The law of small numbers
I have written many times that the first key to making money in the markets is to not lose, or at least to keep your losses to a minimum when you make a poor decision. There are many ways to express this rather simple concept, but a couple that come to mind are “buy when you can, not when you have to” and “buy low/sell high”.
While I have not been the most bullish guy on Earth for a few years, there was a method to the madness; to be able to buy when others were losing much of their capital.
While investing seems complicated, the arithmetic is pretty easy. If you lose 50 percent in an investment, you must double your money to get back to break-even. Clearly, doubling one’s money in nearly any investment is not an easy proposition, but when prices fall far enough (like the recent experience with S&P 500 in the July 2007-November 2008 period – a 50 percent decline), it is those that have their capital mostly intact that can pounce at low levels to take advantage of what I like to call, “the law of small numbers.”
Consider this. Even after the recent 20 percent move up in the S&P 500, the market remains down nearly 40 percent year to date. To the investor that believed the “buy and hold” mantra of the conventional crowd, the move from 740 back up to 890 in the S&P 500 was nothing more than a move from being down 50% to being down 40% – hardly awe inspiring.
While I have made it very clear that my initial target in the S&P was 750, which we did buy aggressively in the 740-770 vicinity as I mentioned in a couple of alerts last week, yet we sold that position as of this past Friday.
Click here for Bennet’s full report.
* President of Atlantic Advisors Asset Management, Bennet Sedacca brings with him more than 26 years of securities industry experience. From 1981 to 1997 he worked for several major investment banks, specializing in high-grade fixed-income securities marketing, trading and portfolio management. While working for PaineWebber as a Senior Vice- president, Bennet was a member of the Chairman’s Council for four consecutive years. During his years with Salomon Smith Barney as a Vice-president, he established an institutional fixed income presence in Central Florida.
In 1997, Bennet formed Sedacca Capital Management focusing on portfolio management for high-net worth individuals and small to mid-sized institutions. He is also a contributor to the financial website, www.minyanville.com and is regularly quoted in Wall Street Journal Online, Barron’s and Bloomberg.
Bennet graduated from Rutgers University in 1982 with a degree in Economics and was a member of the International Honor Society of Economics.
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