The Philippine Stock Exchange Composite index (PSEi) may be hitting a bottom from its nine-month decline, and that is good. This may only be a momentary pause in a longer downtrend, and that is bad.
When asset prices are in a decline that has turned into a negative trend, we start looking for “the bottom.” There is nothing wrong with speculating if a decline has reached its limit. However, the two questions that need to be answered are: Is it a bottom? And, should you go “bottom fishing”?
For the first question, French Impressionist painter Pierre-Auguste Renoir said it best: “When I’ve painted a woman’s bottom so that I want to touch it, then the painting is finished.” While I like the man for thinking that way, maybe there is a more “scientific” approach. Renoir did have the direct advantage in that his painted bottom was next to a live woman’s bottom for comparison.
We do the same thing in the stock market in that we look back at past bottoms to see if they look the same as what we are seeing now. But how do we know when the bottom is finished?
Reverse the question. How do we know when we have reached a top? If you have ever driven your car up a hill, the answer is clear and simple. The top of the hill has been reached when you start going down the other side. I was always the kid that annoyed everyone with “Are we there yet? Are we there yet?” And I was always annoyed with the answer, “We will be there when we get there.” But it did teach me the lesson that the best way—the only way—you know that a bottom has been hit is when prices are in a confirmed uptrend.
Yet investors are almost going psycho about stock-market bottoms for two reasons. The first is because the strategy of BTFD—Buy The Freaking Dip—has been reasonably successful for many years. “Buying on Pullback” as I call it is an integral part of my own analysis and strategy. It does not make money all the time, and you may have to cut your loss if the pullback becomes more than a dip. Overall, it makes sense. But you have to know when a dip turns into a clear and present danger decline.
The other part of BTFD is FOMO—Fear Of Missing Out—“the apprehension that others might have a rewarding experience from which you are absent.” I might understand this if it is ‘Buy 1-Take 1 While Supply Lasts” for Don Papa Rum. Otherwise, it is just plain dumb.
From November 2008 until February 2009, the PSEi was at a bottom. You never missed out on anything by waiting until late April 2009 to buy. Further, those that do happen to buy at the bottom often sell out for profit just as prices are breaking out and confirming a positive trend.
In the real world from where the phrase “bottom fishing” comes, overall the most desirable species do not live near the bottom. Most of the time all you are going to catch is a near-worthless trash fish or a piece of junk like a used car tire.
The sensible strategy that gives the best long-term opportunity and much better peace of mind is waiting until you can see the bottom in the rearview mirror and then buy. You won’t be able to tell everyone what a stock-market genius you are. But that is not the goal of investing.
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E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.