The first rule to catching a bottom? Don’t try to catch a bottom

Michael Batnick, on attempting to catch a bottom, in a post from last July:

Nobody can actually buy low and sell high. Not consistently anyway. Successful traders typically buy high and sell higher, and successful investors buy low and sell rarely. But if you are tempted to catch bottoms, to be the investor who can recognize treasure where others find trash, there are some broad rules that I suggest you follow.

The first rule to catching a bottom? Don’t try to catch a bottom.

The first rule of catching a bottom is don’t try to catch a bottom. It’s one of the hardest things to do in all of investing. Macy’s has experienced three separate 30% rallies on its way to a 70% decline. None of them stuck. Quick traders made money. Bottom-fishing investors got filleted.

Here’s one way to do so:

Rule #4: Wait for a longer-term moving average to stabilize. Macy’s twelve-month moving-average, for example, is still crashing. If you wait for a long-term moving average to stabilize, you won’t buy at the bottom, but better safe than sorry. Falling knives are guilty until proven innocent.

Good reminders when instincts are telling you differently. Read his full post Ten Rules For Catching A Bottom at The Irrelevant Investor.

Value index funds have underallocated tech

Michael Batnick looks at why value indexes have performed poorly over the last decade and finds a simple explanation, essentially it’s an allocation issue.

Value has 23% more exposure to financials and 29% less exposure to tech. This is the primary driver of the gap in performance over the last ten years. Over this time, tech stocks have gained 255% while financials have gained just 61%!

 

via What’s Wrong With Value? at The Irrelevant Investor