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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: upanddown who wrote (31280)	8/20/1998 11:34:00 AM
From: Knighty Tin	Respond to of 132070

John, Not only is the thirds concept complicated, but it is fuzzy and each issue is a separate case. But let me give you some "rules" that I often break, but follow more often than not. First, I start out with a valuation system. I calculate what the value of a stock should be according to the inputs I make. Unlike most who do this sort of quantitative analysis, my inputs usually have little to do with consensus estimates. I think analysts (for eps estimates) and economists (for interest rate estimates and index pe ratios) tend to extrapolate the current condition of a company or the market ad infinitum instead of looking at what could or will change the earnings power or the risk free rate or the pe ratio. Once I have a fair value, I tend to buy a first third of puts when the stock is 1/3 overpriced and a first third of calls or long stock when it is 1/3 underpriced. However, I am also looking for some trigger that might change the market pricing. Without the potential for a trigger, misvaluation can go on for a long time. For example, I calculate that Cisco is 100% overvalued, which would make me eager to buy a third of puts. But the market loves it, and right at this moment, I don't see a flash point that will change that love and lust to mild disgust. <G> There may be one building. I look to Lucent and Tellabs as potential competition, but, so far, Cisco is not hurting from their efforts. With that valuation, I try to guess how high a stock can go off the bell curve. This is where I have screwed up many times in the past with Coca Cola. It has gone higher in pe ratio (50 times) than I thought possible for a stock growing in the mid-teens. But, in general, I get the max close. So, I set up my second third halfway between the first and the max, and my last at the max. Sales work just the opposite, with the first sale of a third at what I think is fair value and the last third at one third above or below fair value. However, please note that this is the strategic total position I am talking about. I will roll options often between these points, especially when I have large profits or expiration nears. For example, I may think the fair value of Ciena is $52, but when it hit $65, I had a huge profit in my $80 stirke price puts and I sold them and bought lower strike price puts further out in time. That is simply juking within the plan, not a change of plan. All of this is susceptible to the fundamentals being other than what I predicted. For example, though my puts have done very well in the past month or so, they didn't do as well as they should because interest rates did better than I expected. So, I have to tweak the model a bit. And a couple of years ago I gave up on Dell puts because their earnings growth, at least as reported, was better than I had predicted. I know this sounds like gibberish, but it is what I really do. <G> MB