I am not in the market right now but I am going to imagine I am in your shoes – in the market and wondering what to do. What would I do with things looking wobbly? Buy, sell or sit?

Of course, you can’t really be in anyone else’s shoes – in trading, investing or in life. But I can use my imagination. I have made a great deal of money out of the market but I was also on the other side of the ledger in my early years. This didn’t last long as I quickly recognized the importance of software, education and skill practice.

Let’s take a simple line perspective of the market:

click chart for more detail
click to enlarge

I have marked my moves. Having sold in early-2008, I did not buy in March, 2009 as I thought the market was likely to fall further, so for the last two-and-a-half-years I have been sitting in cash.

So what would I do if I was still in the market?

Because I have other business commitments I cannot trade short-term and so I look for the new long trends which obviously have not happened. I regard the 2009 recovery as fluky and not a long trend. I have no beef with being out and not having bought in March, 2009. I have slept like a baby since early-2008 and, having sold down, I just wanted to bask in the sun.

I don’t see this period as a ‘buy’ opportunity as I don’t think the market is going anywhere for some time. Whilst I believe the market is overbought, I am inclined to think range trading is a more likely scenario for a while.

So I don’t think it is buy-time but is it sell-time? Selling is more a personal choice than buying.

My view about selling is that anytime is a good time to sell. Let me explain - when I am in the market I review all positions every day. This is not as time consuming as you might think with good software and self-discipline. So I am always watching stocks and am ready to sell should they meet the ‘fail’ criteria. I am always selling, always pruning.

The rest is easy if you have clear rules in your investment plan and follow them. If I bought a quality stock 20-years ago, I possibly would not sell now. But if I had bought since March, 2009 I would be taking profits as I think there will be better buying ahead. This is the case particularly for stock bought over the last two years as for some of these it wouldn’t take much of a fall to be under water. If they don’t pass the ‘sleep test’, I would cut them loose and happily pay the tax.

You have less chance of things going wrong if you are proactive in review. At least you mitigate risk.

Enjoy the ride

Tom Scollon

Chief Analyst