At the end of the last millennium I starkly remember tuning into a number of year-end investment shows and hearing a particular buy recommendation from a number of pundits/analysts. The buy recommendation was for MCI Worldcom. This stock was a sure thing for the year 2000…so it was told.
Within the year (2000), a downturn hit the telecom industry, which significantly damaged MCI Worldcom because they were pursuing a very aggressive growth strategy. On top of the industry downturn, the company was also denied its desired merger with Sprint by the U.S. Justice Department. What was such a sure hit for so many investors in the year 2000 became a disaster.
Around the same time (late 90’s/early 00’s) news stories were appearing that speculated about the coming lack of supply for jobs in the U.S. These stories didn’t talk about a specific job classification, but a general trend that was to awash on shore of the U.S. job market in the next 10-20 years. The supply glut would be caused by an exodus of baby-boomer from the job market.
Over 10 years later and we do not have a shortage of workers; we have a surplus of workers. Baby-boomers are not leaving the workforce in droves because our economic reality has been greatly altered. Again, this is another instance of what many experts thought of as a sure thing, but what actually came to be was quite different.
As an investor, you are going to want to capitalize on emerging trends. Emerging trends are akin to a title wave forming off the coast; you want to catch it at its starts to form so you can ride the wave to its peak. Unfortunately, the variability of trends and forecasted events is much greater than the study of tidal wave formation.
Though forecasting of trends is not certain, it does not mean that the endeavor should be abandoned. What investors need to realize is that the risk inherent in the companies, industries, sectors and economies we invest in is likely much greater than we actually know. Yes, we are able to identify a number of factors that can change the course of a company or economy, but a number of factors we may see as being constant might not be as certain as we’d like to believe.
We are not without a few helpful tools in the development of a strategy to mitigate our wrong-footed investment calculations . The first would be limit orders and trailing stop-loss orders. Both order types can prevent your investment from incurring a significant loss. Therefore, if the tide turns decidedly against you, you’ll have a pre-set strategy to cut your losses before they become larger than you are comfortable with.
Secondly, there are a number of financial tools (A number of ETFs exist) that enable you to profit from a downward-trend. These tools are great for investors that do not want to set up a margin account for establishing short positions. If you know what is available to you to profit from a bear market, you are not totally dependent upon a bull market.
The market is a lot like life, only a few things are certain; death and taxes. Everything else may or may not come to pass. Part of being a successful investor is to know how to profit from both sides of the coin.