Jeff's Latest Ideas on Adjusting for Bear Markets
I started managing stocks for one of my friends, I have learned a thing or two. First I learned that I didn't make this chapter as clear as possible. And I'm sorry for that. But the beauty is I can fix that right now and I will continue to make this book better and better with your help. Please send your questions or ideas for improving this or any chapter in my book. Let's make this the best book we can!
I want to explain to you how I arrived at the Variable SAFE amounts I used earlier and used for two of the stocks I now manage for my friend. I think the way I used different SAFE amounts earlier and was confusing the benefit show was hard to see when Caesar's using standard 10% SAFE finished at about $53,000 and the Variable SAFE Caesar's finished at about $28,000!
One investor wrote me with some very wise questions and he showed me I need to explain in more detail the Variable adjustments I made and show that anyone can make these same type adjustments easily when you see what the adjustments are doing. Please read below and look at the two current spreadsheets with real live stocks I am actively managing for a fellow investor: If you would like me to personally advise you monthly, please email me and I will explain what I can do for you. Email me at: jeffee@t-online.de
Hi, Jeff, thank you for your follow-up regarding Chapter 2A. I have spent some time reviewing the chapter and I must admit that there are several things that bother me about it:
Your safe value choice was optimal. The use of a "Split Safe" is not automatic. A lot of empiric guessing enters into the equation by using various split safes. Who is to say or its very use was correct? Perhaps it isn't.
Dave, you probably looked at the two stocks (see spreadsheets at end of Chapter)I sent you and have this question as well as reading Chap 2A. I probably need to revise Chap 2A so all readers know it is not as complicated as it appears. Of course we know it only applies to buys not sells - sells are always 10%.
On the two stocks I sent you - you see different SAFE amounts with quite a range of difference. So how did I arrive at the adjusted SAFE amounts? Pretty easy! After I subtract SHARE VALUE from PORTFOLIO CONTROL and see a large difference (much higher than 10% - what I do is divide the 10% share value (what we normally subtract) by the MARKET ORDER BUY AMOUNT and then make my SAFE AMOUNT equal to that % so the investor does not buy any that month or buys only about the $$$ amount he would be buying if it were a normal 10% regular SAFE month. I always want to have a + cash amount so if the stock really goes down, the investor still has some cash left to buy the cheapest possible stocks.
I will give two examples from the stocks I am managing and I will send you the spread sheets:
Look at SUN MICRO: Originally started with $872 cash (1/3 of PORTFOLIO VALUE)
Made 3 buys: Sep, Oct, Nov 02 - rock bottom of the Bear Era, but look at the starting PORTFOLIO CONTROL. My investor had managed his own stocks earlier so when I got them, they had really dropped - so I only wanted to buy about the 10% - so in Sep 02 PORTFOLIO CONTROL was 3,150 - SHARE VALUE $1,685 = BUY $1,465 - 10% SAFE (168) = MARKET ORDER BUY - $1,297!
So what did instead was divide the BUY AMOUNT ($1,465) by 168 = 87% SAFE not 10% SAFE. So what I did was reduce the 87% SAFE amount down to 80% and buy a little over $100 worth of stock that month.
Next month Oct 02 - SUN drops to $2.85 - so glad I saved cash the month before.
Again I divide BUY ADVICE 1948 by 10% SAFE amount 126 = 155% SAFE. I still want to make a buy so by lowering the SAFE amount to 140%, I still get to buy 65 shares at $2.85 AND STILL KEEP CASH IN THE ACCOUNT. What I am trying to do is be very conservative with a highly risky stock until it stabilizes. The easy way to see if a stock is highly risky is to look at its BETA. A stock with a BETA of two swings high or low 2X more than BETA stock of one - so any stock with a BETA over 1 has higher highs and lower lows than a BETA 1.0 stock.
In SUMMARY - what I am trying to do is roughly only buy the 10% or make SAFE high enough so there are no buys. Look at Jul 03 - SUN rises to $4.72; rising stock now - so I certainly don't want to buy shares at $4.13 when it was $2.74 about six months. I make my SAFE high enough so there is NO buy that month. So PORTFOLIO CONTROL is 3,359 - SHARE VALUE 2,263 = 1096 BUY ADVICE. I want a SAFE AMOUNT HIGHER than BUY ADVICE of 1096 so by dividing the 1096 amount by the 10% SAFE AMOUNT of 226 I quickly find that if I use 50% (5X the normal amount) I do not have a buy. I have to be patient and wait for this stock to go higher because the SHARE VALUE is still very low but is climbing - so I don't want to buy when a stock is rising after a big fall. The investor patiently waits.
Now there are other variables that can be adjusted. But look in Chapter 7 at Allis Chalmers done many years ago in the '80s before my Bear adjustment. Look how much extra cash you had to pump in the make every buy required - that's OK - If you have deep pockets but I feel most investors don't. I wanted a way to conserve the cash and adjusting the SAFE amount does just that.
Dave's additional comment: The beauty of AIM is lost and AIM now becomes more a matter of subjective interpretation of the market. This may be counterproductive if your market interpretation actually goes against a developing trend--the human error factor.
Yes, a little of the beauty is lost but the cash saved and used later to buy even cheaper shares restores the lost original beauty and makes the stock more beautiful than ever. The true beauty of AIM used to MAX is to have a manipulation in the formula when you have a serious Bear Market. The beauty of driving a nice car is not lost because you have to stop at a red light. That red light lets you live to drive your car another day.
