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Non-Tech : The Critical Investing Workshop -- Ignore unavailable to you. Want to Upgrade?

To: bonnuss_in_austin who wrote (34694)	3/15/2001 10:16:55 AM
From: jambo-bwana	Read Replies (1) \| Respond to of 35685

Hi Bonnie, I have been away for the past several days - anyway, a belated "welcome back"! With regard to the questions that you asked me, I would like to refrain from giving you any specific advice regarding what to do with your funds. First, I am not sure that I am entirely qualified to do so and second even if I were, I would need to know a whole lot more about you before I ventured to do so. But I will answer a question that you asked. I am interested in what you are doing in this market Nothing, for the most part - other than a couple of trades when I am bored. I do have someone evaluating for me two strategies which I intend to implement shortly. The first involves investing in convertible bonds and the second is a fairly complex options strategy - at least complex, unless one really understands options. Convertible bonds offer the potential for upside if the stock takes off but limited downside if the stock declines in value because of its income producing aspect. If we have a continued decline in rates, the bonds should benefit - and if the market makes a recovery then it would be the best of all worlds until rates start to inch up again. The options strategy would only be suitable for someone who is qualified to write naked options and has substantial cash resources to fund the consequences if it becomes necessary. I will also be looking to establish short positions once we rally to a level of resistance. I shall short to a limited extent select stocks that are the weakest during the next rally as a hedge against the next decline while retaining the positions that I am long. To the extent that the market continues to rally, the hope and belief is that the stocks that I am long will out-perform those that I go short. All of the above is predicated on the assumption that the market has not made a bottom but that the downside is not substantial; needless to say, that assumption may well be wrong. I will say that I am not in the camp that sees the doomsday scenarios that are being posted by some on various threads. I doubt that we will see the Composite get to 1500 let alone the doomsday predictions that I have seen posted elsewhere. It really helps at times like this that one makes a basic assessment of the health of the US economy and if one views that the economy is not in free-fall, it seems reasonable to assume that stocks will at some point cease to decline. The reason for the carnage that we have seen in stock prices has less to do with the economy per se and more to do with the fact that we are seeing gross excesses being corrected. I was in the markets in 73-74, albeit to a lesser degree and the analogy with today's market is not valid, IMO. Yes, the Composite has declined by about the same percentage as in 73-74 but the difference is that in 73-74 after a decline of 60% the multiples were a lot less than they are even with the declines that we have seen. But the Composite then was made up of a whole different set of companies - it was before the tech revolution. For those who were not in the markets at that time, the Nasdaq was where companies that did not qualify to be part of the NYSE, found their home - and graduated from the Nasdaq to the NYSE. This is wholly different than today when we have some of the more prestigious companies who have elected to remain part of the Nasdaq. So the issue of today's multiples compared with 73-74 is comparing apples with oranges. Also, the macro-economic factors that existed then versus now are a whole different ball-game. In essence. what I am trying to say is that unless the macro-economic factors change for the worse, I suspect that the potential for downside is limited. Also, if one is a trader there is every chance that we could see a strong rally that would take us to the 3000 level on the Composite - a 50% move - before we head down again. What has helped me more than anything else through this decline has been risk management. I have a diversified portfolio that includes bonds, stocks (tech and non-tech), mutual funds and substantial cash reserves. As you consider what to do with your funds, the most important thing apart from selecting the best companies to own stocks, is whether you will have the financial, mental and emotional capacity to withstand the vagaries of what the market will do before it finally bottoms. I hope that this is of some help to you.