Rookie investors will often say something like this: “PMIs are tanking, GDP growth is decelerating, labor market is loosening, sentiment is awful, stocks are down…so we should sell stocks of companies with high cyclicality, high operating leverage, and high financial leverage!”
That is Rookie Investor Mistake #1. Because more often than not, that is the precise moment when you should be thinking about holding onto existing positions and initiating new positions. That is often the moment when you want to be getting into the crappiest, most financially and operationally levered businesses. The difficulty arises because the rookie (and many veterans too) fears there’s no bottom to the decline, that this downturn is going to get much worse, that stocks could go down another 50%. Even when historical perspective would suggest that things would start getting better over the next while (let’s say 1-2 years) instead of devolving into the next Great Depression.
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