I think reckless bottom fishing should be declared an extreme sport. Many investors, who jumped in too early, based on who knows what reasons, are seeing their portfolio values heading further south—again.

MarketWatch reports “Mutual fund flows back in the black.” Take a look at some highlights:

The mutual fund industry has had little to cheer about, but January’s flow numbers offer a bright spot. Investors put cash to work in all fund types — stock, bond and money-market — reflecting the first positive month for the industry since May.

In December, money-market funds saw net inflows of $127.4 billion, but bond and stock funds both suffered net outflows of $6.7 billion and $27.3 billion.

If I focus on the December data (stock funds), it shows that investors on balance got out of them even as the market was heading north again after the beating it took in November.

In January, everybody was back watching the CNBC cheerleaders and $11.7 billion flowed back into stock funds representing the bottom fishing efforts of the masses. With the continued sharp sell offs in February, more losses have been accumulated in only a few weeks.

Buy-and-hold and bottom fishing investors are being eaten alive as this bear market deepens. To be clear, I absolutely get no pleasure out of seeing so many investors doing the wrong things.

On one hand, I am delighted that trend tracking has helped thousands of people get out of the market in a timely manner; on the other hand, I am saddened that I was not able to spread the word more and help those tens of millions of people who sat on the deckchairs of the Titanic and watched without a clue as to what was about to happen.

Again, I am asking you, if you like my blog and weekly newsletter, to spread the word to as many people as you can; those investor who are helped because of your efforts will be forever thankful.

It’s common knowledge that a lot of hedge funds got clobbered last year along with the overall market.

Kiplinger took a look at some mutual funds that employed hedging techniques to see how they fared in last year’s environment. Here are some snippets from “Hedges That Didn’t Get Hosed:”

None of the funds, which promise to limit losses during severe bear markets, made money, but most did better than Standard & Poor’s 500-stock index, which surrendered 37%.

We like the Hussman fund because of its relatively low cost and its fairly long and impressive track record (from the fund’s July 2000 inception through January 9, it returned an annualized 8.9%, beating the S&P; 500 by 13 percentage points per year). Of the six top performers, Hussman is the closest to a traditional mutual fund. Manager John Hussman invests his long-only portfolio in growth stocks. But when conditions appear dire, he tries to cut risk with options and futures.
…
Because of their hedging strategies, all of these funds are likely to lag the stock market when the bull returns. Keep in mind, though, that they are not necessarily trying to beat the market. Most are simply trying to produce steady, positive returns that don’t swing too wildly. Those that do so successfully have the added advantage of producing returns that don’t move in lock step with the broad market.

It’s nice to hear that there actually were a few astute fund managers out in the market place who did not go down with the masses. If you are a buy and hold investor, you should not make the switch to one of these long/short funds, since their upside potential is limited due to the nature of hedging.

Regroup, by getting rid of your worst losers, and set a limit as to much more pain you are willing to endure on the downside. Then follow the direction of the major trends, whenever they become apparent, as I advocate in my weekly newsletter.

Above all, resist the temptation of bottom fishing. All of those who engaged in that extreme sport back in December have now further compounded their losses. You need to have patience to do the right thing. Overeager commitment to equities, caused by the desperate attempt to make up for past losses, will inevitably make the situation worse.

Once a trend is established, either up or down, it usually follows the basic law of physics that a body in motion tends to stay in motion. That was certainly the case over the past week as downward momentum accelerated and the November 08 lows were taken out with yesterday’s drubbing.

The widely watched 752 level on the S&P; 500 was violated, which means we’re back to square one in terms of looking for a new potential bottom formation. Those who engaged in the hazardous sport of bottom fishing late last year will now have to scramble for the exits to avoid further losses.

Many readers, who suggested last December that I modify the domestic trend tracking rules to allow for a faster re-entry, are hopefully getting the picture that being overeager does not always pay off—at least not in this economic environment.

