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Strategies & Market Trends : Rande Is . . . HOME -- Ignore unavailable to you. Want to Upgrade?

To: Rande Is who wrote (40223)	11/4/2000 8:02:51 PM
From: Rande Is	Read Replies (4) \| Respond to of 57584

. . . . . . . . . .When One Loss Leads To Another . . . . . . Not sure if I got this important concept across or not. . .it was met with considerable resistance during the Fear Period of mid-October. And some even quickly dismissed it as nonsense. I believe in prudence. But. . . Prudence without common sense can be like risk without reward. The low point of the market can be the worst time or the best time to change trading strategies. For the vast majority of investors, it is probably the worst time. If you were playing aggressive high fliers like CIEN, NEWP, EXTR, PMCS, AMCC, EMLX, NTAP, GLW or HGSI. . .[or other even more risky small & micro caps]. . . . . and suffered a serious loss to your portfolio, you cannot expect to gain it back any time soon by rotating into slower moving stocks. The time it would take to return your loss would be unreasonable. Some may scoff at this, but please allow me to demonstrate my point before dismissing it. . . Let's say you lost 66% of your portfolio through over-trading the Summer Bear. In order to return to where you were before sustaining the loss, you would need to see a return of 200%. Remember the game we played a year or so ago, entitled "All Percentages Were Not Created Equal"? It demonstrated how percentages changed dramatically, depending on the direction they were moving. And they can be very confusing for even the brightest of investors. . .as we clearly saw by the demonstration. So if you were aggressive in your losses, you will [theoretically] need to be equally aggressive in your recovery. Now there are some of you who played REITs all summer and actually saw gains since March. For you, playing even slightly more aggressively during a bull run, could result in extraordinary gains. On the contrary, if your play was aggressive when you lost, then taking similar positions in similar stocks at the lows SHOULD lead to an equally aggressive recovery. . .should the market return near prior highs. . . Theoretically! But changing horses at the lows can be a deadly mistake. If you lost on winners. . .you cannot expect to win it back on losers. Ideally, our recovery rate should be similar to the rate of the loss sustained. But to do this, we must not change strategies at market lows. [NOTE: For some reason, this is a difficult concept for me to get across in a simple manner.] Let's look at another example. . . I held some Corning throughout the summer. . . and sustained a modest loss. Fortunately, I was not holding when it and other fibres were slammed in Oct. So at the lows, it was a no-brainer to grab up more Corning so that my recovery would correspond more closely to the recovery of the sort of stocks which brought me the loss. On the flip side, Lucent brought me some of the biggest losses ever. So it was common sense to pick up a good supply of beaten down techs while they were moving off their 52-week lows. [NOTE: I spread out the risk a bit more, to compensate for the changing times. . And I was able to buy MORE shares than I had when I sustained the losses. . . so if these beaten down techs were to FULLY recover, I would actually be ahead of where I was prior to taking the hit.] Get it? If I were to lose 50% on one aggressive stock, then at market lows, shift the same amount of money into a more "stable" issue, which grows at say 20% annually, I could expect to wait 5 years to see my initial capital returned to me. If I were to lose 20% on a blue chip, then, at market lows, shift the same amount of money into a more aggressive issue on the rebound, which grows at say 100% annually, I could expect to see a return of the initial capital lost on the blue chip in about 2 1/2 months. Of course this is all . . . . . . in a perfect world . . . theoretically speaking . . . generally speaking . . . hypothetically speaking . . .etc. etc. etc. There are no guarantees to any of the above postulates. They are meant strictly for educational use. But I hope they help some of you to not make one small mistake into another bigger one. Rande Is