Friday, November 21, 2008

Capitulation


US markets fell below the 2002 lows today. I don't know whether that is the legendary "capitulation" or not, but I capitulated more or less in my Ameritrade trading account today. I sold most of my remaining stocks and kept just 4 (BRK/B, MVC, CHN, LGDI) and now the margin loan is less than 50% of the value of the stocks. Of course, I should have done this many months ago. But I didn't and there's not much I can say. The most important lesson is not to use margin loans. Some people maybe can use them as a short-term source of funding or be disciplined to use them in extreme moderation. Mainly, I sold because I want to be able to sleep at night. But really there is only a 10th of the peak value of the account left and if the market kept falling I would soon be wiped out entirely. My main concern now is for my Australian margin account. I've continued to make adjustments to keep within the margin "buffer". It's been a slow bleed.

Some people were right about how severe this bear market would be. But many of those were very early in their forecast and others were very extreme in their predictions. The average investor should be diversified across assets and managers and only adjust their weightings moderately in response to economic news. When things finally stabilize, that's where we are going personally with our future savings. Luckily we are still not that old.

The pain in this bear market has had two main dimensions for me. One is realizing that I am not as smart as I thought and the other is losing money I worked to earn and sacrificed to save. It is also painful to lose Snork Maiden's and my Mom's money through my decisions. But there were no margin loans there and unless the economy is shifting to a permanently lower state the money should come back eventually.

3 comments:

Ultra High Net Worth said...

Hey - I also have capitulated and for the first time in almost 20 years don't directly own any stocks. Yes, it was a hard decision to make and yes, with hindsight it should have been made months ago. But how could anyone predicted back in August (remember the Olympic games?), that the markets would completely melt down.

Things are coming to a bottom. I thought that when the All Ords was at 5000, 4500, 4000 and 3800 points. Below 4000 was my cut off point. The point in time when there didn't seem any point in pumping in more cash to prop it up. I could very well be wrong and this could be the end - then again I may be right, in which case I'll feel a lot better in 6 months.

My ego has also been battered a fair bit over the last year. Stocks that I know backwards and have been following for years are down +60%. Hours spent analysing annual reports and other data; now gone. This is on top of the cash of course.

Going forward the only investments I will have will be in index funds - simple, cheap and easy to use. I'll have more time to spend on making money through my job and time with the family.

Maybe this is a time, once the pain has passed, to reassess things. You're an economist. There could be a good line in the coming years in not only researching how it happened, but also tearing down efficient market theory and investor rationality. What would happen to the Black-Scholes model if investor rationality wasn't a given?

Stick with it - Murphy's law probably states that the day you sold will be the once in a century bottom and if you hadn't then the markets were on the way to zero.

Revanche said...

Perhaps the best time for my brand of conservatism ever: I knew that things were going to be rough for some time, and never did muster up the courage to dip a toe in. If I had pulled out some money from savings at the time, I would have fallen flat on my face and that would have been very painful.

As you said, the market will be back, it's just going to take time and cause some pain along the way.

mOOm said...

When you end up being forced to sell due to a margin call, that money never comes back unfortunately...