How To Lose Money in the Market

You make money on what you think you know (or because the market goes up) But you lose money on what you find out you didn’t know…after it’s too late

So many on Wall Street are rushing to declare "it’s a bear market" or "it was a bear market and now it’s over." I say, give it a rest.

The market's story has changed. It used to care about nothing except that the Fed would backstop anything that went wrong. Now, the fact that the Fed may have lost its ability to calm the markets for more than a few days is just one of many worries. There’s inflation, concerns about economic recession, as well as an earnings recession. That is, company profits are increasingly…not profitable. Then, there’s Russia’s horrific actions in Ukraine, China’s lockdown policy, and, and, and…

But none of this really matters to investors. At least, it shouldn’t. All that should matter is what is happening TO your money, not what is happening AROUND your money. We can’t control the next piece of news that dominates financial television. But we can make sure we listen to what the markets are telling us.

Right now, the market’s message is simple: stocks are in a decided downtrend, and will be until prices prove they can break that 4-month decline. Will there continue to be sharp rallies? Sure. But until one of them sticks beyond a week or two, there just seems to be another wave of selling behind it. That’s because liquidity is coming out of the market, and S&P 500 investors are starting to sell. That may be a slow train that stops, but if it accelerates, it will be like a dam breaking, like it already has for a large percentage of individual stocks.

The gameplan?

  • Make the stock market prove that it can reverse this trend. Until it does, look to take advantage of each successive leg lower by incorporating strategies that are designed to profit in down markets.
  • Realize that the longer the market stays down, the more it becomes “one stock market.” You can’t get cute by thinking you have a sector, industry or theme that is going to somehow overcome the broader forces driving stocks lower and lower.
  • Don’t be a hero: it is not a crime to maintain very low exposure to the stock and bond markets. That is NOT the same thing as piling up cash. If there was ever a market climate built for things like ETF arbitrage (pairing long and short exposure to reduce risk and try to profit from performance differences in 2 market segments), this is it.

Related: Alpha Can Be Pursued, Just Listen to the Market