BlastInvest
Blast Investor Real-time Plus
by Henry Lu
Ugly Sell Off, Margin Money Management
10/15/2005
BIRTP Performance
Market sold off sharply in the past week, so did Blast Investor
Real-time Plus model portfolio. Nasdaq index is down -5.08% year to
date. The S&P 500 index is down -2.09% year to date. The
Blast Investor Real-time Plus (BIRTP) model portfolio continues to beat
the index handsomely, with year-to-date gain of 48.34%. Since
inception, BIRTP model portfolio is up 136.64%, significantly
outperforming the S&P500's 6.5% return.
Anxiety in Blog Private Club
One of side effect of this sell off is anxiety and nerves I can observe
in our Blog Private Club. Headlines such as "oh my god,
what's wrong" [ hidden link ] certainly would put BIRTP
blog readers on edge.
While BIRTP past newsletter publications mostly focused on stock picks,
now it is time to sit back and review issues which are much more
important than pure stock picks.
Pitfall that Hinders Success
The process of successful stock investment is far more
complicated than simply picking stock winners. It was quite common that
an average individual investor would have picked couple of stocks that
rose 50% or even 100% in relatively short time frame. This was
particularly true in the bubble time of late1990's. However, if we look
around our friends or around our neighbors, we really can not find that
much of successful stock market millionaires. Why is that?
By my observation, one of pitfalls that has hindered success of
individual investors is margin money management.
Margin Management - Winners or Losers?
If you have not read my free article titled Leverage -
Margin Debt, Please read it. Pay close attention to the 2
hypothetical cases in the article. In both cases, the investor picked
same stock and held the stock for the same time frame. However, one
result was success of 20% return, another case was wipe-out.
This is just too important issue so that I have to emphasize again and
again. Don't assume successful stock market investment is all about
stock picking. Think about it, 2 stock investors who invested into same
stock and held it during same time frame, one was a winner who become
richer and richer every year, another was a loser who lost everything
in stock market.
Making big money in stock market is not all about stock picks, it is
also about sound
money management. If one followed Warren Buffett's USG pick from 2001
exactly at his entry price around $14, he/she might have lost her/his
shirt when USG dropped below $10 later on if she/he put USG on 100%
margin at $14 a share. Was there
anything wrong with Buffett's pick of USG in 2001? Certainly not, who
can argue
with 40% annualized return on USG investment that Buffett had enjoyed
over past 4 years?
This over-margin urge is purely due to greed in investors' psychology.
Investors tend to want
their money to work harder and harder to maximize the big return with
higher and higher leverage. They are unaware of the hidden trap of
money management issues or they are incapable of avoiding the
traps.
Even though BlastInvest BIRTP service can not advice on personalized
investment issues, we want to help and this is the tip that I can
offer to any of you directly if you have this problem.
Beating the Dreaded Greedy Urge with Fear
In long term investment based value investing philosophy, we typically
do not want to sell a stock during a sharp sell off. We want to hold or
even buy on sharp sell off and we want to sell during big rally. This
is all nice in theory, but it is not very clear cut in real life stock
investment. This philosophy only works well when a portfolio is
reasonably diversified and with reasonably small margin leverage. If a
portfolio is full of margin at 100% level of equity, this philosophy is
no longer correct.
Let me make it clear. First of all, I am not afraid of any big sell
off. In fact, I view recent big ugly sell off as pretty normal market
correction. I do not believe that I can predict short term directions
of market, nor do I have interest in predicting them. Therefore, BIRTP
will just sit tight and buy and hold at this ugly period.
However, I believe the fear of the hypothetical wipe-out caused
by over-leveraging is real fear. I want you to be fearful and I want
you to be afraid so that you can use this fear to fight the greedy urge
to use more and more margin!
If you are already in this over-leveraging situation, start to act as
soon as possible, and be fearful. You do not have to sell all of
the margin positions at one time, you can sell some immediately and
sell another portion at later time at rebounce. But, do not do wishful
thinking and pretend that this is not an issue. The hypothetical
wipe-out situation can happen to any stock pick, including those same
stock picks in BIRTP portfolio.
If you are already having the similar margin level as BIRTP does, do
not rush into buying more cheap stocks at this sell off using more and
more margin. Yes, you may be lucky to catch the rebounce this time by
fully leveraging up your account. Next time, you may not be that lucky
and the wipe-out risk is real and there.
BlastInvest Margin Management Philosophy
BIRTP model portfolio operates like a hedge fund. BIRTP model portfolio
money management is pretty aggressive, seeking the maximum value and
super performance within the margin of safety of value investing
method. We are not shy about using margin leverage to deliver the
whopping investment return to our readers. Our model portfolio
operation is not bound by bureaucracy of
mutual fund world. Our current nearly 50% year to date performance is
evidence of our success.
However in general, we do not believe BIRTP's style of aggressive money
management is for everyone. If you like the aggressiveness of BIRTP
margin management, and you are passive investor following BIRTP, you
are fine because the BIRTP model portfolio already have my past decades
of stock experience in it. For those who are not comfortable with any
margin, newsletter offers flexibility so that you can use BIRTP picks,
but with no margin.
Final Thought on This Big Sell Off
Are we close to the end of this sell off? I do not know. Is this
question that important for BIRTP model portfolio? Not really.
Regardless of the end or not end of sell off, I am confident that in
the long run, BIRTP model portfolio would do fine in its performance.
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