An Ever-Liquid Account (Concept)

An Ever-Liquid Account

In its operation, an ever-liquid account is normally kept fully un-invested; i.e., in cash or equivalent only. "Equivalent" means any kind of really liquid short-term security or commercial paper.

Book values and market values are always kept identical.

Income is real income; i.e., interest, dividends, capital gains realized and realizable, less capital losses taken or unrealized in the account, which is always marked to market.




Cash and Equivalent (Beginning of period)

add Income:  
interest
dividends
capital gains realized
capital gains realizable

less losses:
capital losses taken
capital losses unrealized in the account


Cash and Equivalent (End of period)




How to keep the account truly ever-liquid?

Income and appreciation are obtained in the ever-liquid account by entering the stock market as a buyer when a situation and trend seem clearly enough established so that a paper profit is present immediately after making the purchase.

In order to keep the account truly ever-liquid, one must use a mental or an actual stop on all commitments amounting to some predetermined percentage of the amount invested (e.g. 3% stop loss or 10% stop loss).

One does not make a purchase unless one feels rather sure that the trend is sufficiently well established to minimize the possibility of being stopped out.  Yet it will happen occasionally anyway.

The decision of what and when to buy is made on a personal basis using various yardsticks best understood by individual investors.




Concentrated purchases of single issues

This investment philosophy leads into concentrated purchases of single issues rather than diversification, because one of the primary elements in the situation is that one must know and be convinced of the rightness of what one is doing.  

Diversification as to issue and type of investment is only hedging - a method of averaging errors or covering up lack of judgement.




Profiting from trends and pyramiding

This ever-liquid method also rarely calls for attempts to buy at the bottom, as bottoms and tops are actually impossible to judge ordinarily, while trends after they are established and under way can be profitably recognized. 

It is a method that leans towards pyramiding; i.e., towards following up gains and retreating before losses.  Such an account, properly handled, bends but never breaks. 

"Averaging down" is, of course, completely against this theory.

With mistakes, there is no cheaper insurance than accepting a loss quickly

Nevertheless, in investing, mistakes will be made.

And when they are, there is no cheaper insurance than accepting a loss quickly.  

That is the tactic of retreat than capitulation.



Serial losers

It would be very difficult for an investor losing, say, 5% to 10% each time on a succession of ventures, to continue to lose time and time again without checking his errors or stopping altogether.



Long term hold irregardless

A buyer who holds regardless of unfavourable news or action can become involuntarily locked in his "investment" for years and often, no amount of future waiting can extract him from his predicament.

It is important to regard the situation with an open mind, unbiased by a bad stale position, and it is important to be able to act each time convictions are very strong.

Unless losses are cut, such an attitude and such action are impossible.

Don’t Let Your Losers Become Big Losers

Don’t Let Your Losers Become Big Losers

So with my Trailing Stop Strategy, when would I have gotten out of the failing muscle-shirt business? You already know the answer.

Remember, the shares started at $10 and fell immediately. Instead of waiting around until they fell to $6 as the business faltered, using my 25% Trailing Stop, I would have sold out at $7.50. And think of it this way – if the shares fall to $8, you’re only asking for a 25% gain to get back to where they started. But if the shares fell to $5, you’re asking for a dog of a stock to rise 100%. This only happens once in a blue moon – not good odds!

Take a look at how hard it is to get back to break even after a big loss...

You’ll Never Recover
Percent fall in share price	Percent gain required to get you back to even
10%	11%
20%	25%
25%	33%
50%	100%
75%	300%
90%	900%

So what’s so magical about the 25% number? Nothing in particular – it’s the discipline that matters. Many professional traders actually use much tighter stops.

Ultimately, the point is that you never want to be in the position where a stock has fallen by 50% or more. This means that stock has to rise by 100% or more just to get you back to where it was when you bought it. By using this Trailing Stop Strategy, chances are you’ll never be in this position again.

http://www.dailywealth.com/1041/Don-t-Lose-Money-The-Most-Important-Law-of-Lasting-Wealth

How to Not Ruin Your Portfolio

How to Not Ruin Your Portfolio


By Abraham
Jul.15, 2010

Today’s article isn’t really a screen (although I do have one at the end). I want to talk about something that I believe is critically important in light of what’s been happening in the market.

