Page 371 - THE MARKET WHISPERER

THE MARKET WHISPERER 36 7

distance between mind and heart is short, for most people it presents a
gap that cannot be bridged. Success requires you to undergo a mental shift
that merges thought and emotion into a single path. It is a tough mental
process which generally takes some years to internalize.

• Rule 1: Blood first needs to flow in the streets
When you are looking for a stock’s bottom, try to imagine how you would

feel if you bought it at its highest price before it plunged. If you think you
could handle the drop without fleeing, then it’s not the time to buy! If you
feel you could not withstand the pressure, that you would break and sell,
then that IS the time to buy. This is an important rule, but notice that it does
not apply to all stocks. You need to focus on stocks with good fundamentals,
where no one quite understands why they have dropped, rather than on
those which are trending down because of negative earnings reports. You
will be looking for stocks dropping as a result of overall market hysteria.

Usually, I do not buy stocks because of their fundamental value. That’s a
game best played by the funds. I am sufficiently experienced to know that
there is no link between book value and stock price; but sometimes, when
a stock is being traded shockingly below its real value, that’s the time to
buy.

Within the framework of this rule, you also need to check which sector
the stock belongs to: for example, during a severe financial crisis (2008
Sub-Prime Collapse, for example), if you would have considered buying a
bank stock traded at a dreamy 1:6 Price to Earnings ratio (PE) based on
the next year’s profits, I’m not sure you would have been making a good
trade. It is more reasonable to assume that over the next year, the bank
would not make even half of that PE ratio. By the same token, I would also
not recommend looking for bottoms in dotcom stocks during Internet
crisis years. Remember that the more pain caused by the drop in price, the
higher the chance for a successful bounce.

• Rule 2: Don’t listen to analysts’ recommendations
Pay no heed to technical analysts, financial analysts, financial sites, hocus-

pocus software that forecasts the future, fund managers, and especially
not to economists who claim they have identified the bottom. They are all
no more than background noise, and you need to keep your distance. This
is not an easy game to play. It is not about reading a newspaper article.
Fund managers who claim to be “bullish” on a stock are virtually declaring
that they have already invested in it. Remember the first rule: the greatest