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Strategies & Market Trends : A.I.M Users Group Bulletin Board -- Ignore unavailable to you. Want to Upgrade?

To: Jack Jagernauth who wrote (5480)	8/30/1998 8:32:00 AM
From: JZGalt	Respond to of 18928

I tried to send this yesterday, but had problems submitting to SI. Jack, Clearly mistakes were made. ;-) The best guess at the time was that the oil service sector had not yet bottomed, but was fairly close to a bottom. This is why I choose the 25% initial cash reserve as well as overriding the "buy every 2 weeks" suggestion in the book. Clearly with 20/20 hindsight, the basing supposition was wrong and the aggressive purchasing (sometimes twice in one day) as the stocks fell brought into focus the reason to buy slowly and sell slowly. Initially it appeared that the two week delay in the book was done because of the information lag and time considerations that most people would have had when the book was originally published. There was passing reference to stretching out the purchases to make sure you didn't expend your cash too soon into an economic contraction, but somehow I didn't think that was important at the time. <grin> The original 5 stocks in the AIM portfolio were those stocks which we felt had only minimal likelyhood of being directly impacted by the decline in oil prices and would be able to ride out the drop in the sector with relative immunity. FGII makes oil drilling rigs and has a huge backlog which is unlikely to be canceled. VRC makes fittings, valves, etc, and also has a huge backlog. EVI makes equipment as well as being in the drilling business. RIG is in the deep water where rates are even today relatively firm and has a large fraction of it's rig committed thru 1999. RON makes machinery that goes on rigs (turbines, compressors, etc). So in the majority of these stocks we were looking at would do well as long as someone was drilling for oil. It turns out that the economic backdrop on prices collapsed so fast and with so much uncertainty of where the eventual bottom in the industry might be, analysts and individuals have sold down the group in lockstep regardless as to the prospects of the individual companies. We were hoping that the companies with stronger outlooks would not be punished as much and be able to recover faster. So far that has not happened. I disagree with your premise that you should start an AIM account only if you believe the sector is going to turn up. If you follow that way of thinking you will soon raise cash and never have deployed the original reserve. I think you would be wise if you avoided making the initial purchases in industries which are clearly near the top of their historic valuation ranges, but I don't see a need to buy them only after they have started the upwards path. Once you complete several economic cycles, the differences in the initial purchase points should disappear according to the book although like this example you will suck air with the cash reserves gone and miss some of the performance on the rebound. I would think that the closer you could come to running out of money in the cash reserve at the bottom on the first cycle, the higher your eventual return would be. As an example, I am considering making BA one of the first AIM stocks that I might put in actual money. I have no idea where the bottom is on Boeing, but I know that at some point it will once again get it's act together and produce commercial aircraft at a profit. This is one sort of stock that I think does well for the "by the book" AIM. Not as exciting as buying those small tech stocks, but less chance they will hit a technological pothole and become roadkill also. The other point about sector diversification is a valid one. I didn't think that anyone should roll the dice and put the entire nestegg in the oil service industry even if it is a valued assuming a severe depression in the industry. The purpose of the AIM portfolio was to compare and contrast it with three other portfolio's of active management. The first was Mike's selections within the industry, the second was the sector index, and the third was the Fidelity oil service sector fund. Theory would have it if you have followed the AIM methodology, you would be able to make purchases without emotion and in the long run outperform the "actively" managed portfolio's on a risk adjusted basis. Personally I would never have started an AIM portfolio at the time the ODB AIM portfolio was created. I know that oil service sector does not move in abrupt and violent reversals of a trend. The trend from May thru July was down and was likely to remain down to flat. There was plenty of time to "jump in". I made the assumption that the AIM portfolio would be "ok" to start since it was assumed to be "near" a bottom and it would be difficult to compare it to other methodologies if I interjected a time lag between it and the other portfolios. If I had to make a guess as to the optimum time to start an AIM portfolio in this oil service area, it would be when oil prices stabilize. At that point in time, the stocks within the sector might still be being knocked around so you can deploy the cash reserve after the initial purchase, but you are much less likely to suffer the 50% drop the current portfolio has sustained. FWIW, the stocks in this group have been battered unreasonably as the market has fallen. That doesn't mean they will spring to life any time soon and I am not putting fresh money into this sector yet, but assuming that the world does not go into an economic depression, these stocks will recover and prosper. ---- Dave jump.to PS, even though the oil service group is down a whopping 40-50% in the past 8 weeks, subscriptions to the Newsletter continue to rise. Now into the mid 400's after starting from zero on July 1st. Not too bad for a few postings on SI and Yahoo. Industry types are also dropping by the website. Saw a login from Aramco the other day. ;-) For a free subscription to the Offshore Drilling Bits newsletter, send blank email to offshore-subscribe@makelist.com