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Xpost from HG: Philosophy

Waiting for the bottom is precisely what I believe most of the "smart" money out there is now attempting to do. (Remember, 7 months ago, these same folks were bidding everything higher under the illusion that nothing would go wrong with our economy.)

When everyone's pulling money out of the market in anticipation of the bottom, that's when we see incredible deals on a wide variety of strong businesses. We've got that now.
- Sj from the "For the Disillusioned" thread

Agreed. But, with so many good companies on sale and, presumably, only so much cash available to invest, how do folks implement a buying strategy during a bear market?

* Same as in any other market environment or different?

* Sprinkle whatever cash you have among several of your favorite companies? Or, somehow decide on only a handful of the "best" and go with those? How do you decide which are the "best" when so many are on sale: prospects, valuation, both, other criteria?

* Favor adding to existing positions or initiating new positions? If you want to add to a current position, but it doesn't currently offer as good a value as other companies (i.e., it hasn't fallen as far or as fast, for example, as others on your buy list), do you earmark cash for it and wait, or do you put the cash on some other company because it has a better valuation now?

* Assuming that you don't want to use all of your available cash too quickly, how do you pace your buying? Buy at usual (monthly?) rate or buy at accelerated (2x, 3x, 5x?) rate until run out of cash? Buy standard order size, even though you may run out of cash well before the market recovers? Or, buy smaller positions than usual, so that you have the cash to buy continuously if/as the market falls?

* Given that prices can fall continuously and relatively rapidly in a bear market, if you buy a stock and it continues downward, when do you add to the position (assuming that you have the cash)? Down 10% from entry? Down 20%? Down 30%? Never, because the cash was allocated to another stock?

This post is intended to start a discussion of various methods and approachs, so I'll attempt to answer my own questions in the hope that others will lend their perspectives as well.

By way of background, I rolled over a 401(k) about two years ago, and between it and my cash account I'm about 25% in cash, waiting for exactly this opportunity. Generally, I'm approaching the market in the same way that I have been approaching it for a while. I decide what I want to buy and the price that I want to pay, and then I set a GTC limit order. I'm sticking with my usual order sizes rather than reducing them, but I'm wondering whether this will lead me to run out of cash sooner than I'd like. Based on the decisions that I've made to date, about half the orders will add to existing positions and half will start new positions.

I've already made several buys in the last couple of weeks (to the tune of about 5%). But, even though there are many stocks that I'm definitely tempted to buy at today's prices, I'm forcing myself to set fairly agressive limit prices, so that the orders are likely to trigger over time. My hope is that this will effectively space out my buying, so that I don't use all my cash in the next week (for example), and I'm able to take advantage of better prices.

There are a couple of things that I'm struggling with in deciding what and when to buy and whether the above approach is a good one.

First, for the stocks that will be new to my portfolio, I'm likely to end up with initial positions only, as I'll run out of cash before being able to add to them, even if the market offers better prices.

Second, for stocks that are already in the portfolio, I'm adding to the ones that have been hit the hardest soonest and for essentially no reason (e.g., MPEL), but, if the market continues downward, I'm probably going to run out of cash before others in the portfolio hit prices that I'd find attractive (e.g., BIDU).

Third, I'm obviously going with the "sprinkle" approach, because I'm not sure how to go about figuring out which are the "best". And, based on the way that I'm buying (GTC orders), I'm essentially letting the market decide which stocks end up in the portfolio (i.e., the ones that fall the fastest will be bought first, and, if they keep falling, I'll be tempted to add to them before orders for the other stocks trigger).

Lastly, if I do manage to spread out my cash in such a way that I'll buy more than one position for a new holding, and prices keep dropping, I'm not sure how far apart to spread the buys. A 20-25% drop from an entry price on no material news usually prompts me to make a second purchase, but in this market environment, I'm wondering whether this is still a good rule of thumb.

I know that there are no hard and fast answers to any of the questions that I've listed above. But, given that many on the boards have not bought through a bear market (myself included), I thought it might be interesting to hear how more experienced folks approach buying in such a market and how others (experienced and inexperienced alike) are actually approaching this market.

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