Personally, I am excited about these new lows as they will bring us closer to the eventual real bottom wherever that may me. Additionally, it allows more time for our trend line to descend even further, which will present us with the opportunity to deploy our assets again at much lower prices.

The flip side is that those buy and holders still hanging on for dear life will be hurt even more as the bear market deepens and inflicts further portfolio pain. With the S&P; 500 having lost 38% in 2008, and almost 18% year-to-date, the picture for those having stayed in fully invested positions is now showing that they have reached danger territory.

Last Sunday, I talked about the impossibility of being able to please all the people all of the time with my blogging efforts. I received a lot of commentary and emails, some of which you can review here.

Feedback is a valuable component of any business or any writer whether he gets paid for his efforts or makes a voluntary contribution. If you work for a company, the feedback you receive consists of an annual job review, along with raises, pay cuts or even termination.

A business receives feedback from its customers although many organizations seem to have forgotten that fact and don’t show too much interest in how their customers feel about them. I’m sure you have come across this annoying fact many times.

Then there are others who try to take feedback to the ultimate level. Some of the better known fast food chains insist that their top ivory tower executives spend at least one week a year behind the service counter, so that they never forget who generates the revenues.

And who can forget the wonderings of Lee Iacocca, who walked the assembly lines of Chrysler talking to the mechanics as to how things could be improved. There is no better way to solicit feedback than from the man who actually does the work.

Then there is the other extreme that comes to light when you have too much money and you are surrounded only by brown-nosing “yes-men” so that the only reality you are exposed to is phony compliments telling you how great you are. Entertainer Michael Jackson comes to mind.

The bottom line is that we’re all better off if we get some kind of feedback regarding our efforts. Usually that requires that you check your ego at the door first, before wading into the unknown. I for one appreciated your comments, which where all constructive and some contained valuable suggestions, however, most opinions were evenly divided, which supports my theme that you can’t please everybody.

Many readers liked my references to other articles, some didn’t. I will keep continuing on the same path, but try to condense and reduce wherever I can, which I already attempted this past week.

Everybody has an opinion on this subject, even former President Bush had to chime in as the following video clip shows.

http://www.youtube.com/get_player

Don’t kill the messenger; I thought this was very funny.

In regards to my recent post “7 Years Of Wealth Wiped Out,” reader VR had this comment:

It’s almost funny when I try to talk people out of buy-and-hold strategy and point them to your blog for market-timing.

Everyone is afraid of missing out on a big rally. They don’t really mind losing more than 50% of their investment to a bear.

The worst is that no one believes that the market could go further down from this level.

It’s hard for me to believe that anyone would be more concerned about missing out on a rally than protecting himself from downside losses. I suppose that old habits die hard because the buy and hold proponents have done a great job of brainwashing the public for a long time.

However, numerical facts, which most don’t bother to look at, show a different picture. You most certainly remember the last bear market of 2000, the brunt of which we avoided by selling on 10/13/2000. On that date, the S&P; 500 stood at 1,374. Two days ago, it closed at 779, which is a loss of about 43% over some 8-1/2 years.

Since most investors and professionals alike are desperately trying to beat the S&P; 500 performance, and most fail to do so, many portfolios have done worse. Looking at it another way, year over year, this century has not been kind to the buy-and-hold investor as the following chart shows:

This means a portfolio with a starting value of $100,000 would now be worth $68,000. 8 years of investing via buying and holding and nothing but losses to show for.

If the markets don’t provide us with a significant rally over the next couple of years, many investors will become acquainted with our own version of the “lost decade.”

Since bear markets are a fact of life, and can strike at anytime, a smart investor needs to recognize that fact by using some sort of an exit strategy. This century has shown that selling at the right time is far more important than when and what you buy.

Not selling can have a devastating effect on your portfolio, as we’ve seen, while missing out on the initial stages of a bull market will merely reduce your potential profits.