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Blog : The Penny Stock and Predicting the Markets Bottom
by John Whitefoot on October 31st, 2008
My friend the Stock Market Dandy (he who inherited money and loses money on the markets with reckless abandon) “called” the end of the bull market some 3 or 4 years ago. I suppose he didn’t really tell any of us when it would end, just that it would.
Clearly he is not aware that the markets go through cycles. This is beside the point. What is important is that he said the bull market would end. It has. Now that the markets have tanked, he is fashioning himself a financial forecaster. And has assumed all of the bragging rights associated with said title. This includes using the “I told you so” dance.
To prepare for the eventual demise of the market my friend, not so taken with his own predictions, sold his shares in September; when everyone else did. Having bailed and taken a huge financial hit, he is now predicting when the market is going to bottom. Needless to say, his notions for re-entry are as unreliable as anything else he has espoused.
Though, he is not alone. Those who were forecasting a race to the bottom are now busy forecasting when the (inevitable) bull market will return. And forecasters are making some pretty eye-popping, headline catching predictions.
“To make a crazy forecast today, is not crazy,” said one former Yale professor who studied economic forecasting. “It’s not crazy to predict the Dow is going to 2,000. That’s in the realm of possibility.”
Such predictions attract publicity, name recognition and a bigger client base in a business where people can pay millions for stock advice and investing guidance he noted.
Unfortunately, even if a forecast is way off-base, there are few, if any repercussions because, like a bad psychic, erroneous predictions are forgotten. No one really tracks accuracy. And a lack of accountability can breed empty wallets.
“Anyone that invests 10 cents on the basis of someone’s forecast of the Dow is desirous of losing a good portion of their 10 cents,” said the president of one money management firm. “It’s almost the height of arrogance to say this is where the Dow is going to trade.”
This fits the bill of my friend The Stock Market Dandy. Unfortunately, he doesn’t say how low the Dow is going to go. In turn, he’s having difficulty telling us when a good time to buy in is.
For penny stock investors, the best thing to do is to ultimately not buy back in. This is because you hopefully didn’t sell into the panic.
Trying to time the market and figure out when it will recover is impossible. The Wall Street Journal reported on the results of a study by SEI Investments. The study looked at twelve bear markets and concluded that those who held on to stocks when the market bottomed out profited handsomely from their restraint.
Investors who bought back into the market only 3 months after the bottom lost more than 50% of the profits gained by those who did not try to time the recovery.
Unless you needed to get your hands on some much needed cash, the best thing for penny stock investors to do is to sit tight and wait for the bull market. And a bull market will return. It always has and always will.
What should you do while you wait? Why, prepare yourself for the return of the bull.
If the stock market collapse made you lose sleep, you might want to consider lightening up on penny stocks during the next bull market. However, if you shrugged off recent losses you may want to consider increasing your penny stock holdings.
When it comes to adding to your penny stock portfolio, like everything, timing is of the essence. But waiting for share prices to fall back, so you can buy back in at lower prices could be a costly mistake.
Looking at the SEI study, if you held stocks at the market bottom, you made 32.5% over the first 12 months. If you purchased one week after it bottomed your gain fell to 24.3%. If you waited and didn’t buy in until three months after the bottom, your gain was a paltry 14.8%.
Not every stock, large cap or penny stock, is going to rebound; no matter how much the markets climb.
The Stock Market Dandy might be busy trying to figure out why to buy back in, but, if you can stomach it, the best thing to do is sit tight and re-evaluate your penny stock portfolio and strategy.
Yes, better days are ahead. But trying to figure out when is a waste of time.