I steered clear of GE, even though I was tempted, and conservatively bought SPY. If you have some spare change lying around and you don't mind looking at it for at least five years, I'd suggest you buy an ETF with a wide net of diversity tracking an index you understand (in other words, the S&P 500 versus Brazilian small caps). Because it's not about finding the absolute bottom, it's about buying into the market at a much lower price than it will be five to ten years from now. Stocks haven't been this cheap since 1985! And because companies are dropping oops-we-lost-billions-of-dollars kind of surprises on us left and right, I'd really really encourage the average investor to stick with index funds/ETFs through a ROTH IRA. Also, don't go all in. For example, if you have $4,000 to invest, you could invest $1,000 a week for a month to spread your price risk.

In the meantime, prepare for a rough ride. And remember, as long as a company doesn't go belly up, they can't take away how many shares you have. While that's been of little emotional comfort to me, it does keep my panic in check.

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