These Aren't the Bulls You're Looking For

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If you could predict the future movements of the stock markets, could you make money with that knowledge?

To quote a certain political figure, "You betcha!"

Most of the time, trying to divine future market movements with any accuracy is a fool's (not Fool's) game. But I have a feeling that these are not those times. The bulls we saw yesterday were a mirage.

I'm not being a pessimist; I'm just learning from history. Another of the biggest one-day gains in the history of the U.S. stock market came the day after the Crash of 1929 -- which only marked the start of years of market pain. Call yesterday a dead-cat bounce or a relief rally or whatever you like, but with a tough recession looming and more credit leverage yet to be unwound, my sense is that Tuesday's move was not the opening phase of a new long-term bull market.

In fact, at some point soon, I expect the markets to head right back down to the neighborhood of the recent lows, or maybe even lower. To be clear, I don't know exactly when -- could be tomorrow, could be sometime after the election, could be next spring -- but I think it's likely.

And if history is any guide, the up-and-down cycle will repeat itself (though hopefully with less drama) until lots of people give up on stocks altogether and put their remaining money in Treasuries or CDs instead.

That's called capitulation, and it's historically the last phase of a bear market. To make a long story short, I'm inclined to think that recent events weren't the capitulation we'd been hoping for.

Of course, I could be completely wrong. So what do we do right now?

Do this right now
The first thing we should do is decide not to worry about near-term market antics. Don't panic when the market's down 5%. That, too, shall pass. Don't panic because you had some cash that wasn't invested when Alcoa (NYSE: AA  ) went up almost 20% yesterday, or because you didn't buy Apple (Nasdaq: AAPL  ) well under $100. You didn't miss the boat. There will be more gains (and more losses) in the future.

Just don't panic, period. Panic leads to bad decisions, the kind that can wreck a portfolio. We're all wired, deep in our prehistoric animal brains, to follow the herd (by buying when prices are up) and to flee danger (by selling when the numbers get big, red, and scary).

That is not the road to sustained investment success.

Follow this road instead
How do we find success in the markets? These principles work better than any others I know:

  • Buy good businesses at a discount. Stick with the basics. A good business has solid, steady management. Its business is sustainable -- it's not a fad. It's in excellent financial shape. And it's selling at a discount, by which I mean one of two things: It's selling for less than its intrinsic value right now, and its price should rise once the market recognizes it -- or it's poised for significant growth, after which it'll be worth a lot more than the price it's selling for today.
  • Construct your overall portfolio deliberately. Asset allocation works. And it doesn't mean you have to be only one-third invested in stocks and miss the fun while the bulls are running. (Although that doesn't sound too bad right now, does it?) An all-stock portfolio that is allocated to different corners of the market using a good plan, and rebalanced from time to time, will outperform a more focused portfolio over the long run more often than not.  But remember that your "portfolio" includes all of your investment accounts -- and might take things like real estate holdings and your job into account, too.
  • Remember your thesis, and stay informed. If you bought Marvel Entertainment (NYSE: MVL  ) at $35 because you thought it was in the early stages of a great long-term growth phase, is that thesis less valid now because Marvel is down around $30? If you thought Pfizer (NYSE: PFE  ) was a rock-solid dividend machine at $21, is it less solid at $17.50? Is Koninklijke Philips (NYSE: PHG  ) less of a value at $17 than it was at $21? Sometimes, an investment thesis can change -- hello, Bank of America (NYSE: BAC  ) -- in which case selling could be the right course. Sometimes it's less clear, and dependent on things that are tricky to predict -- will oil prices recover enough to make Contango Oil & Gas (NYSE: MCF  ) worth holding on to, or even a buy at these levels?

It's a lot to think about. If you'd like some expert help, along with some great stock ideas for today, consider a free trial of the Fool's flagship Stock Advisor newsletter service. Every month brings all-new recommendations for new money now, and updates are issued whenever market conditions warrant. It's a great way to learn the art of stock analysis while profiting from experts' picks. You can see all of their current recommendations right now -- for free -- with a 30-day trial.

Fool contributor John Rosevear owns shares of Apple. Pfizer and Bank of America are Motley Fool Income Investor picks. Pfizer is a Motley Fool Inside Value recommendation. Marvel Entertainment and Apple are Motley Fool Stock Advisor picks. The Fool owns shares of Pfizer. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (8) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 29, 2008, at 1:24 PM, Brettze wrote:

    The best and smartest investment remains to be energy conservation if carried out by almost everyone... This alone will be sufficient to raise practically all boats minus Big Oil and Coal, etc. Big Oil keep on making financial messes out of our economy like clockwork.. Oil shareholders are constantly shielded by so called experts who keep on singling out every other business for shoddy management or whatever while never mentioning Big Oil mischief one single time since I can remember.. We ought to unload Big OIl stocks so that our govt will not need to spend up to $700 billion bailing out oil shareholders via banks and clearinghouses... Oil sharehlders are now anxious about unloading oil stocks but there is no funny money around to bail them out yet.. Why hold the oll stocks that high while every other stock already took a hot oil bath everywhere! ?? Dump oil stocks now for another 50% crash| to save govt billions on bailout!

  • Report this Comment On October 29, 2008, at 1:26 PM, Brettze wrote:

    You are a fool for holding oil stocks is long overdue to crash 50% which is necessary in order for us to afford the "unaffordable" alternate energy program as well as massive energy conservation efforts that is considered politically unsexy!!

  • Report this Comment On October 29, 2008, at 1:26 PM, Brettze wrote:

    Cut back your stupid lazy energy consumpiton!!!

  • Report this Comment On October 29, 2008, at 1:27 PM, Brettze wrote:

    I am not gonna wait for my stocks to rebound while waiting for Big Oil stocks to crash too slowly.. Hurry, Big Oil, die!!

  • Report this Comment On October 29, 2008, at 9:54 PM, 181736065 wrote:

    I hear ya..

    but "Big Oil" will be around for a while.

    It will die... slowly.

  • Report this Comment On October 30, 2008, at 6:50 AM, TMFMarlowe wrote:

    "Big Oil" will be around until they morph into or are replaced by "Big" whatever-replaces-oil. Even if you assume that oil supplies are finite and production has already peaked (I'm willing to assume the former for the sake of discussion but skeptical of the latter, fwiw), it's a safe bet that all of the accessible oil in the ground is going to be pumped out and burned, and that process has a long way to go yet.

    Resentment isn't really an effective investing strategy. Never has been.

    And FWIW, commodity prices (including oil) are likely to bounce somewha in the near term just like everything else. As the technical analysts would say, they're way oversold. In fact, they're already up considerably from the bottom -- oil's closing in on $70 right now.

    Thanks for reading.

    John Rosevear

  • Report this Comment On October 30, 2008, at 10:59 PM, morrals wrote:

    Obama is going to lose the presidency because he is black and we live in a world controlled by whites...if not you can ask Marthin Luther King Jr.

  • Report this Comment On October 30, 2008, at 11:04 PM, morrals wrote:

    and yes bush did violate the geneva conventions by abusing the detainees in guantanamo bay....his executive order was both illegal to the eyes of the united nations ( which we belong to) and the rest of the world and immoral...and unethical and yes his executive power clashes with the supreme court...its like Abraham Lincoln suspending the habeas corpus.....thats how insane he is

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