Beware the typical pitfalls of wrestling with a boar market
There are bull markets, there are bear markets and then there are boar markets. We're in a boar market. It's boaring. The market hasn't gone anywhere in more than five years and we've been in the same trading range for coming on two years.
There are bull markets, there are bear markets and then there are boar markets. We're in a boar market. It's boaring. The market hasn't gone anywhere in more than five years and we've been in the same trading range for coming on two years.From a broker's point of view this is all part of the cycle. We're used to it. Life for us has always been feast or famine and those that have been around know that sometimes the market pays out and sometimes it doesn't and, when it doesn't, clients don't make money, the volumes dwindle and activity dies down. Perfectly normal.So what do you do in a boar market? Here are some typical reactions, most of them mistakes:Private investors Average down, otherwise known as buying a falling market. Shut your eyes and declare your faith in the long term. Set and forget. Convert to "value" investing without changing your time horizon from 20 minutes to 20 years. Turn from investor to trader and attempt cute short-term trading in unpredictable short-term share prices. Trade even more to compensate for absent capital gains. Start shorting stocks through leveraged derivatives on line. Get your credit card out and buy an instant fix, like that $8000 course in option trading. Declare you are "no good" at investing and exit the market forever.Broker reactions Declare every "up" day as the beginning of a new long-term bull market. Continue to be optimistic. Being 100 per cent optimistic sells more product than being 99 per cent optimistic. Produce more trading ideas and if they're ignored call them "conviction" ideas. Keep that commission rolling. Emphasise that the market always goes up, and say "in the long term" when you've put the phone down. Final resort find a new job earning a salary instead of commission.More appropriate reactions on the other hand might include:Trade the range. Without a trend that's all that's left.Trade less. When I was working at Nomura in London in the 1980s and the market collapsed the head of the trading desk sent four principal traders on holiday for a month to stop them trading. He told them to go and play golf. They did. He saved the firm a fortune. There are times in the market when you are better off spending your money on beer and holidays because at least they deliver some value, more than a dollar lost anyway. Go to Bali for a month. It'll be cheaper than pushing water uphill.Buy high-income stocks. A natural reaction in a bear market is to forego the concept of making capital gains and instead focus on defensive stocks and income stocks. For those that do not rely on the income, cash (term deposits) is the only defensive stock in a falling market. For those that think they can do better, a word of warning. Not all income stocks are quality or defensive. Many are high yielding because they are crap companies. It's called the yield trap. When it comes to yield more is often less. Look at how much debt they have and how they earn their money. Ask yourself, is it reliable in all conditions?Beware a really big fall. Even the income investors, keep your eyes open and set some wide stop losses (10 per cent?) and stick to them. Only a few professionals will ever advise you to sell. The job of protecting your net worth from something major is yours.Adjust expectations. Expectations met are the root of all happiness. If you want to be happy in a boar market you might just have to bite the bullet and shade your expectations a bit, and you'll need to clip those of your dependents as well.Change your routine. The head of equities at one major broking firm was famous for once going to the cinema in the afternoon in a bear market. And why not? Apart from avoiding losses the main game in a boar market is to amuse yourself somewhere warm until things get better.Marcus Padley is a stockbroker with Patersons Securities and the author of stockmarket newsletter Marcus Today. For a free trial go to marcustoday.com.au. His views do not necessarily reflect the views of Patersons.