You can see that both AMD and Starbuck’s LEAPs have been big losers. Now we want to prevent ourselves from getting hurt at by future AMDs and Starbucks. How can we do that?
The first thing to think about is should we have bought AMD and Starbucks in the first place? With the benefit of hindsight, I think we should not have bought AMD. AMD has always been volatile and frankly computer chips are not a hot business right now when I wrote this. Even Intel hasn't done that well lately or when I wrote this 15 years ago. Frankly I thought Starbucks was a good buy when bought. It was down and to me prospects for the future look good. BUT if we had held onto AMD and Starbucks and rolled over the LEAPs to longer-term LEAPs we would have made a lot of money – again be patient and in this for the long haul. So we have to acknowledge we will make mistakes in these high risk areas. But we can minimize them and hang in there till things get better. Basically we got to buy time for our LEAP to get better.
But since I am editing this several years later if we had the courage to help hang onto the Starbucks LEAPs we would've made a ton of money. Like a told you earlier; go to Yahoo Finance and do historical prices on Starbucks say from January 2008 to the present and see how much up-and-down action you got and the stock didn't gain or lose nearly as much as the LEAP did. That's why if you're only buying a few LEAPs, stick to the "blue chip" LEAPs like the ones I now featured my newsletter. Again we all know what level of risk we can handle and if you can handle a LEAP like Starbucks going up and down like it did you will make a great deal of money if you are patient. And the same thing happen with Crocs, a unique type of Shoe Company that went all the way down from say $22 to $1 and is and then went back up into the $30s. See the attached spreadsheet for Crocs in Chapter 25 of Adobe Acrobat free book to see just how powerful AIM is if you hang in there!
In reviewing how I handle AMD and Starbucks, I find I wasn't aggressive enough in waiting to buy when the price of the LEAP went down. I just wasn't aware that LEAPs could sink so far in a bear market. In the future when you own a LEAP, you must really analyze when to buy and how much to buy. In the future I will take a much stronger stands and will wait to buy initially in the down market. A good rule of thumb would be to wait until your LEAP drops 50% before making your first buy. So for example if you bought a LEAP that was $4 a share or $400 a contract then you wait until the LEAP drops to $2 a LEAP or $200 a contract and then you make your first buy. And also use an aggressive bear SAFE to make a minimum buy of around $1,000 worth of new LEAP shares or even less.
You'll see looking at AMD that it was originally bought at $3.45 a share. This was a low price at the time comparing the LEAPs high/low history. But as hindsight shows, we bought new shares too soon. The first buy was made at $2.70 and following the history of AMD, you will see many other buys were made too soon. Since AMD was a risky LEAP, I should've waited until it dropped the 50% before making the first buy or set up an automated sell order at say 50% of the initial price. You can see that by not doing that we set ourselves up for a big loss that has very little chance of ever being recovered in the short term but a good chance to be recovered over the long-term.
Based on my experiences with AMB and Starbucks, I decided that you should limit yourself to "blue chip" LEAPs initially or really understand how volatile a non-blue-chip could be before you purchase it as an initial LEAP in your portfolio and be able to handle the emotional and financial risks. Even if you buy a conservative LEAP, that doesn't mean you will eliminate the risk entirely. The nature of the beast is that a LEAP will always be a lot more volatile than the stock it derives its value from. Even on very conservative stocks, LEAPs can fall sharply. Take a look at Citigroup: again you will find this spreadsheet in your Adobe Acrobat version.
As you can see Citigroup has fallen quite sharply but not as bad as either Starbucks or AMD. I have hope for Citigroup (boy was that hope misplaced, several years after writing this Citigroup has basically become a penny stock and shows no signs of ever recovering even close to what it originally was). I always think they will rise but that is not always true.
