How to make money in a down market?

Here is an example of making money in a down market.

At the end of 2007, an investor was enthusiastic about a stock ABC.  Then the severe bear market of 2008/2009 intervened.  Here were the investor's transactions in stock ABC.

1.11.2007  Bought 1000 units  @  $6.00          Purchase value  $6,000
6.11.2007  Bought 1000 units  @ $ 6.75          Purchase value  $6,750
15.9.2009  Bought rights 800 units @ $ 2.80    Purchase value  $2,240
!5.9.2009   Bought 5,500 units  @ $ 3.51         Purchase value  19.305

Total bought 8,300 units
Purchase value  $34,295
Average price per unit $ 4.13

Current price per unit  $ 5.51
Current value of these 8,300 units is $ 45.733.

This is a total gain of $ 11,438 or total positive return of 33.4% on the invested capital, excluding dividends, received for the investing period..


Lessons:
1.  Investing is most profitable when it is business like.
2.  Stick to companies of the highest quality and management that you can trust..
3.  Stay within your circle of competence.
4.  Invest for the long term.
5.  Generally, hope to profit from the rise in the share price.
5.  At times, the share price becomes cheap for various reasons # - be brave to dollar cost average down, provided no permanent deterioration in the fundamentals of the company..


# Severe bear market of 2008/2009.

How to properly assess the stock market today

How to properly assess the stock market today

By: Christina Pomoni

The current financial crisis has made investors extremely nervous.

• In majority, they doubt that there are buying opportunities in such downturn, or at least opportunities that will give them a return that can compensate them for the extra risk they undertake under these extremely risky market conditions. 
• On the other hand, equity analysts and stock market theorists consider that this is the perfect timing for entering the stock market and buying good stocks at low prices instead of entering the options markets and buy defensive puts.

1.  One good strategy to assess the potential of stock markets in today’s economy is to evaluate the daily performance of NASDAQ and Dow Jones. The decline of the stock markets is expected given the negative climate of global economy and therefore, the NASDAQ and Dow Jones demonstrate a negative performance, often over a series of trading sessions. However, the index performance alone is not enough to assess the overall performance of the stock market. Investors should also evaluate the performance of the individual stocks. For instance, there are companies that perform really well within the financial crisis such as copper and gold companies that expose positive increases. Therefore, investors can read accurate stock reports on Yahoo Finance or Bloomberg in order to get an idea of the market performance as a whole and be able to evaluate the overall performance of the economy.

2.  Another way to assess market performance is to evaluate the fundamentals of the listed companies. Fundamental analysis examines the economic factors, industrial factors and company variables that define the intrinsic value of an investment. Hence, investors can take into account all these parameters in order to observe how a stock performs in this kind of economy and compare its intrinsic value to its market price. In doing so, investors take well-informed investment decisions. Besides, not all companies under-perform within financial crises. Companies are different, have different products, goals, missions and organizational structures and all these diversities are reflected on their interim financial statements and, of course, on their annual reports. Therefore, by following daily trends, but also by getting to know the company fundamentals, investors acquire a general idea of the market and stick to the hot shots, while avoiding the stocks that decline sharply.

3.  For those investors who are not so much into fundamental analysis, technical analysis may be the answer to their inquiries about the prospect of a stock and the market in general. Technical analysis observes historical data of market performance such as price and volume and identifies new trends in order to estimate the market prospects. In this context, investors can use technical analysis to base their investment decisions on historical market data and psychological factors.

4.  Finally, investors can visit the company website in order to get information on historical data, past performance, market positioning, how well the company does in relation to competition and what are their estimates for the future. Besides, corporate websites are always a good source of information in regards to major organizational or other sort of changes and how smooth they occurred. Stability is extremely important in a company and consequently in an investment decision. Stable companies typically rise upwards. Unstable companies are volatile and fluctuate too much.

http://www.simama.org/article/how-to-properly-assess-the-stock-market-today

Review of potential past KLSE market returns

In 1997, this KLCI touched the low of 300 points briefly. Today, the KLCI is about 1,100. From 1997 to 2009, the KLCI has compounded at 11.4% per year over the 12 year period. To achieve this 11.4% return. The KLCI was a low of 850 at end of 2008; giving a CAGR of 9.93% over the last 12 years. To achieve these returns, you would have to have invested a lump sum at the trough of the market in 1997.


What of the performance of the average investors?

This is the average guy. He is the guy who invests regularly whenever his savings allow him. He is not among those who achieved the 11.4% compound annual return.

Let us make this assumption to facilitate some calculations. His dollar cost averaging over 12 years approximates to a lump sum investment in the market from KLCI 700 to KLCI 1100 over 6 years. His gain is the equivalent of compounding annually at 7.82% over 12 years. When the market was at its low at end of 2008 (KLCI of 850), his CAGR over 12 years was 3.29%. (KLCI 700 is chosen as it is the average of the trough KLCI of 300 in 1997 and present KLCI of 1100.)

