The Alchemist: Humpty Dumpty

Posted in Money Matters on February 1, 2003

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, “Humpty Dumpty.”

The Alchemist: Humpty Dumpty

by Al Thomas

Humpty Dumpty had a great fall and all the King’s horsemen
could not put Humpty Dumpty back together again.

The Stock Market has had a great fall and all the brokers,
CEOs, analysts and politicians have not been able to get it back up
again.

Oh, it will go up again, but if history has a way of
repeating it will be a long time before we see it at “even”. From 1920
to the present there have been 3 major bull markets lasting close to 16
years. Unfortunately, each has been followed by a bear market of about
the same length of time. So far we are ending the 3rd year of the
projected down cycle with only 13 more years to get to the bottom. It is
a long way off.

At a recent investment seminar one of the speakers asked
his large audience if they believed the stock market would be higher 5
years from now. Every one except one thought it would be. The current
mindset of most investors believes this also. For the period from 1982
to 2000 (18 years, close enough) there has been a bull market. Every
investor has considered himself to be a financial genius during that
time. There is an old saying, “The market makes fools of us all - sooner
or later”.

Unless you learn to listen to what the market is saying and
not your broker, you will be able to recoup some of your losses, but
probably not all. During this long-term bear called a secular bear
market, your main effort will not be to make money but to keep from
losing more. During a bear market the one who loses the least is a
winner. You may not like what I say, but history has that strange way of
doing it over and over.

Maybe I am wrong about it because “this time it is
different”. I hope so, but you can protect your money in your 401K or
elsewhere with a simple loss limit order. Call your broker and have him
place a 10% (or whatever number your prefer) stop-loss order on all your
positions. That way you don’t guess about where to sell; you let the
market tell you when it has turned weak.

Brokers and brokerage companies hate stop-loss orders and
will try to talk you out of it. Ask him if he will guarantee your
portfolio. You can bet he isn’t that dumb. It is your money. Once it is
gone you will have very little chance of getting it back. Protect what
you have left.

Don’t be a Humpty Dumpty!


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.