How many stocks to buy
Let's say you have $100,000 of allocated capital that you want to buy in this recession.
Remember I said if the index drops 40%, you’ll use half of it to buy the first batch of stock.
With $50,000 you can start buying some stock like maybe, Amazon, Tesla, Google, Apple, whatever you want. Till the $50,000 is used up.
If the index drops to 50% mark, you can fire off the remaining $50,000 in buying the remaining stocks that you want.
Maybe the similar stocks that you have bought previously, but now at a better price or it might be some other new stocks that you know you didn't manage to buy earlier.
Again, it's all up to you.
My suggestion is to try to make things easier if you have a $100,000 of capital, and let’s say you want to buy 10 stock, then simply put $10,000 in each stock.
You can get fancy, overweight certain sectors and buy more stocks within that sector or buy more heavily towards that stock.
But that’s where the idiosyncratic risk comes, where you never know what the management of the company's doing behind the scenes. You don't have such information.
My suggestion is just kind of like spread out your bets, you won’t know what happens.
When to sell the stocks
I am not an investor at heart. I'm a trader at heart, I'm not going to devour research papers, fundamental news of the company to see when it’s a good time to buy.
Here are some guidelines on when to sell:
Sell 50% when it reaches near the previous highs
Let’s say Amazon before the crisis is trading at $1,000 and now prices drop to a low of $500 or $400.
When you buy it at that price it rallies near the previous high of about $1000, you can sell half of it and you keep the remaining half.
Sell the remaining 50% when the stock closes below the 200-week moving average
Because you have no idea how far this could go.
Maybe the economy is going to a long-term bull market. All stocks are being lifted along the way. You're now trailing your stop loss to ride the trend as long as possible.
What you can do is to sell the remaining 50% when a stock closes below the 200-week moving average.
This way you are giving a buffer to ride further to the upside.
But whatever the case is half of it is in the bank, you’ve already booked that profit. Technically it’s risk-free to you.
Again, I'm not a fundamental person, I'm not going to study a research paper nor read the quarterly earnings. I'm just going to follow a simple technical analysis and ride the stock till the weekly candles close below the 200-week moving average.
Here are some things to take note of:
1. Don’t invest with money you can’t afford to lose
I have no idea whether this is going to be a recession, whether you know you will be buying stocks over the next few weeks or the next few months.
The most important thing here is that you don't invest with money you can afford to lose.
If you have bills to pay, you have a mortgage payment, you have to put food on the table, don't borrow money to invest. Don't borrow money to trade.
Just because I share with you how I'm going to time the market doesn't mean that the market will bottom-out at 50%.
It might go in further to 60-80%, I have no idea.
If that's the case, if you're investing on margin, you’re going to get a margin call and sell all these quality companies at a time that you don't want to be selling because you're dealing or you're investing with money you can’t afford to lose.
So don’t do that.
2. Don’t sell too quickly
I know it can be tempting because in bear markets the rally is very quick and many investors buy at a really good price and the price goes up at 20%, they sell everything. They say, “Oh, wow, look at the amount of paper profits that I have, I'm so tempted to sell.”
And when they sell at 20% guess what? The stock goes up another 200%.
Don't let that happen to you, don't sell too quickly.
The guidelines that I've shared with you earlier, are meant to allow you to hold those winning stocks for as long as possible.
If you sell too quickly, then why go through all the emotional trauma just to earn 10-20%. It doesn't make sense.
3. You don't have to nail the bottom
You don’t have to nail the exact bottom to make money. Many investors are always trying to pick the exact bottom to make money.
But as I've shared with you earlier, even if you don't enter at the absolute bottom, you can enter at 10-20% around the bottom.
When a stocks rebound, the returns are still highly favourable. Don’t focus on nailing the exact bottom that you miss the entire move. Don't focus on the trees that you miss the entire forest.