"The first rule of investing is don't lose money. The second rule is don't forget Rule No. 1."
- Warren Buffett
"My priority in a down market is to avoid losing money. Sitting on cash is the simplest and most sure-fire way of doing that. This means I may miss a big up day now and then, but that's OK since I also miss many big down days."
- Ken Deen
Preserving your investment is a high priority at Deen Capital. So how do we do this?
On a stock-by-stock basis, we set a mental stop-loss price on every stock we buy.
If the stock closes, or appears poised to close, below that
price, with rare exceptions, we will sell.
In this way, we keep most of our losses small -- in the single digits.
During bear market conditions, however, this is not enough.
The stocks we favor tend to outperform the market substantially under
normal market conditions, but they also underperform severely during
bear market conditions.
This fact makes it imperative that we employ an additional layer of risk management --
some form of risk control in a down market.
Our preferred method of market risk management is to maintain a high level of cash during
bear markets and corrections. (And when we say a "high level of cash", we mean 50% to 100%.
This contrasts sharply with most other money managers, who rarely raise cash beyond 10%.)
The challenge with this method of risk management, of course, is
to identify the proper time to move to cash and the proper time
to move back into stocks.
In making this decision -- whether to be mostly in stocks or mostly in cash -- Mr. Deen relies heavily on a number of tools and technical indicators. The most important of these are:
In addition to these three primary indicators, Mr. Deen also looks at a number of other factors, including economic and geopolitical news, how the market is reacting to news, technical price/volume patterns, and interest rates.
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