MarketLife Ep 26 – Taming the bear: managing market declines

640px-Black_bear_(PSF)Markets have been a bit volatile over the past few weeks, and the future is uncertain. For many investors, these moves can be troubling because it’s been many years since we’ve had a substantial decline–whether we do or do not from the current point (and, for the record, I think it’s much more like the market surprises us with new highs sooner than anyone would think possible), we need to spend some time thinking about how to manage our portfolios and manage ourselves in a market decline. This podcast shares a few thoughts and ideas for declining or bear markets. Here are the show notes:

First, watch your language

  • Labels are meaningless: Correction, pullback, bear market—just words
  • Listen to the terms people use: fake, rigged, propped up, short covering rally. The words we use matter because they carry emotional meaning.

Understand market psychology

  • Market moves are mostly emotional. If you don’t understand that, you’re doomed to be at the mercy of the market.
  • The news doesn’t matter (for prediction.) You need a plan for how you read the news!
  • Market movements arise from competitive action of traders driven by both reason and emotion. This is why the market creates such emotional reactions in traders and investors.
  • The “permabears” are interesting (and dangerous)
  • Learn to monitor and understand your own emotions and reactions

Understand the reality of the market

  • Markets are mostly unpredictable. No one knows what is going to happen in the future with any degree of reliability
  • Best guide is statistics, but need to understand what this means:
    • On average, stocks go up over long time periods
    • Hard to short stocks
    • Strange things happen on shorter time spans
    • What is predictable in the future is fuzzy and uncertain, and deviations can be large
  • Most of the things people talk about follow the market, so they can’t be used to predict the market!
    • The market is the leading indicator. (Dow)

What to do?

  • The biggest mistake investors make is selling into declines
    • How to avoid? Don’t do it
    • Best plans are fading (going against) moves in stocks. If you implement this one rule, you’ll be ahead of the game.
  • Always use limit orders. Always. Always.
  • Buy at steep discounts, planning to hold for multiple years
    • Be a predator
    • Buy “stupid” prices for things you are reasonably sure aren’t going out of business/away
  • Be your own manager
    • Break destructive patterns
    • Stop mistakes before you make them
  • Consider shorting
    • Shorting is not evil or (that) complicated, but this is a topic for another day

If you enjoy the podcast, one of the very best things you can do for me is to leave me a review on iTunes here.

Also, if you like the music for this podcast, then be sure to check out Brian Ashley Jones, my friend, and a fantastic singer-songwriter.

Enjoy the show:


Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.

This Post Has One Comment

  1. A_Joe

    So connected to Episode 20 (on Market Cycles and Regimes) rechecked again today ! Thank You !

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