Courtesy of Joshua Brown, The Reformed Broker
Good morning and welcome to the end of civilization as we knew it. Just kidding, but wow – what a stunning development in Europe. Even some of the people who voted for Brexit are telling reporters it was just to vent, they never thought it would actually happen. Welp…
Anyway, last August, with the markets in free-fall after the surprise devaluation of the yuan, I published the below and subsequently received an ocean of feedback from people who were helped by it. I actually did the Facebook and Netflix buys personally, at absurd prices, shortly after. This time around, who knows?
I republish My Little Trick for Coping with a Correction in full here today, hope it helps you too. It’s important to point out that today is merely day one, and things could get worse for awhile. Stay woke out there. – JB
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It’s going to be bad this morning. China was down over 8% last night. Europe is down close to 5% this morning. As of this writing, the Dow Jones looks like it’s going to open down another 600 points, after losing 1000 points last week.
It’s official, we’re experiencing the 28th 10% correction since WWII.
How do you cope? There are some tricks.
The first is, you remind yourself that this is what diversification and strategy are for. But it’s too late to start thinking about this now. If you don’t have anything in place to mitigate the volatility of the stock market already, nothing you do today is going to make a difference.
But there is one thing that anyone can do right now that could be very helpful as a coping mechanism to get them through today and whatever is to come. It’s a psychological trick I picked up somewhere along the way during my 17 years trading and investing in the markets.
Before I lay this trick out, a standard disclaimer is in order: I do not know you personally nor do I know anything about your financial situation. I don’t dispense advice here on this site for exactly this reason. I share my thoughts and a bit about my own process, but I never tell strangers what they themselves ought to do. With that in mind, please do not construe what comes next as advice, a solicitation to trade or an offer of any kind.
Okay, with that bit of obviousness out of the way, here’s the trick I’ve used over the years when markets have been in free-fall:
I log into a brokerage account and go to the Orders screen.
I pick five or six of the best stocks in America that I’ve missed out on – the ones that have always bothered me. Everyone has their names. A contemporary list might include Netflix, Amazon, Facebook, Disney, Celgene, Starbucks, Chipotle, Goldman Sachs, etc.
Now I go to my quotes screen to see where they’re currently trading and I come up with utterly absurd prices at which I would buy them (all price quotes as of 8:15 am pre-market):
Facebook: Buy at 65 (now 81 per share)
Chipotle: Buy at 500 (now 691 per share)
Disney: Buy at 80 (now 94 per share)
Goldman Sachs: Buy at 125 (now 180 per share)
Netflix: Buy at 75 (now 92)
You get the idea. These are discounts of 20% and beyond to the already discounted levels the stocks are going to open at this morning. They’re absurd prices. But that’s the whole point. Market panics give you a crack at absurd prices.
Next step – I create GTC Buy Limit orders for a handful of these stocks at the exact absurd prices I’ve come up with. The Buy Limit order will not allow my trade to get executed until the price I’ve specified is reached. I won’t end up with the long position unless it’s on my terms.
The GTC – or Good Til Cancel – part gives me the leeway to watch a correction play out over weeks or months with my absurd buy list still in effect. Check with your broker on this part of it: some have GTC orders requiring manual renewal after 30 days or 6 months.
The important thing is that I put the orders in and I leave them alone. I don’t adjust higher if the sell-off appears to be running its course and reversing. That’s what the real portfolio is for.
When you have these absurd limit orders on excellent stocks in place, something wonderful happens to your frame of mind. It is completely rearranged and you find yourself beginning to root for even more downside. It makes no sense, of course, because the rest of your portfolio is declining in value – but your fixation on seeing one or two of these absurd prices hit completely overpowers any concerns you have. You begin rooting for the correction to continue!
It feels a bit like having a bet on against your favorite football team. Your heart wants them to win but your mind wants the money should they lose. It’s exciting. It even feels a little bit dirty. But getting into this mindset completely distracts you from the panic going on all around.
And you may even get one or two of them! Imagine telling that story – “You know who nailed the bottom on Facebook? Me. This guy!” Then show ’em the confirm to prove it. “What’s up now, partner?”
Aside from it potentially being a homerun trade, it will also serve as a reminder for the rest of your life that you’ve gotten through panics before and you’ve even come out on the other side with a trophy.
I’ve seen one of the Old Masters I know do this trick and I’ve adopted it for myself. Sometimes coping is the most important decision you can make.
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