And that’s about managing your risk — using stops, cutting your losses — all of that stuff.
Not a fun topic, but probably one of the most important for right now.

What’s interesting is that nobody ruins their portfolio when the market is going straight up. It’s when the market goes down that people get into real trouble.

But ironically, it’s when the market is going up that a lot of these bad habits are created.

The problem is that even bad decisions are oftentimes rewarded in a bull market. But when the market is going down, there’s no mercy for bad decision makers. Sitting on losses in hopes of them coming back can ruin your portfolio as they grow bigger.

I like using a 10% stop loss rule because it’s kind of a tit for tat. If you lose 10% on a trade, you only need a little bit more than 10% to get that money back (11.1%).

But if you lose 20%, you now need a 25% gain to get that money back.

And it gets worse as it goes down.

If you lose 30%, you now need nearly a 43% return to get back to where you were.

And if you lose 50% — you now need to pull out a 100% return to get back to even. (And if you’re so slick that you can pull a 100% return out of your hat at any time, why did you just get clobbered for a 50% loss?!)
So I think it’s important to keep your losses small.

Why do so many people find it hard to cut their losses short?

I think a lot of people hate taking losses because they fear that if they get out, and the market goes back up, they’re going to miss out on the move.

Like somehow, they’re going to get out and it’s going to go up a million percent without them.
First off, that’s nonsense.

Just give yourself permission to get back in.


If the stock does go back up and a paul smith sale big move ensues, the 10% you gave up won’t really matter.

Of course, you don’t want to get back in the moment it goes a tick above where you got out. Give it some proving room. But if there’s a compelling reason to get back in, do so.

Don’t hang onto losers for fear that they’ll all of a sudden become big winners once you get out. You can always get back in. But every losing trade begins with the investor believing that it was going to be a big winner too – otherwise they wouldn’t have made that trade in the first place.

In stocks, nobody is 100% right. So knowing that – take your losses when a trade is not working out and move on to another higher probability trade.

Plus, it can help you stay focused. By keeping your losses small, you won’t  get gun shy on your next trade.

Stock Screen

One of the ways to minimize your downside, in my opinion, is to find stocks outperforming the market.
A simple screen I’ve been running is to look for the top 100 companies that have outperformed the S&P 500 the most.

I add in the Zacks Rank and price and volume constraints (> $5 and > 100,000 shares) to first narrow the universe down. But then I’m looking for the top 100 stocks with the greatest Relative Percentage Price Change over the last 24 weeks.

And you get a lot of interesting companies across all different sectors and industries.

Here are 5 that came through this list for Tuesday, 9/16/08:




http://abraham.ilikehandbag.com/2010/07/15/how-to-not-ruin-your-portfolio/

Taking Profit and Reducing Serious Loss

Taking profit

Profit should be realised from sales of stocks in the following situations:
(I) when the stock is obviously overpriced, or
(II) when the sale of the stock frees the capital to be reinvested into another stock with potentially better return.

• Not taking profit in the above situations can harm your portfolio and compromise its returns. 
• In other circumstances, let the winners run.
• 
  

Underperforming stocks should also be sold early.

• Hanging onto underperforming stocks is costly too. 
• There is the opportunity cost that the capital can be better employed for higher return. 
• Also, hanging onto these lack-lustre stocks reduces the overall return of your portfolio.

Reducing serious loss

When the fundamentals of a stock have deteriorated, sell to protect your portfolio. 

• This decision should be make quickly based on the facts and situations, in order to keep your losses small.

How can you improve your investment returns in stocks?

