Preparing your mind for a bear market

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Everything is going good at the moment... But knowing your history should make you prepared for the next market crisis that will eventually come.

When you are following the plan that I do, i.e. buying into a few companies and then increasing that buy in each month with the goal to build my own money making machine it will be hard to see market value disappear.
Since 2014 when I started investing in this way, the markets have grown stronger and stronger and I've not yet experienced the fall. How do you prepare for losing a lot of the market value that you have built up?

By not caring and sticking to the plan.
Yes, you lost a lot of market value but hopefully the companies that you invested in will still be there (you didn't invest in the hottest thing at the moment didn't you? instead look for long term survivors)
If your portfolio lost 80% of market value over night that also means that all company shares are 80% cheaper to buy. If there is long term revenue streams in the companies you invest in, then you should not really care about the markets valuation of the share price... Instead you should do the math yourself, if you see yourself holding the shares for 10 years or longer then chances are that the bear market will end and a new bull market will start.
If a disaster doesn't hit you during the fall (like losing your job and hence your investment power) you should continue to buy when the markets go down, maybe even consider increasing the investing power by selling stuff that you do not need anymore. This way, you may actually grow stronger when the markets are at the lowest and reap the rewards when the markets start to rise again.
There is no such thing as market timing, so do not try that.. Instead just buy each month and look at a falling market and red numbers as companies being on sale, and you could make a bargain!

So, if you have done so already. It is time for you to device a plan of your own on how to handle the next financial cycle of the world markets!

Until next time: Challenge yourself to do something new

Disclaimer. I am in no way an expert on capital management or investing. On this blog I only wish to share my findings, ideas and comments on current events and fields that interest me. I hope that my thoughts can entertain you. I expect that everyone reading take their time and do their own research before acting on anything read on this blog. Investing is not for everyone. E&OE.

Market Timing vs. Dollar Cost Averaging

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It's been a while since I wrote about my financial views, but now when markets around the globe are going strong and doomsday prophets shout that you should sell all now to avoid the inevitable down-turn I thought I'd write a little bit on how I think about market swinging up and down over time.
As with all other posts on this blog, the time frame of my investments is long 15+ years. If you need your money for things in the near future, you may need to follow another plan.

So, what is market timing?

Market timing is the ability to foresee a market swinging up or down and buying or selling accordingly to maximize the profits. Sounds good right? To be able to sell just before a market fall and then buy again at the lowest. This is the movie and Wall Street version of how the stock-market works, the ideal that many stock-brokers and money managers strive to do. And from time to time they get it right and they are the golden child, investors pour more money on them. The thing is that it is hard to time the market continuously, the pressure added if you did it once plays along but also the fact that it is not possible to foresee the future.

What is dollar cost averaging

Dollar cost averaging is the act of buying shares over a period of time, to prevent investing a large lump sum at the once and then seeing it go to nothing as the market crashed. Instead, you buy at the highest point (if the same crash scenario) with say a fifth of the total investment, and then continue to buy once each time period, say a month, until the money is spent.
In the case of a crashing market, the price per share is lower each time resulting in more shares bought for the same amount of money. So in the end you end up with more shares then if you bought them at once and then saw the market crash.
But the same goes the other way as well, you buy at the lowest and you would receive less shares then if you invested it all at the lowest point.
The idea is, that if you are a long term investor you do not care about the volatility of the market and just continue to buy in ups and downs. When the market goes down, you get more shares, when the market goes up you get less shares.. In the long run it evens out.
For me, I do not have a lump sum to spend so my monthly investment is basically a continuous dollar cost averaging scheme.

Numbers on a single share.

After reading the Forbes article Busting The Myth Of Market Timing, I decided to try to map the data myself based on a Swedish bank (SEB, or Skandinaviska Enskilda Banken AB) looking back a 10 year period.
2007-04-25 – 2017-04-25

The starting point is at the middle of a down turn, i.e. share prices are dropping.

Say that you have 1000 to buy with each month and continue buying for 10 years.

So when the share hits rock bottom at 18 SEK, you buy 54 shares as the share is on sale.

At the end of the 10 year period, you have received 1253 shares.

So how to simulate thinking like a market timer? As the share is dropping at the beginning of the scenario, lets think that you try to look at signs for things to change, criteria will be 2 months of gains until you enter and 2 months of dropping price and you leave. Otherwise you hold. (don't know if this is accurate but just bear with me)

End result, 954 shares... 299 shares less then the buy buy and buy more approach.

