Ross Jardine Reviews

Chapter 4 Risk Management

Playing a round of golf can be like investing in the stock market.  One bad hole can ruin the round, while one bad investment can spoil the market.  Ross Jardine in his book Bear Market Game Plan, Strategies for Success in Choppy Markets tells how you can take steps to get that bad investment out of your game.

1. Stop loss order.  A stop loss order will instruct your stock broker to automatically sell a stock when it drops to a certain price.  This is important to have as it will limit the loss you will suffer on any one trade.  Another important aspect of a stop loss order is that it will help prevent you from playing the stock market with your emotions.  You should determine the stop loss order at the time of your purchase.
2. Deciding on a stop loss.  Jardine says that you should set your stop at 10 to 20% of the purchase price.  If you buy the stock at $20 per share, a 20% stop would issue the order when the stock drops to $16 per share.  Some investors who don’t like much risk will put the stock loss order at less than 10%.  If you are trading in the options market the stop loss should be in the 30 to 50% range.  Remember that you will almost always have a better chance of earning a loss back on your next trade than sticking too long with a stock.
3. Choosing your stop.  Remember the moving averages we discussed earlier.  Make sure you use that research to help determine where to put your stop.  You also need to be aware of support and resistance.  Support is the point where buyers tend to jump in and offset any selling pressure.  Look at the history of the stock and set up your stop just below the support level.  Make sure you are following trends for the stock, the market and the segment of the market you are trading in.
4. Stop order versus stop limit.  Make sure you know the difference between a stop order and a stop limit.  Some trading websites give you the option, Jardine says you should never go with a stop limit.  The difference is simple to understand.  Using the example from above, if the purchase price is $20 a share and you put the order at $16 a share your broker will automatically sell the stock when it hits $16.  Since you can’t sell instantly, the price could be a little less than $16 or a little more.  The point will be the stock will be sold and you are protected.  With a stop limit, it will have to sell at $16 a share.  Therefore if the price continues to drop it will not sell because it hasn’t returned to $16.  To get out, you will have to over ride the stop limit and you could end up selling at a much lower amount than you want.

There are a couple of other things to consider with a stop order.  Make sure you understand how your broker handles stop orders; some will automatically expire after a certain date.  Don’t lower a stop loss from your original stop price.  Trade with knowledge not with emotion.

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Chapter 3 The Trend is Your Friend

In our last discussion of Bear Market Game Plan, we talked about not falling into the trap of listening to your emotions when investing in the stock market. How do you avoid your emotions? One way you is by learning the trends in the stock market and you also need to learn that the trend is your friend. Think of taking a raft down a river, if you find the right current the trip will be easy and won’t take much effort. Get in the wrong current and the trip can be choppy and dangerous. Ross Jardine says in his book the Bear Market Game Plan (Strategies for Success in Choppy Markets) that you have to know the current if you want your head to stay above the water.

To be successful in the stock market you have to know how to recognize the market trends. Check them on a daily basis. Jardine suggests that you use charts that show a daily moving average. He recommends 30 day or 50 charts. On a 30 day chart, it will show the market average for the past 30 days. You can then compare it to a daily chart. The daily chart will be choppy going up or down each day. The 30 day moving average will be a smoother line. When the market is going up, the daily chart will be above the moving average, if the trend changes and the daily starts to drop then it will drop below the moving average. By using a moving average, you won’t panic if there is a one or two day drop in the market. And it will show the trend the market is heading to so that you can make the right investing decisions.

The charts can also be broken down in the various sectors of the economy. So don’t just check the averages for the Dow Jones or the NASDAQ, but also look at your technology charts, energy charts, and other sectors. There are only three trends; up, down and sideways. Learn the trends, when they are bullish use bullish strategies. When they are showing the bear, use your strategies for riding out the bear. If you are not sure what to do, then follow the saying –when in doubt, sit out.

If you are a short term investor, then use the shorter daily averages. If you buy a stock and look to profit quickly use a 30 day moving average to determine the trends. If you are a long term investor then you are not worried about the short ups and downs, so look at a longer moving average, say 200 days. Even if your investing style is buy and hold, you want to make sure you understand the long term trends so that you don’t end up holding on to a stock for to long.

Don’t fight trends, when a stock approaches its moving average it tends to bounce away from the moving average in the direction of the trend on the moving average. In other words, if the daily chart is above the moving chart, it may start dropping but normally rebounds when it approaches the moving average. You should invest in stocks with an up trending short-term moving average, only invest when the technical indicators you follow give you a bullish signal, and/or invest only if there is no immediate resistance on the chart. More on Ross Jardine’s Game Plan for trends and Bear Markets in future installments.

