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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Arthur Kane, an investor in Miami, bought stock on margin until he was deep into debt with an $11 million portfolioIncreasing Your Knowledge of When to Buy Stocks and When to Stay on the Sidelines IN CHAPTER 4, I POINT OUT THERE ARE TIMES TO INVEST WHEN THE probabilities are greatly in your favor. There is also a time when you should stay out of the market, regardless of how favorable you think the probabilities might be. If you are under a period of stress, such as a major relocation, divorce, health disability, or even a sudden windfall of money, do not become involved in the stock market. After graduating from college in 1960, I entered Naval Officer Candidate School (OCS) in Newport, Rhode Island. I was wearing most of my belongings and had stuffed the rest into a couple of cardboard boxes. The first person I met at OCS was a smartly dressed graduate of UCLA. He even had a suitcase. I was a little embarrassed but quickly exchanged my civilian clothes for the Navy uniform I was issued and threw my old clothes away. The first semester at OCS was a monumental struggle for me. I had made it through my schooling up to that point with the help of a good memory and a lot of bluffing. Now I was cracking the books with the crme of the crop, graduates of Yale, Notre Dame, and other prestigious schools. I just could not keep up with them. Candidates like me who were getting failing grades were confined to the base on weekends. For the first two months of the program, I did not step off campus. Not only was I in trouble academically, but also in other areas of officer training. For example, we had to polish our shoes until they reflected the inspecting officers face like a mirror, and the bedding on our bunk beds had to be tucked in so tight that a quarter would bounce when tossed on the bed. I received demerits for my sloppiness and began to despair that I would never make it as a naval officer. At the start of my program in Newport, there were 619 candidates in the 50th class at OCS. Only 495 graduated. The rest flunked out to face boot camp training as enlisted men, along with high school dropouts and others without a college education. They would never become officers. I was sliding downhill from the beginning and my classmates were not much help. Halfway through the first year, we were asked to name one classmate we felt would not make it through the course. I was crushed to see my name on the list. The future looked bleak indeed. In my despair, I called my mother and poured out to her my disappointment in myself as a failure in the officer-training program. Mom, I said, Im flunking out, and Im going to end up as an enlisted man, a common sailor, at Great Lakes. George, she asked, where are you now? Im at the base. They wont let me off base because my grades are so lousy. Hows the food? What did you eat today? Good, Mom. I just had some oatmeal, but Are you sleeping well? Yes, but Thats good, Son! Good! At that moment, the burden of all of my worries and concerns about my dismal performance rolled off my back. Mom, Ive got to run. Ill call you back, I blurted into the phone. I hung up and started laughing. I laughed until tears rolled down my cheeks. I felt as light as air, as frivolous as a feather. I had been liberated from my fear, knowing that my mother did not care if I was an officer or a sailor. All she cared about was that I was eating and sleeping well and not in trouble. She did not mind that I was confined to base; at least I was not running around in town making mischief. My experience at Officer Candidate School turned a corner. I became a motivated learner, a rapid assimilator of the facts and skills poured out in lectures and practice sessions. I owe my turnaround to my mother for being the simple, loving person she was. When I had called her, I was in the bottom 10 percent of my class. By the time I graduated, I was in the top 10 percent. In addition, the list of prospective failures composed by my classmates no longer included my name. Does stress make a difference in a persons performance? Absolutely. Arthur Kane, an investor in Miami, bought stock on margin until he was deep into debt with an $11 million portfolio all purchased with funds borrowed from Merrill Lynch. On Black Monday, October 19, 1987, the Dow Jones Industrial Average dropped 22.6 percent, the largest single-day decline in history. Kane was so distraught that he walked into Merrills North Miami office and opened fire with an M-19 pistol. He killed the manager, hit a broker, leaving him paralyzed for life, and then killed himself. The next day, the market recovered and went on to soar to new heights. Those who held on got all their money back. If only Kane had waited one more day, things would have worked out for him. Instead, at his moment of greatest suffering, he panicked. Shakespeare said, Take heart, suffering, when it climbs highest, lasts but a little time. It is unfortunate that Kane lost control of his emotions, and at his moment of greatest suffering, panicked. Save major decisions for a time when you are not under stress or otherwise overly emotional. In Chapters 8, 13, and 14, I discuss the Magic T. The Magic T is a simple technique that I developed