Friday, May 21, 2010

Another Bad "Expert" Advice Story

In August 1998, I appeared on the Cavuto Business Show on The Fox News Network along with another guest. I was bearish on the market and pointed out to Neal Cavuto the similarities to October 19, 1987, (the day the Dow Jones Industrials dropped 508 points, otherwise known as “Black Monday”).

When Neal asked the other guest, “What are you buying here?” he answered, “We’re buying the stocks that have dropped the most.” This was on Friday, August 28, 1998, and coincidentally, the following Monday, August 31, 1998, the Dow dropped 512 points, suffering one of the worst one-day price declines in stock market history.

I suppose for my fellow guest, the 512 point market crash resulted in even more opportunities to buy stocks that went down the most?

After a sharp decline, some stocks can have short-term bounces or rallies; however, in my experience few stocks bottom out when you expect them to do so. And, even if they do bottom, often they simply move sideways for an extended period, wasting valuable time. There are periods in the market when the reward to aggravation ratio is just not worth your valuable time and capital.

If you’re looking to find the next big market winners—the market leaders—then you want to keep your eyes peeled for the stocks that hold up the best (not the worst) during a market decline, and then buy them as they emerge from the market’s wreckage and move into new high ground. This will occur AFTER the stock's price undergoes a consolidation period of several weeks or more.

As in any profession, there are only a small number of truly outstanding practitioners, whether a doctor, lawyer, baseball player, poker player or investment pro. Don’t think that just because someone is an “expert” or they’re on TV it means they’re outstanding or even know what they’re doing very well.

Pros make huge, costly mistakes and often give terrible advice. More importantly, just because some “pro” does something stupid (like buy the stocks that went down the most right into a decline), it doesn’t mean you have to. Be smart. Develop a solid, sensible plan and adhere to it. By doing so, you can outperform most of these so-called “experts.”
-
Mark Minervini
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12 comments:

  1. It certainly is an interesting phenomenon. . .I have a friend who told me he made most of his money last year doing that. I wonder if he implemented this system a few days ago. . .I wonder how he fared yesterday. . .I just don't want to ask!

    Thanks for helping us keep our head in the game! Awesome stuff!

    ReplyDelete

  2. Very true. Also these so called experts have their vested interests in their recommendations and would do all possible to lure others in same hole they dug themselves in. If I cannot myself find reasons to invest I would rather not invest.
    Thank you for being a true beacon of light

    ReplyDelete

  3. Mark - Any advice on how to maintain discipline on a day like yesterday (Friday), where it felt like the market may be due for a relief rally? The urge to buy/do something is tough to fight off even though owning anything right now is a gamble. Thanks.

    ReplyDelete

  4. Mark

    In a market like this, do you recommend the short strategy? Do you personally do that? Any guidance or framework for the same?

    Thanks

    ReplyDelete

  5. JJ,
    If you have a difficult time resisting the urge to trade then you are attracted to action not success as a stock trader. The only thing I can say is that everyone gets what they want in the market and in life. If your trades are gambles, then you like to gamble.

    The way I control the "urge" is by having a strategy. I simply remain faithful to my approach not my day-by-day cravings.
    -Mark

    ReplyDelete

  6. Peter,
    I have been shorting stocks since April 27th however; tyhe market has gotten a little ahead of itself on the downside and may rally for a few days. I am currently on the sidelines in cash and may entertain the short side once again after the current oversold condition gets worked off a bit.
    -Mark

    ReplyDelete

  7. Hi Mark,
    I like your approach you are very good trader. The best one ;) I knew about you about the book "market Wizards"
    I have been trading part-time since many years and after a beginning good success I had my bad experience with 2000 bubble. then I restart more conservative and was able to get out the market in 2007 and enter (unfortunately too moderate) last year. Now I am 100% cash. Unfortunately I am not US resident and can't short Us stocks (only italians, ma my universe list is a lot smaller compared Us). But I watch US market as a benchmark for the globla one.
    Want ask you a thing: i saw that on friday the S&P500 made a new low intraday compared to the previus bottom of may (according my chart it made 1055,90 vs 1065,79) but the recovered above that level. On the weekly chart price stay still below the downtrend trendline that started on end april. The short term trend is still short, but we are flirting with long term supports.Do you think if this trendline will be broke it will be a good occasion to re-enter aggressively long? On the otherside a test of that level and a failure will open new short occasion. Especially below 1050 stocks could drop a lot.
    What do you think? thanks and have a good sunday

    ReplyDelete

  8. Mark -

    In response to JJ's question above, you made a profound statement that I believe Ed Seykota also made in the market wizards book - Everyone gets what they want in the market.

    Would love to hear your perspective on this statement little more please.

    ReplyDelete

  9. blog_toscano,
    I don't put much faith in trend lines; I simply don't use that type of analysis. When there are signs of accumulation in the market and stocks set up to meet our SEPA® criteria, then and only then will I move aggressively to the long side. Currently, I'm in cash.
    -Mark

    ReplyDelete

  10. Peter,
    There really is no more perspective to give you. Ed Seykota is correct. Everyone gets what they want from the market. That goes for life in general as well; at least in my opinion. If you really want to succeed big in the stock market you will. There's nothing stopping you accept you. It's all a matter of priorities, persistence and beliefs. Best wishes.
    -Mark

    ReplyDelete

  11. Love the insights on your blog. It sounds like your counterpart on that business show never heard or paid heed to that adage about keeping away from falling knives. I know you do not put a lot of stock in trend lines. However, do you think a system that utilizes simple moving average crossovers to buy and sell is worthwhile? For example, I have recently been using the 4 and 9 SMAs with decent results on SPY. When the market begins its next uptrend, I hope to try the system on companies with high quarterly earnings increases (found using IBD's DGO). It seems like no uptrend begins unless the 4 crosses and stays above the 9 and no downtrend occurs unles the crosses and stays below the 9. I know this is incredibly simplistic - but it has been working - any thoughts?

    ReplyDelete

  12. T,
    Moving average crossover systems can work during trending markets both up and down however; you can get whipped around quite a bit in range bound market environment. Simple is good but, keep in mind that the market lately has been trending and that is why your moving average system has been working well. With that said, your basic 4/9 ma system is probably better than 90% of the market "experts" out there. Keep me abreast of your progress. Best wishes.
    -Mark

    ReplyDelete

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