How can this average investor improves on his investment returns? More specifically how can he improves this return to 10% annually? Or, to above 15% annually and consistently?


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Return Rate (Discount Rate / CAGR) Calculator
http://www.moneychimp.com/calculator/discount_rate_calculator.htm


Total return from a stock
= (Capital appreciation + Dividend + Profit from Sale of Stock)/Amount Invested
= (Capital appreciation + Dividend + Profit from Sale of Stock)/(Value of Stock + Cash)


Total return from a portfolio
= (Capital appreciation + Dividend + Profit from Sale of Stocks)/Amount Invested
= (Capital appreciation + Dividend + Profit from Sale of Stocks)/(Total Value of Portfolio + Cash)

The bear isn't all bad. What exactly is a bear market?

http://www.douglasgerlach.com/clubs/askdoug/bearmarket.html

The Looming Bear

by Douglas Gerlach

Market headlines of recent days are using words that seem tailored to strike panic in the hearts of investors: fear, suffering, carnage.

Starting with the technology stocks of the Nasdaq, and now spreading even to the blue chip stalwarts of the Dow, this market sell-off is bringing us into territory that smells distinctively bear-ish. After enjoying years of great market news, it's unfamiliar territory for many of us.

But as Peter Lynch likes to point out, "When it's 15 below in Minnesota, they don't panic -- they just wait until spring." The market has gone up and down throughout its history, and it doesn't pay to panic when the market declines.

What exactly is a bear market? It's an extended period when stock prices generally decline. It can last for months, or even for years. A bull market is a period when stock prices generally increase. These terms originated back in the 1800s, but no one really knows how or why they came into use, nor why the bull came to symbolize periods of increasing prices while the bear represents downturns.

When you look at the market from a statistical perspective, you can see that it's very common for the market to experience some serious downturns. From 1928 through 1997, the S&P 500 declined in 20 of those 72 years. In eight of those years, it declined greater than 10 percent, and greater than 20 percent in four of the years. And that's not even counting the times that the market has declined greater than 10 percent or even 20 percent in the middle of a year and then recovered!

On the other hand, the S&P 500 has ended the year higher than it started out in 52 of 72 years. In 41 years, the S&P 500 ended up greater than 10 percent, and in 28 years, it closed the year with a 20 percent or greater gain.

But a bear market isn't all bad news. Sure, it can hurt when your portfolio takes a hit when stock prices fall. But you'd still better be prepared for the inevitable downturns in the stock market, and remember that the situation is only temporary, after all. In every instance when the overall market dropped, it returned and then grew to greater heights. In fact, the stock market has a 100 percent success rate when it comes to recovering from a bear market! The only thing to remember is that sometimes it takes longer for the bounce-back to occur.

If you follow a long-term approach to investing, then you know that patience is a virtue whenever you're investing in the stock market. It also helps to keep your vision focused on your long-term horizon whenever the market hits some turbulence. By using dollar cost averaging and by investing regularly, you can even make the bear market work for you by taking advantage of generally lower prices with additional purchases. Knowing the market's infallible past record, you can sleep easy -- even when other investors are panicking.

Goodbye, Bear Market?

http://www.kiplinger.com/columns/value/archive/2008/va0714.htm

"Believe it or not, history offers surprisingly good news about what the stock market will likely do from here. No, history doesn't always repeat itself, but, as the saying goes, it rhymes. So please don't cash in your stocks for CDs until you read the rest of this article. To ignore history would be folly."

"Do things seem worse than they were during other bear markets? If so, it's partly because of our tendency to forget the distant past and focus instead on the recent past. I submit that the events surrounding many past bear markets were at least as frightening as those of this one. I certainly remember the anxiety surrounding the 1987 crash, when the Dow Jones industrial average plunged 22.6% in one day—eclipsing the 1929 crash. I thought we might well enter a depression. Instead, stocks hit bottom less than two months later."

"Yet, soon after the onset of a bear market, the market generally has risen. One month after breaking the 20% threshold, the S&P had gained 3%, on average, during those nine bear markets. Two months later, it had risen 6%. on average. Three months later, it was up 5%, and six months later, the S&P had returned 7%. Twelve months after the initial decline, the market had surged 17%, on average."

How can the market advance so much so quickly when stocks tumble another 11% after hitting the 20% bear market threshold?

James Stack, president of InvesTech Research, says it's because bear markets tend to be "V"-shaped in their final stages. That is, share prices tend to decline dramatically and quickly as investors capitulate, then rebound just as quickly. "Once a bear market ends, the rally out of that bottom is very sharp and very, very profitable," Stack says.

Yes, we all know that averages and statistics can be misleading. After all, the returns above are for the average bear market. What's to say that this will turn out to be an average bear market, with all the bad news still out there?