over the years to keep my emotions in check, especially when making any major long-term decision, including the amount of risk I am willing to take in the stock market at any given time. Any investor who uses insider trading analysis as an important tool in deciding what to buy and when to buy it is, by nature, a contrarian. Insiders, in general, are going against the grain of popular opinion. They sell as stocks go up and buy as stocks go down. This is their nature. When the stock market is in the throes of a major decline and fear abounds, the only buyers of stocks will be insiders and other contrarian investors and those who follow insiders. Eighty percent of all money managers will be selling stock at major bottoms to meet redemptions by panicky investors. These forced sales are always accompanied by negative news into an already deeply oversold stock market. As contrarians, we live for times like these. The Magic T will be 100 percent weighted to the buy side, and the signal is usually early (one week to three months). We will have had sufficient time to prepare for the decline and the bad news that accompanies it. Severe market times are always accompanied by great fear at the bottoms, and the Magic T is instrumental in keeping us calm and centered so that we can buy stocks at the bottom, against a backdrop of negative stock market and economic news. However, there is another time when our emotions run wild, and being on the sidelines might make us anxious. That time occurs when the market has soared to new highs and the backdrop of good news and positive sentiment is at extremely high levels. As contrarians, we must always be on the opposite side of what the masses are doing. At market tops, all of the news is super. Analysts and professional money managers are bullish, market letter writers are ebullient, and the public is making money and buying on margin. At these times, the Magic T will be flashing a Stay Out signal. In my opinion, market tops are tougher on emotions than bottoms. Everyone loves a bargain and that includes bargain stocks. If we have not been buried in the decline and have been sitting on the sidelines, waiting for our Magic T signal, it is easy. What is not easy, however, is to be on the sidelines when day after day, others are making money. Even worse, they often remind you about it. I know how hard it is emotionally to have been out of the stock market while it continued going up. In May 1987, the Magic T turned negative. The market did not break until mid-October and it had its biggest rise from May to September. I recall doubting myself about having become yesterdays news or a dinosaur. As usual, most of these doubts came in the month just before the crash. Another tough emotional experience took place in late June 2003. After having had three Magic T buy signals in July and October 2002 and then again in March 2003, the Magic T advised to start selling stocks and to Stay Out. It was very painful to see the market rise to new recovery highs in early January, seven months following the sell signal. Without a technique to keep my emotions in check, I would never be able to stay with my contrarian approach to the stock market. I would cave in and buy stocks, and most likely I would be with the masses, holding the bag at the top. After all, I am Romanian and my romance heritage would be my downfall in times of emotional periods. Fortunately, I have the Magic T to keep me in check. A contrarian basis always reminds me that the key to market success is Bought well, half sold. Having bought well makes the job of selling a lot easier. When the Magic T flashes its usual early sell signal, I know I will have to take some emotional pain as the market enters the last and usually insane, parabolic phase. I am always comforted by the fact that I made money on the last Magic T buy signal and another one will most assuredly follow. In the meantime, I can work on my golf swing or skiing technique while I wait. What should you do at times when your emotions are running high? Nothing; put your money into a one-year Treasury bill and wait for your thoughts to become clearer. A few years ago, a friend called and told me he had just received a big windfall. His grandfather had left him $700,000 and he had just received the money. He was a secure person, happy and well adjusted. I told him to buy a one-year T-bill and call me when it matured. He seemed confused and wanted to know why he should wait. I explained that a lump sum of money can actually add to your stress level, because there are many decisions that have to be made, such as disputes among the family, requests of financial help from friends and family, taxes, and the many choices of where to put your money. Today they even have a name for this stress. It is called Lottery Winner Syndrome, named for the many people who have won millions and then have gone on to destroy their own lives. In my experience, similar to many of lifes lessons, the answers will come from within. The men and women who followed my advice, never had to ask me for complete guidance. Over the following year, the answers came to them. It is a bit like the old Chinese proverb Stand in one place long enough and just about everything will pass in front of you. |
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