Friday, May 06, 2005


After four tough months, can it be true that we are near net new high profits in our main stock portfolio? Wow!

During the past couple of weeks, when I kept writing "BUY THE BIG BULL BOOM BUBBLE" on most of my posts, we "doubled down" our main account. We bought all we could and used margin. We added money to the account but the net high is only in regard to the profits.

We feel comfortable purchasing on margin even though it makes our account volatile. A couple more good days could shoot our equity to an all time high! The winning stocks have included GLW, AMR, CAL, GT, GME and GOOG.

Margin is like a sharp knife, which can be a useful tool or a dangerous weapon. Margin has been feared by most folks since the great depression. In those days, investors put up $1,000 to buy $10,000 worth of stocks at very high valuations. The most aggressive investors saw a 10% percent decline in the market wipe out 100% of their equity.

Now-a-days, one can only margin 50%; doubling the volatility of an account. A 10% move in the portfolio value moves the equity by 20%. A major down-turn in the market of 25% would cost the maximum margin account 50% of its equity. The numbers are actually a little worse because the interest costs must also be paid. In other words, if you borrow $10,000 and lose it, you still must pay all $10,000 back with interest. If you borrow $10,000 and double it, you still must pay back the $10,000 with interest, eventually.

The bottom line is that margin is wonderful in good markets and horrible in bad. Stocks in the current market are relatively cheap. They are on average cheap relative to bonds and real estate. One can imagine scenarios where stocks, bonds and real estate suffer. If inflation were to turn high, bonds could tank--dragging stocks and real estate down.

It may be interesting to you that I am excited about breaking even for the year in the stock market. One must remember that performance is relative. Some of the other accounts that I help manage, have not done well the past four months. It has been a tough market and I suspect there are lots of folks feeling pain.

Perhaps, my optimism is boosted primarily by the real estate market. Several members of my family own resort rental properties. The values of these have increased substantially in the past couple of years. Being aggressive in one market is often easier to do if you are having success in another.

Although we use an eclectic approach, sticking to fundamental rules is the way to make money. Everyone should develop a style of investing that fits their needs and personality. However, every successful investor will follow basic rules. The following are some fundamental rules of success:

Keep your over-head low: Trade Infrequently; Use Discount Brokers; Avoid High Fees (including Mutual Fund Fees); Don't Buy Newsletters or Pay For Useless Advice

Buy Out of Favor Values: Buy Low Price to Sales; Buy Low Price to Book; Buy Low Price to Cash Flow; Avoid Hot Stocks; Avoid Falling Knifes; Avoid Bottom Fishing

Buy Relative Strength: Buy in Strong Sectors; Buy Stocks That Have Been Out-Performing; Don't Try to Out-guess the Market but Flow With the Market

Take Reasonable Risks: Diversify Your Holdings but Don't Be Afraid of Securities Hated by Analyst or News Commentators, Avoid Holding Too Much Cash or Short-Term Bonds, Balance Stocks With Real Estate, Reduce Exposure When The Markets and Economy Have Been Super Strong, Avoid Insurance Investment Products.

Study The History of Great Investors and Play Follow the Leader in Regard to Style: Don't Reinvent the Wheel, If You Can't Find a Historically Successful Investor Who Used Your Style, Change Styles.

Don't Let The Tax Tail Wag The Dog: Take Losses Short-term and Let Winners Ride but Never Hold a Stock to Avoid the Payment of Taxes.