Rule #1 Finance Blog

With Investor Phil Town

Rule #1 Question of the Week: How I Got Out in 2000

Phil_town_106 Q:  With the DOW at a record high and going up it comes to my mind that after Christmas, we will see a huge bear run. You mentioned in your book the tools told you to get out of market back in 2000. Was it all the stocks moving down at once which I think will be too late or Investools market forecast tool?

A: 
How did I know how to get the heck out in 2000 — was it a general decline or just my stocks signaled me with the tools? 

Simple answer: I was as clueless as the next guy that the market had topped at the beginning of 2000… but I did two things right:

  1. I was only buying businesses that seemed like they were on sale.
  2. I was selling them on the "get out" signals. 

Up to that point, I felt like these tools were pretty much an
experiment that required a lot more trading than I'd done before.  I
started using Investools in 1998, but everything was going up so I
didn't know if this stuff really worked.  Then the market crashed, I
was out, and I didn't lose money. 

This is a huge sea change in investing.  Absolutely revolutionary.
Prior to these tools, a Rule #1 investor like me had to get in and stay
in through thick and thin.  I had to act the same as a Warren
Buffett… which is crazy since I was unable to take advantage of being
a small investor with great liquidity. 

Mr. Buffett is one of the big guys, and as such cannot in his words, "nimbly dance in and out" of stocks.  But I can.  The big difference is
that without tools, you are guessing about when to get in and out — and
being human, you tend to hold when in hindsight you should have sold and
you sold when in hindsight you should have held.  And it makes you
crazy.  A few lessons like that in the old days and you just don't do
it.  Enter computers and online data and great tools. 

Oh, and also enter the huge change that 401K plans made to the market —
they put 85% of the money in the market in the hands of a few fund
managers who now control the market but cannot move quickly in it
precisely because they do control it

And let's not forget one more
critical piece — low commissions. 

Those three things create a
revolution.  The little guy now can get in and out with ease while the
big guy gets whip-sawed by market dives that he creates just from trying
to get out. 

Right now for a small investor it's the best of all worlds… if you have a
bit of knowledge and the right tools. 

In 2000, I got out on reds.  Like
always.  No big deal.  But then the stock price of some of the
businesses I liked never came back.  Microsoft, for example, just kept
dropping and eventually lost 50% of its value to this day.  And all the
while, we just sat in cash and waited. 

Well, actually it was kind of
alarming.  But that time period taught me patience.  Just wait it out.
And what do you do in the meantime?

You go play now says Phil Town.