This Mistake Could Cost You a Fortune

This Mistake Could Cost You a Fortune
By Austin Edwards
January 17, 2010

 

Granted, it's not like I made a big bet on DryShips (Nasdaq: DRYS) at the beginning of last year -- right before it dropped more than 75% (although I know people who did). And I certainly didn’t listen to any of the doom-and-gloom pundits who suggested you short “zombie banks” like JPMorgan Chase (NYSE: JPM) and Morgan Stanley (NYSE: MS) just before their epic rebounds.

 

But I did move back to Big 12 country just in time to see my beloved Oklahoma Sooners lose game after game after game -- not to mention lose their Heisman-winning quarterback, Sam Bradford, to a season-ending shoulder injury mere minutes into their opener.

 

You see, my grandfather played football for Oklahoma, and I've been rooting for them since I was old enough to walk, so 2009 was a pretty painful year for me. But don't worry, I'll always be a Sooners fan -- no matter how bad things get. In sports, that's a virtue.

 

Wall Street, though, is a different ball game
For proof, just ask any longtime "fan" of:

 

Stock
10-Year Return

 

Merck (NYSE: MRK)
(22%)

 

Corning (NYSE: GLW)
(46%)

 

Home Depot (NYSE: HD)
(47%)

 

Sun Microsystems (Nasdaq: JAVA)
(94%)

 

 

Data provided by Yahoo! Finance.

 

 

Or ask my fellow Fools Rich Greifner or Adam Wiederman. Or even ask Jim Cramer. In his book Real Money, Cramer reminds investors, "This is not a sporting event; this is money. We have no room for rooting or hoping."

 

Yet it happens all the time -- and time after time, investors ride stocks right into the ground because they're emotionally attached to a company's story, products, or management.

 

I, for one, am sitting on a major loss in Clearwire. And if we're being honest, the only reason I bought shares in the first place was because I liked that it was backed by Google, Comcast, and a handful of other tech heavyweights.

 

Ditch that loser!
One of the "20 Rules for Investment Success" from Investor's Business Daily is to "cut every loss when it's 8% below your cost. Make no exceptions so you'll avoid any possible huge, damaging losses."

 

To a sports fan, that might seem cruel and unusual, but is it good investment advice?

 

To find out, I dug through David and Tom Gardner's Motley Fool Stock Advisor picks. You see, they often re-recommend a stock even after a big run-up -- or a sharp fall.

 

As it turns out, I found three examples when breaking IBD's rule actually paid off big-time:

 

Stock Advisor Pick
Decline After Recommendation
Gain After Re-Recommendation

 

Netflix
23%
294%

 

Quality Systems
14%
1,189%

 

Dolby Labs
10%
163%

 

 

These weren't flukes, either
In his re-recommendation write-up for Netflix, David Gardner admitted, "We're currently sitting on a 23% loss." But he went on to say, "I think this is one cheap stock at $11, backed by a great management team that's going to create value for us going forward."

 

And he had well-thought-out reasons for continuing to own the stock: "It remains first and best in a growing industry, creates convenience for millions of consumers, and is led by visionary management that markets aggressively." Netflix stock has risen 313% since then.

 

So when do you sell?
Many investors have hard-and-fast numerical rules. Others -- like the Gardners -- stick to a more analytical and intellectual approach to determine when to recommend that their Stock Advisor subscribers sell a stock. So when do David and Tom Gardner consider dumping a stock? Primarily when they encounter:

• Untrustworthy management.
•  Deteriorating financials.
•  Mergers, acquisitions, and spinoffs that could damage the business.

The debate rages on
Investors may never agree on when or why to sell a stock. But it is important to have an emotionless, well-thought-out strategy in place. If you don't, you may suffer major losses -- or miss out on massive gains.

 

For what it's worth, David and Tom Gardner rarely sell, and it works for them. In fact, Tom's average Stock Advisor pick is performing more than 35 percentage points better than a like amount invested in the S&P 500. Meanwhile, David's are performing 66 points better on average.

