The Alchemist: The New Bull?

Posted in Money Matters on October 22, 2002

The following is this week’s installment of The Alchemist, a column by Mensan Al Thomas, author of If It Doesn’t Go Up, Don’t Buy It. Click ‘Read More’ below for this week’s article, “The New Bull?”

The Alchemist: The New Bull?

by Al Thomas


These past few trading days of the stock market have given life back to many thousands of investors who have been taught the Buy and Hold mantra. Ninety-nine percent of brokers and financial planners will tell you “the market always comes back, stay in for the long haul”. We’ll see.


The bull market started in 1974 and lasted to 2000. That’s 26 years. Many will say it started in 1982 to 2000. Only 18 years. Still a long time.


The bulls can point to an economy that is recovering with unemployment decreasing and many big businesses showing better profits. The bears also have ammunition in declining economic growth and a big budget deficit. Actually each side has plenty of bullets so how is the little investor to tell whether to buy more stocks and mutual funds or to sell out of everything as the market goes up.


I am not a soothsayer so don’t ask me which way we are going from here, but there is one thing I can see that is very clear. The major trend is down and has been for almost 3 years. Until that major trend changes it is best to be sitting on the sidelines with your hand on your wallet. Having been a major player in markets for more than 30 years I know there are times when doing nothing is the best course of action.


Because you have sat thru the down move this long and endured big losses you are not sure what to do. And that is easily understandable. Your major goal now should be to protect what you have left and if this is the next bull you want to keep your investments so they will make money. Your principle goal should be protection of what you have now. There is a simple way to have the stock market tell you when it is going to go back down and yet let you keep profits as it goes up and never give them back like the last time. Suppose you own IBM and it is currently trading at $75 per share. You don’t want to sell it, but you don’t want to sit with it again back down to $55. Instruct your stockbroker to place an open stop loss order at 10% below the closing price of each Friday. This week it might be $67.50 ($75 - $7.50 = $67.50). Next Friday IBM might be $80 so you again instruct your broker to move your stop loss up to $72. As your stock advances you continue to move the loss limit up, but NEVER move it down. If and when the stock becomes weak and drops down again it will tell you so you don’t have to guess about where to sell.


Because no one knows how far up this next bull will go every investor should be wise enough to protect himself just in case it is a bear in a bull costume.


Copyright Albert W. Thomas. All rights reserved. Author of “If It Doesn’t Go Up, Don’t Buy It!” www.mutualfundmagic.com. Comments to al@mutualfundmagic.com.