Two Ways of Looking at a Downtrend

 | Nov 08, 2012 | 3:02 PM EST
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It's always interesting to consider the difference in thinking when the market is in a downtrend.

One group of investors, the traditional mutual funds, wants to be fully invested at the exact moment the market makes a low. Their methodology is to average into weakness and make a final buy just as the absolute low hits. The thinking is that once they identify good stocks, the time to buy them is when they are "on sale." These investors trust in their belief that the stocks they pick are just temporarily mispriced by the market.

The other school of thought is represented by the trend-followers. They have no desire to be invested at the exact low. In fact, they want to be 100% in cash the moment the market bottoms. They only want to buy when the market has proven itself to some degree and has started to uptrend. This thinking is summed up in the old adage that the market can stay irrational much longer than I can remain solvent. Trend-followers don't have the same confidence that the mutual fund investors have in fundamentals. Just because a stock is trading lower, doesn't mean it's a better bargain. Sometimes it means that conditions have changed and the stock simply isn't worth what it used to be.

I clearly prefer the trend-following approach, but I'll readily admit that some folks do well trying to buy into the teeth of a decline. I find that a much harder way to make money and much more dangerous, but that is my opinion. Every investor needs to find a style that suits him or her best. What works for one may not work for another.

Speaking of downtrending markets, this one is still ticking down steadily and I'm still standing aside.

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