re: still don't have the methodology in hand
Perhaps that's because I don't, either. <g>
Specific examples are the most useful way to explore this. So, for AMAT:
I decided, using FA, that I'd pay 35$/share. I got that by: $3.50 peak earnings times PE of 20 = 70$ peak price; chop that in half, and that's the max I'll pay, for shares I may (just may) hold till the next cycle peak (2004??, doesn't really matter).
So, when the stock got to 35 in September, I started buying (equal $ lots), and bought every 2.5 points decline, from there on down. Automatically, rigidly, without regard to the news or prevailing sentiment. Was doing the same thing then, with NTAP and EMC and QCOM and TXN and the like. Kept doing it until my max margin comfort level was reached. Notice, this method depends on being approximately right, using FA, about where the bottom is; if I had started buying AMAT at 85, or NTAP at 120, or the like, I would have had a margin call eventually. As it was, I guessed right (enough) on all those, that I bought right down to the bottom, (except for TXN).
In late September 2001, it felt like in October 1998. I could do a detailed "compare and contrast" essay on those two dates, using lots of numbers, but that's not how I decided that this was a capitulation bottom (and therefore, that I was willing to use margin, for the first time that year). The smell of fear was in the air; on the Gorilla thread, they were seriously discussing valuation, and non-stock asset diversification, for the first time ever. People were obsessing about risks they had never thought about before. Everyone was doing Jay's apocalyptic style, even people who usually don't. The best quantification I can find for this "feel" of capitulation, is a net flow of cash out of stock mutual funds. As a general rule, I think it is only safe to buy on margin, during times when there are net redemptions from stock mutual funds. But you get paid handomely, for having the courage to buy on margin at those times. And, when "investors" are throwing 40, 50, 60 billion $/month into stock mutual funds, that's a good time to be selling the rallies, and raising cash. Go contrarian at the extremes.
On the rebound off the October lows, I sold some AMAT at 35, and 40, (and the other stocks likewise) to get off margin, and "await further developments" with cash in hand and realized cap gains. Am still holding the lowest-cost lots I bought, at 27.5 and 30 for AMAT. I may hold those remaining shares till the next cycle peak; or I may sell them, if the stock gets too far ahead of itself, or the macro situation looks weaker than anticipated. Or if the stock seems to be finding resistance (at 50?). Lots of judgement calls, and flat-out guessing.
There were 3 rallies in 2001, after the January, April, and September dips. I totally distrusted the first 2 rallies, and got completely out of AMAT, TXN, QCOM, etc. on those rallies. The September dip felt like a longer-term bottom, and I'm more willing to Believe this rally (relatively speaking). That is, I'm holding more long positions, for longer, on this latest rally, and considering trying for LT Cap Gains territory.
Disclosure: I Believed the mid-2000 rally too long, held long positions too long, and took large losses. Which I have now regained, but it's been a long struggle. This range-trading is hard work, and I've guessed wrong on occasion. In January 2000, I went to 70% cash, and I would have done almost as well (with less risk), by doing nothing since then. I am not advocating my method as a model to emulate. I simply post what I do, and try to explain my reasoning, to get criticism and hopefully improve my methods (which are a work in progress). |
