The depression moment has set in. Remember the five stages of grief, denial, bargaining, depression and acceptance? We are finally getting to where we have reached depression and how we handle this moment is going to determine who stays in to make long term money and who gets blown out and goes home.
I've been waiting for this time to occur, fearful that there was so much speculation, so much froth that when things went bad there would be so much money lost that it doesn't' even matter whether people stay or go.
Only now, in the depression phase can the younger investor, who is hanging on by her finger nails, be saved. So let's go through how we got here and what it's going to take, what are the do's and the don'ts of getting back to where you can invest and buy stocks that do get cheaper when they go lower as opposed to getting crushed and becoming still one more lost generation, lost to stocks and confined to cd's as so many were after the tremendous blow-up that was 2000-2001.
First, when things started rolling over in the speculative part of the market, the stocks untethered from the fundamentals or way too expensive versus the rest of market as measured by price to sales because price to earnings didn't work because there were no earnings, there was denial all over the place. Most of these newer investors, as measured by my social media guideposts, simply didn't believe the party - and it was a party - could ever end.
Then people got angry when I suggested that it was time to move on from the stocks that were risky with no real grounding. Take some profits. The shakeout was coming. Oh boy, the vitriol when I brought out the frothometer was so palpable. No one wanted to hear that you needed to sell some GameStop (GME) in the $300s. They didn't want to know anything about how the Zooms (ZM) and the DocuSigns (DOCU) and Teladocs (TDOC) might not be as safe as stocks that were more fuddy duddy and boring. They wanted go-go and they were getting stop-stop.
I was a party pooper and I was willing to take the heat because I had no other agenda but trying to keep people from getting where they are now.
That anger still exists. I am still getting those bogus charges that I am working for my hedgie friends. Are you kidding me? You think that's who I hang out with? Come to Summit New Jersey, go to Club Q, our outdoor hang out over at Haleys, and see who I really talk to. Better, don't bother, we don't want you there. We don't talk stocks. We talk life.
But most people have moved on to the bargaining phase where those who didn't' really know what they owned said that when the stocks rally back, they promised themselves they would get back to even and then go. They weren't going to lose.
This week? We have a realization that that the wild Nasdaq names that did so well during the pandemic may not be coming back and the speculative companies, like those advocated and purchased by ARK Investments (ARKK) , truly are risky and, if you borrowed money or bought them with options, you are going to be crushed. I'm not hated anymore because I highlighted the risks and I am not going down the I told you so path.
So what do you do to get out of the depression phase and start accepting that things went awry and you want to right your financial ship. Let me give you the dos and don't you must do if you still want to own stocks and don't want to give up on the asset class entirely because you hate them so much.
First, do clear your head. If you were to read Confessions of a Street Addict, there is a moment where I was deeply depressed because I had bought the wrong kind of stocks for the market and was about to be down double digits. What did I do? I stopped waiting for stocks to come back and literally sold everything. I decided that if I wanted any of those stocks I would buy them back. Of course I didn't. I knew they were wrong. You know what's wrong, too. Accept it.
Second, do have some cash and stop borrowing money or doing nothing but buying options on stocks. That game's over with. You need to accept the fact that risky stocks do go down, something that didn't happen until about a month ago. If you aren't more conservative after what's happened, you can't be saved.
Third, do some homework. Can you tell me exactly what a company does that you own shares in if you saw me on the street, and don't just say "goes higher." Do you know if your stocks all trade together? Do you know what their price to sales are? If you own more than a couple stocks that sell at more than 8 times sales you are going to lose money in this tape. Does the company have enough money or does it need to survive? This market's hostile now to those that don't have enough money to get through to profitability. This market's all about the great reopening of once strong companies. It's about the end of the pandemic and you've got to cut back on risky stocks that don't relate to that theme. If you don't understand what the company does, sell it. You can buy it back after you have learned what it does.
Fourth, do know that we are now in a sell the news mode. For almost a full year you could buy the stock of a company that might have good news coming. When we got the good news the stock went even higher. That's no longer the case. If you are trading and you get the good news you are looking for, sell the pop.
Finally, five, wait for weakness in stocks. Do not chase strength. You get spikes like we are seeing today in the meme stocks? Use it to lighten up. That's yesterday's business.
Okay how about some don'ts.
First, stop following those with hot hands or once hot hands. Do your own work. Just because a particular fund manager happens to be hot, don't you tag along. You don't know when that fund manager will sell, you don't even know if he's right.
Second, don't ignore the surroundings. Stocks don't exist in a background. If the economy is expanding you want to lighten up on stocks that are going to do okay even if the economy stalls. This market wants companies that are going to show fabulous year over year earnings comparisons.
Third, if you don't' know what an earnings comparison is, or are mystified about why that even matters, you have to learn the way money managers think. You may hate them but they are now back in control of stock movements so accept that and learn the importance of their thinking - we teach it every day, or go buy an index fund so you have less to worry about.
Fourth, don't underestimate the difficulty of making money. You just came through a period where if you owned something it went up. That was a highly unusual time. Now you need to respect that a market can be as vicious and nasty as it was joyous and oblivious toward the news that comes its way.
Finally, fifth don't trust Wall Street to be your friend. Right now Wall Street's willing to mint anything, any SPAC, and underwriting, without any discipline. You have to be on your guard recognizing that lots of companies shouldn't even be public, they have no earnings and no hope of ever having them. SPACs that trade well north of twenty when they come public are probably going to be busts because there simply aren't enough good targets right now to make good money post acquisition.
If you accept your predicament and follow these do's and don'ts you have a chance to prosper in what's a brand new market. If you don't, you will join the millions of people who missed out on the monumental bull runs we have had since the bottoms in 2002 and 2009.