There will be more 1,000 point down days.
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When the stock market is tanking, you don’t have time to do any stock research. That’s why one scenario I discuss with all my managers is what they would do if the Dow dropped 1,000 points in one day. On Monday, our preparation paid off. We made some great buys this week. If you share the view that we are likely to see more 1,000 point down days, here’s what you can do to prepare for the next one.
First, let me say that I am not advocating timing the market. I’ve tracked thousands of managers for over 18 years, and no one has been able to anticipate a downturn with enough confidence to get out of the market before it tanks.
However, having said that, I’ve never understood why so many people think the right thing to do after the market tanks is to “stay the course.” I tell my managers that anyone who thinks the best stocks to own after a 1,000 drop are exactly the same ones as before the drop is asleep at the wheel and should not be managing other people’s money.
When the market drops 1,000 points in a day, something scary happened. It would be a miracle if whatever happened affected all stocks equally. In this case, many of the stocks Tony Mitchell, my best tech manager, follows were down twice as much as the market on a percentage basis. To me, this meant he either had to get ready to sell or buy more. Standing pat was not an option.
The key to deciding whether to buy or sell was this question — Where do you think the stock will be in 3 years? If the stock looks just as good 3 years out as it did before the market tanked, then the right answer is to take advantage of the firesale prices and buy. This discussion resulted in Tony buying and recommending Facebook, AMD, and Amazon. All of his trades were solidly profitable by the end of the week. Trades don’t always turn profitable this fast, but it’s nice when they do.
My Take: The best way to prepare for the next 1,000 point down day is to do the research now to find stocks you think will deliver solid returns in the next 3 years. Then, when the market hits the next air pocket ask yourself whether whatever is scaring the market changes your view of where the stock will be in 3 years.
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