 

http://www.fool.com/investing/general/2010/01/17/this-mistake-could-cost-you-a-fortune.aspx?source=irasitlnk0000001&lidx=3

Getting Out While the Getting's Good

Getting Out While the Getting's Good
By WALTER HAMILTON
September 18, 1998

When should you sell a stock? If you're bargain hunting in today's dicey market, the answer is sooner rather than later--that is, if the stock moves against you.

The market's summer plunge has made for some good buying opportunities. But it has also made for a risky investment climate in which it's easy to lose money quickly, experts note.

To protect against that, some investment pros say individual investors should take the bold step of jettisoning any stock that falls as little as 8% from the price at which they bought it.

The reasoning: For most of the 1990s' bull market, stocks often bounced back quickly from trouble as a rising tide lifted most boats. But today, a stock that begins to sink may quickly crash--and stay down.

"The very best investors I know have very set parameters for losses," said Jonathan Lee, managing partner at Hollister Asset Management, a money management firm in Century City. "They say: 'I'm going to buy and have very tight risk parameters. If it goes down 5%, I'm out.' "

Dumping a stock that drops 8% or so from your entry price may sound drastic. Even in a good market, prices naturally ebb and flow, and an investor who sells after a small loss could subsequently watch the stock rebound.

Indeed, conventional wisdom is that an investor needn't reexamine a stock unless it declines 15% or more. If a stock has fallen simply because of market sentiment--rather than because of a fundamental change in the company's prospects--traditional thinking says an investor should hold on.

But in a high-risk market like this one, one or two sizable losses can crush a portfolio.

Think about this: If an investor waits to sell a falling stock until the loss is 20%, and then reinvests the proceeds in another stock, that new holding must rise 25% just to recoup the original amount. After a loss of 30%, a fresh holding must climb 43% to get the investor back to even.

*

Some pros take a more basic view of why losers should quickly be sold.

"The best reason why you should not hold [a losing] stock is . . . you've made a mistake," said David Ryan, head of Ryan Capital Management, a Santa Monica-based hedge fund.

Ryan is a onetime protege of William O'Neil, an investment legend and founder of Investor's Business Daily newspaper. O'Neil has long been one of the more vocal proponents of the "8%-loss-and-out" sell rule.

Note that this rule applies only to newly purchased stocks--not to price moves in shares that an investor has owned for a while and that have appreciated in value.

In those cases, assuming you're holding the stock as a long-term investment, interim moves that may erase some of your gain (without reducing your original principal) are OK to ride out, so long as they reflect overall market weakness rather than problems specific to the company.


The conventional thinking about sticking with a stock that falls sharply from your purchase level also misses another point: A stock often turns down before an erosion in the company's fundamentals is readily apparent.

Even the most diligent investors have trouble getting access to the best information. They may not know exactly why a stock is going down, but they can often infer from the action in the shares that the company's outlook is dimming.

"Many times a stock will tell you something bad about the company before anyone else will," said Tom Barry, investment chief at George D. Bjurman & Associates in Century City, which manages $1 billion.

*

But what about the practical issues involved in quickly selling stocks that move against you? True, there are commission costs. And depending on market conditions, an investor may end up taking a large number of losses.

Still, better to take smaller losses than risk that they become major losses, many pros say.

Investment legend Peter Lynch has long noted that investors are likely to make the bulk of their profits in a relative handful of stocks that rise dramatically over time. Most stocks in a portfolio, Lynch has said, will be mediocre or poor performers. Thus, keeping losses to a minimum assures that your few big gainers aren't watered down by big losers.

Indeed, many pros insist that small investors' prime mistake usually is to hold losers too long, hoping to at least break even.

"There are too many companies where things are going great. Why not switch?" Barry said. "There are so many people who don't want to admit a loss, so they hold their losers. We do the opposite. We sell the losers and keep the winners."

Psychologically, the 8%-loss sell rule may be easiest to observe in the case of higher-priced stocks. An 8% drop in a $50 stock is $4, while for a $25 stock it's only $2.

Still, investors should remember to focus on the percentage loss, not the dollar amount.

