As a freelance writer and author, I have been fortunate to have interviewed many stock market gurus over the years. One of the most memorable was with the legendary Peter Lynch, the former mutual fund manager at Fidelity Investments. Years ago, for an article, I talked to him about one of his favorite topics: helping young people learn to invest.
Lynch popularized the idea of investing in what you know, that is, owning stocks in companies with which you are familiar. He wrote three best-selling books about his ideas, including going in person to see what people were buying first-hand. Lynch was famous for visiting companies in which he wanted to buy stocks. For example, before buying shares in a car stock, Lynch would go to the dealership showroom, chat with salespeople, and check inventory. His advice, although it sounds simplistic, is really brilliant. After all, most people spend more time and effort looking for a new refrigerator than buying one. I made that mistake when I started investing, investing $ 50,000 in stock in a Texas cell phone company that I had never heard of. Why? Because an acquaintance who knew more about the stock market than I did said that I should. “You can double your money,” he promised. Famous last words. Instead of doubling my money, I lost half in a few months when the company almost went bankrupt after some questionable accounting maneuvers. It was also the first and last time I bought stocks on margin. Using the margin, the broker allowed me to use my original $ 25,000 to buy another $ 25,000 worth of stock (2-1 margin). When stocks crashed, I not only lost money on my original investment, I also owed the brokerage for the money I borrowed. Margin mismanagement is one of the ways many investors get into trouble when their actions go against them. Study balance sheets and stock charts. If he had followed Lynch’s advice and done some basic research, he would have discovered that the so-called cell phone company was a scam. He was being promoted by fake press releases and bloated social media posts. In hindsight, he could have flown to Texas and visited the company. He would have discovered that he only had two employees. It would have been a lot cheaper to fly there than to lose $ 25,000. You could also have studied the company’s balance sheet, looked at a stock chart, and studied its earnings reports. It sounds like common sense, but think about how many people buy stocks every day without doing the most basic research, known as exercising “due diligence.” Others call it “doing homework.” How Lynch Handled Bear Markets From my interview with Lynch, I learned that he does not make predictions. “I have no idea what the market is going to do for the next one or two years,” he told me. “What I do know is that if interest rates go up, inflation will go up and in the short term the stock market will go down. I also know that once every 18 months the market has a 10% drop. These are called fixes. We could easily have a 10% correction. Perhaps one in three of these corrections will turn into a 20% to 25% correction. These are called bear markets. “Lynch took market corrections in stride, including bear markets. Although he disliked bear markets as he was a long time manager and hated losing money when it occurred, he did not panic.” If you understand what companies you own and who your competitors are, “Lynch said,” you’re in good shape. You don’t panic if the market falls and stocks go down. If you don’t understand what you own and you don’t understand what a company does and halves, what should you do? If you haven’t done your research, you can also call a psychic hotline for investment advice. ” I learned from Lynch that while bear markets are inevitable, they cannot be predicted. That’s why before one occurs, you need to assess what stocks or funds you own. If you trust your investments, you will not be affected. For me, it means reducing some of my positions, especially given the current technical indicators of the US market. Although the market has been in a 12-year bull run, it is still vulnerable to a steep correction, or worse, a bear market. That’s why it’s more important than ever to do basic research (that is, study balance sheets and stock charts). For short-term traders, this is what some solid technical indicators are now saying about the US market as of April 8 close. Moving Averages: Bullish. The S&P 500 SPX, + 0.42% is on a breakout, well above its 50, 100 and 200 day moving averages. Based on moving averages, all systems are up and running. RSI (Relative Strength Indicator) – Overbought. The RSI, which measures overbought / oversold conditions, tells us that the market is approaching the danger zone. When the RSI reaches 70 or higher, it is a danger sign. By the way, the weekly RSI of the S&P 500 is currently at 69.14. Consider this: In less than three weeks (since March 25), the S&P 500 is up about 250 points. The Dow Jones Industrial Average DJIA, + 0.17% RSI is 70.86, while the Nasdaq COMP, + 1.03% is at 63.73. If the market continues to rise, short-term risks increase. Remember that markets or stocks can remain overbought or oversold for long periods. For example, right now, some individual stocks have RSI levels of 90 or higher, and yet they are not falling. The RSI is best used as a track, but not for timing the market. MACD (Moving Average Convergence Divergence): Neutral. Many short-term traders rely on the MACD to provide reliable trading signals. At the moment, while the MACD for the S&P 500 is above its zero line (positive), it is also on par with its nine-day signal line (neutral). At the moment, the MACD is not giving a clear signal for the S&P 500. Meanwhile, the MACD for the Dow is bullish (MACD above the zero line and the nine-day signal line) and is neutral for the Nasdaq. . VIX (CBOE Volatility Index): No fear. The VIX, VIX, -1.22% which measures the implied volatility of the S&P 500, has been falling for months and is in the basement (it is currently just under 17.0). This tells us that there is little volatility and little fear. Few expect anything bad to happen in the stock market, and if stocks go down, many believe the market will “come back.” Only Mr. Market knows if this is true. Bottom line: If you’re a long-term investor, Lynch’s ideas and methods are great. If there is a bear market mishap, take the opportunity to buy stocks or indices that you have researched. If you are a short-term trader, there are clear warning signs that the US market is too good to be true. The most important thing is that you do not own anything that you do not understand or that you received from a notice from a neighbor or from a salesperson on television. And be careful about buying on margin. Michael Sincere (michaelsincere.com) is the author of “Understanding Options,” “Understanding Stocks,” and his most recent, “Economic Profit Trading Options,” which presents simple option strategies for beginners. Plus: S&P 500 is now overbought and looks poised to fall in the short term, according to this strategist. Also read: ‘We have reached a tipping point’ in bitcoin adoption, says Fidelity’s Tom Jessop.