Also, almost all investors no matter how many times I tell them they must never let emotions overpower them in either a BULL or BEAR Market really start to panic when their stock runs out of gas. My friend who I managed for was to sell everything he had left last Aug 02 - in the year applying the Variable SAFE Amount, his portfolio is up 35% & most of that year was very Bearish.
One time while experimenting with the AIM formula I tried using 0% SAFE - making
BUY ADVICE & MARKET BUY the same amount - boy, do you need to pump in a lotta extra cash to make all the AIM buys doing that - I concluded that system would only work for Bill Gates, Mayor Bloomberg & a few others. So that never found its way into my book - far too risky for the average investor.
And that's who I write for - all I am doing is making AIM safer during Bear Markets. And I think that is a beauty of AIM.
So look at the spreadsheets for two currently managed stocks that were wounded but not killed by the Bear and I will explain why I made the Variable SAFE amounts and were the variable SAFE amounts came from - no, not my crystal ball - that' just for advice!!
I will now talk about the two current real stocks at the end of this chapter and I will explain the using a Variable SAFE is fairly easy and explain how I made my decisions for a couple of the buys and "do nothings"
The absolute bottom for the Bear Market was Oct, Nov, Dec 2002. First lets look at Sun. I inherited Sun Micro in Aug 02 after my friend had been managing it, he was a little discouraged to say the least about Sun's performance before Aug 02. So at $4.21 in Aug 02, PORTFOLIO CONTROL was 3150 and SHARE VALUE was 1743 so Sun roughly has to double to $7.60 before SHARE VALUE will equal PORTFOLIO CONTROL and you will be in the "do nothing" zone and will have to go up to roughly $10.00 a share before you will have a SELL MARKET ORDER.
So I wanted to be very conservative for my friend - this is his retirement money and we still had some cash to work (basically at this point since my friend had extra cash). We agreed to set up each stock as if just bought but keep the old PORTFOLIO CONTROL because that was 100% relevant to any buying, selling or doing nothing we needed to do. So for these 2 stocks and the others, I started with 2/3 stock and 1/3 CASH. So Sun Micro started with $1,743 SHARE VALUE and $872 CASH.
So when Sep 02 came along, I used a high enough SAFE amount 80% or 8X normal SAFE (10% SAFE 168 X 8 = 1,344) to make sure I only made a small buy because we were still in a down market. Save the extra cash for the next month.
Next month Oct 02, Sun is still going down (remember when it was in the 100s?) and drops sharply to $2.85. Again we want to conserve cash (again if you have lots of spare money, and can stand high risk, I do recommend you only use 10% SAFE regardless and when the stock turns around your profits will be much higher (see Caesar's example earlier in this chapter. But if you are Conservative, don't want to any or very much additional money into your stocks, follow my guidance here.)
So at $2.85, I want to buy some at this price but still want to be very conservative. I use 140% SAFE (14 X 10% SAFE of 126 = 1,764 AND buy $ 189 of Sun or 65 Shares. Same next month, want to buy some SUN but only about the 10% SAFE amount so I use 180% SAFE (18 X 10% SAFE of 139 = 1,807).
Now look at the remaining months: Sun has started back up like all of my friends stocks and many, many more on both the New York Stock Exchange and the NASDAC. But it hasn't go up enough to sell for a profit yet because of high PORTFOLIO CONTROL from the Bear days. So I want a high enough SAFE so we don't do anything until Sun truly recovers. And I don't want to use any of the remaining cash to buy more shares because it is going up, not down. I still want my cash in case Sun slips once or twice on its forthcoming recovery. So while you see different variable SA FE amounts from Dec 02 to Jul 03, all I was doing was dividing BUY ADVICE amount by 10% SAFE and get a variable SAFE high enough so we did nothing. For ex. Dec 02 - BUY ADVICE is 1238 so 1238 divided by = 58% SAFE. So all I did was round up to 60% SAFE and we "do nothing”. Other months are the same.
Now I explain Nortel quickly. Same rational as Sun, I want to protect cash and buy at the lowest points. I make SAFE high enough in Sep 02 so I do not have a buy because Nortel went from $.85 to $1.25. But I wasn't convinced the overall Bear Market was over so I wanted to be cautious with a risky stock. As I say elsewhere in this book, when a stock drops below $3 it is risky but many better stocks that are not "Pennystocks" can drop below $3 and will rebound. So I was very cautious with this stock - remember I have been charting stocks during the previous Bull Markets for many years and for the past 3 years or so, been charting them in a bad Bear Market. You will gain experience and become better and better the longer you do your monthly charts. And as I said above, I will be happy to get you started by helping you for a while - just email me at jeffee13@hotmail.com
So I used a variable SAFE of 170% (17X 10% SAFE of 168 = 2856) so higher than BUY ADVICE of 2943 = MARKET ORDER BUY ignore 87. Now glad skipped buy in Sep 02 because Nortel goes down sharply next two months and again I use variable SAFE amount but do want to make small buys and get more shares. Look at remaining months - Dec 02 - Jul 03 - Nortel has more than tripled from its low of $.63 - we even had a SELL of 228 shares in July 03 (at the regular 10% SAFE). Again all the SAFE when you see a number were higher than 10%. When you see the REMARKS column blank, I was using the regular 10% SAFE and MARKET ORDER BUY told us do nothing. Again, if you have any questions please email me at jeffee13@hotmail.com and anytime I see a problem, I will again modify this chapter.