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Ross Jardine - Chapter 2 - Emotions of Investing

Ross Jardine’s book Bear Market Game Plan, Strategies for Success in Choppy Markets explains that in a down or bear market such as we are experiencing right now perhaps the biggest challenge facing an investor is to keep your emotions in check. Investing is not done with you heart, its is done through much research, time and effort and using strategies and practices that have stood the test time, and which maximizes your opportunity for success.

There are two primary emotions that the investor has to watch; fear and greed. Greed is what got us into investing in the first place. Greed or the desire to make money is what prompted us to make investments; after all we invest our current money to make money in the future. Fear however may keep us out of the market, which in turn will result in lost opportunities. Fear can paralyze investors, keeping us out of a market that others will capitalize in. We may sell off out of fear, instead of staying the course when the value will return to our portfolio. Greed also can work against, as we try to squeeze profit out of stocks that we should have sold weeks ago. Greed can lead to losses, but fear will cause us to miss out when we could be profiting.

Some things to remember when trying to develop a strategy for riding out a bear market:

1. Recognize the warning signs. As the economy shifts or changes there will be signs to pick up on early. Watch out for the warnings signs of a bear market to be best prepared. Do not fall so much in love with any particular stock that you cannot see the value of selling it at the right time. We can hang on the emotions that things will get better.
2. Getting off the train. Try to get off when you have a chance. Sure if you sell the stock now you may have only a 10% loss. But if you hold onto it, in another week it could drop another 10% in value. While you never want to lose money, it is always better to lose a little than a lot. No matter what investment strategy you choose, you will also suffer some losses, the smart investor doesn’t avoid loss but he does minimize it.
3. Admitting you’re wrong. You are going to make mistakes when investing, don’t be afraid to admit it when you are wrong. If a stock has gone bad, admit to your self that it was a mistake to purchase it and cut your losses. At the same time if you plan on selling a stock after it has risen 20%, follow through with the plan. It is always better to sell too early than too late. If you hold on too long, you may lose out rather than gain.
4. Eternal optimist. We want to believe in the value of what we are buying and that it will make us money. There is a natural optimism that some investors have in stocks. Guard against it in order to make the best decision.
5. Fighting the trends. An optimist has a tendency to ignore the trends of the stock market or the market sector that he is trading in. Learn about market trends then follow what you have learned. Be aware of what is going on in the markets, they have been around long enough so study them and use what you learn.

Follow Ross Jardine’s Bear Market Game Plan and you can be successful even in a down market. What are your thought? Please feel free to leave a comment.

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Chapter 1 Don’t Let the Bear Scare You

With the troubled economy in the United States, investors need a game plan for dealing with the stock market. The book, Bear Market Game Plan, Strategies for Success in Choppy Markets, written in the year 2001 by Ross Jardine offers valuable insights for dealing with today’s market. In the past few months, investors have seen financial gains wiped out in the market; and with a weak dollar, a volatile housing market and increasing energy and food costs the immediate future is very uncertain.

Jardine notes that markets never go up forever, despite our wishes for bull markets to never end. This bullish bias can turn into a major weakness when the market turns to become a bear. This book lays out strategies you can use to survive as an investor in a bear market. Bear markets never last as long as bull markets, but can damage an unprepared investor both financially and emotionally.

What is a bear market? There is no set definition for a bear market. Most experts however do agree that a bear market occurs when market value drops by more than 20% over a period of time. As an example in the year 2000, the NASDAQ market at the end of the year had dropped 50% from its year high in March. The other leading markets dropped during that time period but not nearly as much as the technology based NASDAQ.

When a bear market occurs there is a rising supply of stocks with a diminishing demand for them. Sentiment among investors turns pessimistic, there’s an increase in unemployment while productivity in the marketplace drops. The cycle of bear and bull markets has been observed by economists for over 100 years so it is not a new phenomenon. The most famous bear market in the United States history was at the same time as the Great Depression. From 1929 to 1932 the Dow Jones Industrial Average lost 90 percent of its value. In 2000, the internet bubble burst as companies discovered that creating a website was not a guaranteed means of making money and investors learned that earnings reports really do matter.

For the past 50 years, the average bear market has last 9 months with a 29 percent drop in the markets. The 1973-74 bear market lasted 20 months, and on average it has taken 17 months for the markets to regain their value following a bear market.

The smart investors recognizes that there are both bear and bull markets and he must use separate strategies to be successful in both types of markets. You should not be discouraged by a bear market as there will be opportunities to make money during a downturn in the economy. Over the coming weeks, we will be taking a close look at the Bear Market Game Plan that Ross Jardine recommends for investing in a bear market.

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