In reality

• Each share pays out dividend.. 
• Each transaction costs money
• You pay taxes when you sell for profit (at least in Sweden)
• Change is transferred to the next month, 
• you receive a bigger paycheck and can invest more or do something actively to increase the amount spent each month

All this leaving you with a lot more shares then the example and even less shares if you market time. This is just one example, that happens to reflect my point of view but there is a lot of research done in this area and gurus like Warren Buffet think that market timing is a hoax.

But don't trust me, do your own research and find out more yourself. In the end, knowledge leads to better decisions. : )

Until next time: Work to Live, Don’t Live to Work

Disclaimer. I am in no way an expert on capital management or investing. On this blog I only wish to share my findings, ideas and comments on current events and fields that interest me. I hope that my thoughts can entertain you. I expect that everyone reading take their time and do their own research before acting on anything read on this blog. Investing is not for everyone. E&OE.

My Current Plan, 2016 October

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As I've hinted in previous posts, I don't follow the diversified investing strategy or invest in index funds myself. I still think that that is the best risk averse way to invest, perfect for your retirement plan or when you are saving for your kids and most of all when you do not want to put any real time into it.

That being said... I have too much time..

So, after reading a lot on the subject. Going through Graham, Buffet and numerous books that I don't remember the names of, that could be the subject of another post I devised my own strategy.
So lets go through the overall ideas that influenced me to form my own plan.

There is no one way to wealth, everyone do it in their own way

Some preach diversification, others are into value investing and then again others only want dividend payers. Buy only companies that are cheaper than the money they have in the bank, or buy into big well proven companies that are stable. Buy and hold or Buy and sell?

So there is no single path to riches.

There is no such thing as market timing.

At least not in the long run and I am in it for the long run.
This seems to be the least common denominator that everyone agrees on. Everyone meaning the authors and investors that have a horizon of a decade or five.
Graham didn't have to time the market as he basically bought the whole basket and then micromanaged that portfolio to see when things were ripe for harvest. Others buy at a nice price (not always the best) and hold the investment for a long period and see it grown.

What I look for

Management

Do I trust the management to drive the company forward into a money maker for me?

Dividend payout

I.e. a cash flow that can be re-invested. And when time comes, a cash flow that can substitute a full time job or 2. Best deal if it has a long term increased dividend strategy.

I can figure out how they make money

This is key. I don't want buy into a company if it is in a field that I don't know about. If it is unclear how the money gets created, then it is a no.

A Great Company

I don't want to go through the endless waves of small unknown companies that may become the next [insert any skyrocketing company here from your local financial news]. I want a boring old money maker with a well recognized brand that is out there and has 'always' been. Think Coca-cola.

Does not ask shareholders for a cash-in from time to time

Another no way. Steady long term business that is able to finance itself and pay a dividend.

Not my employer

I like my employer, I like working for them. But, a big but if.. If they go out of business and I loose my job, I don't want to loose my investment at the same time. Or the other way around. Just think about it. You see your investment go into ruins and the next day you get fired. Not an ideal situation. I don't buy my employer.

Is  better than the ones I already have?
If the proposed return of investment isn't better then from worst company I already own, then I might just as well buy more of the ones I know of.

When to I plan to sell

Never :)

But honestly, no.. I do not have an exit plan. I do have an emergency plan for when the

Management turns sour

As time goes by, the management team of a company change their members or the bigger shareholders want a change and it may turn out to be in a direction that I am not comfortable with. When trust is lost, that's when I might sell. Emergency plan, not an exit.

Until that happens, the market may do whatever it likes. If I trust my companies, then I'll hold on to them. Preferably for me would be if the market thinks the worst, as it just gives me an opportunity to buy more shares at a cheaper price.

So. That was a summary of the strategy that I follow. Currently holding 2 companies and buying more of them every month. Until something better comes up, I'll stick to those two.

Hope this gives some ideas to other people starting out in building their own future :)

Disclaimer. I am in no way an expert on capital management or investing. On this blog I only wish to share my findings, ideas and comments on current events and fields that interest me. I hope that my thoughts can entertain you. I expect that everyone reading take their time and do their own research before acting on anything read on this blog. Investing is not for everyone. E&OE.

Step 2: Expectations and mindset when investing

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This is step 2 of my private economy, saving and investing series. Be sure to read the other posts as well:

Step 1: Stabilize your economy
Step 2: Expectations and mindset
Step 3: Index funds

Now we have done some ground work.

An automated savings plan is in place and a buffer is filled for the rainy day. So whats next?
By now you might have noticed that the ordinary savings account has a pretty low interest rate, if at all. It has become more and more common for 0% interest rates on savings accounts.

