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Stock market follow-through, and why Warren Buffett thinks you should buy stocks

17 October 2008

As some of you know (but many of you probably don’t), I split my time between sportswriting and writing about the stock market, for a newspaper called Investor’s Business Daily. For nearly a decade I’ve written the paper’s flagship stock market column, called “The Big Picture”. Much like my sportswriting, The Big Picture, and IBD in general, take a contrarian approach to the topic being covered–in this case stocks as opposed to baseball/sports.

In today’s edition of The Big Picture (which I’m linking to here–it’s password-protected, but you can get a free 10-day trial by going to investors.com if you’re interested…I don’t see a penny either way), I note that yesterday was what’s called a follow-through day for the stock market. Describing a follow-through in technical terms is a bit challenging in blog form–the column explains the concept. Basically here’s what it boils down to: Not every follow-through day launches a new bull market; in fact many don’t, including a follow-through that just happened Sept. 25. BUT, no bull market has ever started without a follow-through.

The stock market usually turns for the better when we least expect it, when the economy looks terrible, everyone’s scared of stocks, and hunkering down seems the most prudent course of action. After the crash of 1987, the market very quickly hit bottom and bolted higher. Same thing happened in late 2002, after a 2.5-year bear market that ranks as history’s worst. Also during WWII, after the three-year bear market started by the crash of 1929, etc. We can never tell with 100% exactly when the market will turn. A follow-through can often point the way–but as I said, sometimes it misses.

For what it’s worth, though, this morning I picked up a few shares of QQQQ, which is just a tracking stock for the Nasdaq. Nasdaq goes up, I make money; Nasdaq goes down, I lose money. I have strict rules about cutting losses. If a stock I buy goes down 7% to 8% from the point at which I bought it, I sell, no questions asked, no excuses. That way if I buy a stock and it tanks, no biggie, I just lose a small amount–80 bucks on a purchase of $1,000, for instance. And if the stock goes up, I can hold onto it as long as conditions remain decent.

Anyway, I’m some hoser who writes about the market for a living, whatever. But in today’s New York Times, Warren Buffett has a fascinating op-ed out on why the best time to invest is often when everyone thinks the world is going to hell. I encourage you to read the article, even if you’re not an investor, by clicking here (also password-protected, you can go to bugmenot.com, then click the link for the NY Times, to get a username and password).

Should be interesting to see how events unfold. I’ll update you on my investment in the coming days…and if the market keeps edging higher…weeks and months.

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