I've always thought that investors can find a way to make money even in the worst imaginable market. For the past few months, we've been in just such a market -- and I've done it.
Horowitz: Down-market do's
So while many investors have been brainwashed into believing it's possible to make money only when stocks move higher, don't believe it. It's not true.
Over the past six months, I've turned a profit both in real life and with a model portfolio on MSN Money in the Strategy Lab stock-picking game. During a brutal bear market, my Strategy Lab portfolio finished ahead by more than 14%, while the S&P 500 Index ($INX) was down 35%.
Horowitz: Down-market don'ts
The experience has helped me identify three ways to make money in any market:
- Be disciplined. Set a price to buy and a price to sell whenever you make a move, and stick to them. Don't get attached to any stock. Don't waver.
- Be nimble. Lazy portfolios do not make it in a market like this. Everyday investors are often told not to trade and particularly not to sell short. In a tough market, you have to move fast.
Horowitz: Set sell stops
In short, find a system that works and stick to it. To get you started, I'll offer you mine -- actually a set of strategies based on market conditions.
Serious money
Even though I started Strategy Lab with $100,000 in fake money, I treated it like it was my own and managed it as I would real dollars.
Early on, I had to make some tough decisions, as the disciplines that I had outlined in my book, "The Disciplined Investor: Essential Strategies for Success," were about to be put to the test in front of millions of readers.
The Disciplined Investor approach is straightforward: Use all of the key strategies that the professionals adhere to in analyzing stocks and markets. While most pros focus on just one, my approach uses the best parts of each. Staying flexible while sticking to a set of predetermined rules may sound like a contradiction, but it helps me build profits and avoid severe losses.
So, what is a discipline anyway? Here are the standard definitions:
- A system of rules of conduct or method of practice.
- The trait of being well-behaved.
- Training to improve strength or self-control.
It's a process of continually educating yourself and improving your techniques. The truth is that knowledge is power, and, in the world of investing, it's also money.
Now, more than ever, we all need to learn to be nimble and flexible. There is no room for lazy portfolios or blindly followed tips. We can't afford to fall in love with any one idea or one stock; cut your losses early, when they're no more than annoyances.
I use a process I call "QuantaFundaTechna" to come up with my specific plays. It involves studying stocks screens, analyzing key ratios and financial statements, and doing other technical analysis, using tools like those on MSN Money.
Documented results
I wrote during the contest about how I had approached the markets in August 2008 as the Lab round was about to begin: "Overall, the idea was to hedge the portfolio, remain flexible and to have a process by which downside protection was paramount. It saved us. It was not one way or the highway."
Looking back, there were many reasons for the success, but it all comes back to the Disciplined Investor process and the understanding that change is constant.
The MSN Money team highlighted five investments that helped my portfolio beat the bear. Strategy Lab editor Ron Prichard wrote:
- His first journal spied trouble back in August, and he bet that oil and the dollar would fall. When the trades went his way, he exited and took his profits. One of those plays, ProShares UltraShort Oil & Gas (DUG, news, msgs), spiked from around $38 in August to above $74 in October. In January, it traded below $22. Horowitz didn't get the spike or the loss; he set a stop-loss point, took a double-digit profit and moved on. Lesson: Protect gains with stop-loss positions, and don't fall in love with any stock.
- Early on, he shorted Manhattan. "We saw this summer that there was a nasty brew forming as the fallout over the financial mess would hurt New York in particular," Horowitz writes. "So, we added shorts on closed-end New York muni funds and made a handsome profit approaching 30% on each." Lesson: Look for unusual opportunities.
- In September, when banks were getting slaughtered, he added several preferred shares with this journal. The result? Quick 25% to 40% gains. Lesson: Look where others won't, but carefully.
- In mid-October, at the height of market panic, Horowitz noted extreme volatility in several leveraged ETFs, including ProShares UltraShort MSCI Emerging Markets (EEV, news, msgs). He shorted EEV, covered the position, then bought it long and sold that stake. He posted a gain of more than 80% on EEV in less than two weeks. Lesson: Make volatility your friend.
- On Nov. 21, he called the market capitulation, that point where the market loses all hope, which often signals a recovery. After a couple of weeks with an empty portfolio, he added several infrastructure plays for the Obama era with this journal, and he's scored some hefty gains.
Could I do it again? I think so. But with Strategy Lab going on hiatus, you'll have to be the judge. If you want my help, I won't be far.
With my blog, my podcasts and my regular contributions to MSN Money's Top Stocks blog, I will be able to lend you a hand if you need it.
I look forward to hearing about your journey as you work your way toward becoming a disciplined investor.
By the way: People often ask me these days if I'm a bull or bear. I tell them I don't care. The only time you can't make money in the market is when it's closed.
Produced by Darragh Worland
Published Feb. 18, 2009
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