For us it was a deal with the bank to start an investment account to get a better interest rate on our house loan.
We did not know much about how the capital market worked when we signed the deal, only what we picked up in the news and movies. The popular cultural view includes

• A lot of trading. Movies love day-traders and Wall Street corruption. Buy! Sell! Follow the markets up and downs.
• Speculation and the quest of finding the next big winner. In my ears this sounds like a lot of work and a high risk.
• Small daily variations in trade make big head-lines in financial news. But then again, real journalism seems to be hard to find these days.
• The market always has the correct pricing due to the volume of trade.
• Stocks are just numbers that can be statistically analysed.
• Stock picking is everything there is to it.

The first book on the subject that I read was The Intelligent Investor by Benjamin Graham and the biggest eye-opener for me was the notion that when you buy into stock of a certain company, you actually own a certain part of that company. If your company does well, it will pay you back, if it goes bad it will not.
The strangest thing is that I never thought of that before. The abstraction of a share has taken over.

Definition of the word Invest.

"To commit (money) in order to earn a financial return"
-merriam-webster.com

"Put (money) into financial schemes, shares, property, or a commercial venture with the expectation of achieving a profit."
-oxforddictionaries.com

"To put money, effort, time, etc. into something to make a profit or get an advantage"
-dictionary.cambridge.org

The investing options discussed on this blog follow these definitions. The common idea is to put money or time into something and expect a return on that investment in the form of money.
Many people think of their house or apartment as an investment but in my mind the money you put into your house is in a very grey area, even if you make a profit when you sell it you will still need somewhere to live.. Buying an house and renovating it and then reselling for a profit is a investment. Your home should not be. If you earn some extra cash on moving, see it as a bonus and put it into your investment plan.

Don't expect to get rich fast, it will take time but in the long run if you stick to the plan you will start to get returns that in the end will blow your mind.

Mr Market

Grahams famous allegory of Mr Market goes something like this: once you become a shareholder you will start to get daily visits by Mr. Market with a price quote on your shares. But some times the quote is ridiculous and it is up to you to either trade with him or not. It does not matter if you do or not, because if you are still a shareholder the next day, he will come back. Mr Market listens closely to every piece of information and follows every lead when setting the price tag on a share.

Lets fast forward to present time, today Mr Market comes to visit more frequently. He pretty much comes multiple times per hour if we let him. But it is still you, the shareholder, who must either accept his offer to trade (either buy or sell) or not to.

Day-traders continuously negotiate with Mr Market and trade with him multiple times per day to gain a profit. They do not look at their shares as parts of a real physical business but more like paper with a price-tag on them. In my mind, this is a very high risk game and the only real winner is Mr Broker.

Introducing Mr Broker

Where Mr Market is the provider, I like to see Mr Broker as the pusher. He wants you to do business with Mr Market.

Mr Broker is the guy you call each time you want to trade with Mr Market. He does all the paperwork and takes a small fee for the favor. In the end, if you trade a lot, he is the only real winner. Think of it as the house always wins at the casino. So the key is to involve him as little as possible. Mr Broker loves the news and the manic-depressive Mr Market as they increase the amount of trades per day. Mr Broker is a very very rich guy.

One of the things with Mr Market that Graham left out of his allegory is that he is a pretty bad guy, not only does he have manic-depressive traits, he is also a stalker. Even if you sell every share that you own to him on one day, he will come back the next. And continue to do so. Meaning that you will have a pretty good picture of if the decision you made was a good one or a bad one.

Grahams strategy to battle Mr Market is to diversify your holding. Meaning that you buy into businesses in different fields, that are undervalued by Mr Market and when they rise a little you sell them back to him for a profit. And you continue to do so until you get rich one step at a time.
In my mind this requires a lot of work even though the risks are quire small.
Or you could just buy into an index-fund that is built to automatically mimic a certain markets index. This is what I did when I started out. More on that in a later post.

In conclusion.

If you get into investing with the mindset that shares are owner certificates for a businesses you will probably have a better outset than most. View yourself as an owner and read up on their business instead listening of the wild speculations done by news, media and the market in general. Take your time to read a report or two, perhaps even go to an annual meeting, and only engage in a trade with Mr Market on your own terms and limit the number of trades so that Mr Broker doesn't steal your profit.
If you do not want to do that, then stick with Grahams diversification plan and buy into an index fund with a low fee whenever you have a nice sum of money to put away.

Continue to the next step: Index funds

Disclaimer. I am in no way an expert on capital management or investing. On this blog I only wish to share my findings, ideas and comments on current events and fields that interest me. I hope that my thoughts can entertain you. I expect that everyone reading take their time and do their own research before acting on anything read on this blog. Investing is not for everyone. E&OE.