*

To see the benefit of the 8% sell rule in action, imagine you bought Chase Manhattan at its July 31 peak of $77.56. Let's say you disregarded the sell rule, which would have gotten you out a mere two days later at about $71, as the stock slumped.

You might have figured that Chase, as a blue-chip stock, would be insulated from a sharp drop.

But amid deepening worries about U.S. banks' potential trading and loan losses overseas, Chase shares have plunged to $47.88 now--a drop of 38% from the peak.

It's entirely possible that the fears are overdone and that Chase will emerge unscathed from the current global turmoil.

But it remains to be seen whether an investor who has ridden the stock down will be able to claim the same thing.

*

Times staff writer Walter Hamilton can be reached by e-mail at walter.hamilton@latimes.com.




http://articles.latimes.com/1998/sep/18/business/fi-23902

Fund management: A game of luck?

Fund management: A game of luck?

A large part of the active versus passive debate has always revolved around whether an active manager's returns are through luck or judgement.

Last Updated: 8:14AM BST 08 Apr 2009

The debate was reignited at the end of last year when Inalytics, a specialist firm that helps pension funds to select and monitor equity managers, published research which showed managers typically get only half of their decisions correct.

The research, based on an examination of 215 long-only funds worth a combined £99 billion, found that the average manager's ability to identify winners and losers was no better than 50-50. Put simply, they would do no worse tossing a coin.

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The research looked at two measurements of fund manager skill: what it termed the hit rate and the win/loss ratio. The hit rate shows the number of correct decisions as a percentage of the total number of decisions. The win/loss ratio is a comparison of the alpha generated from good decisions with the alpha lost from the poor decisions. To judge these, Inalytics daily analysed every purchase/sale, underweight and overweight made by the fund managers.

Rick di Mascio, the chief executive and founder of Inalytics, says: "The industry maxim suggests that six correct decisions out of 10 would constitute good performance. However, we did not find one manager who got six out of 10. The average was five out of 10 (49.6pc) and the really good managers only managed to get a 53pc hit rate, which was a surprise as we expected the best manager to be a lot higher."

To compensate for this, di Mascio says the average manager is able to generate good gains from "winners" to offset the losses from "losers". According to the research, the average win/loss ratio was 102pc, which means the alpha gained from good decisions was 2pc higher than that lost from the poor decisions.

"The good managers had a win/loss ratio of 120pc, with the best getting up to 130-140pc," says di Mascio. "This is where the skill comes in, running your winners and cutting out the losers. It's what differentiates the also-rans from the best. There is nowhere to hide with these numbers."

http://www.telegraph.co.uk/finance/personalfinance/investing/5093111/Fund-management-A-game-of-luck.html

The Problem with Losses

The Problem with Losses

Big Losses

This investment has an expected return of 9.50%. Standard statistical thinking tells us if we invest in this stock and hold it, some years we will have high returns and some years low returns, but that, on average, the return will be 9.50%. This assumption is true, but it is also a potentially misleading result.

Suppose an investor buys this stock and holds it 10 years. In each of 9 of these years, the stock advances 20%; in the other year it falls 90%. The 10 year arithmetic average return is 9%
{=(9x20% - 90%)/10}, slightly below the return predicted by the distribution.

In reality, a $1000 investment, however, would be worth only $1,000(1.20^9)(0.10) = $516, less than the starting value! The compound annual rate of return is a negative 6.40%.

Learning points:

1. A large one-period loss can overwhelm a series of gains.
2. If an initial investment falls by 50%, for instance, it must gain 100% to return to its original value.
3. Big losses complicate actual returns, and investors learn to avoid situations where they may lurk.
   
   

Small Losses

Over time, even small losses can be a problem if too many of them occur.

An example will show why. Suppose the proverbial statistical marble jar contains two colors of marbles: red and green. The red marbles symbolize a 10% gain in the stock market, while the green marbles symbolize a 10% loss. If, in simulating an investment and taking a number of marbles from the jar, we draw exactly the same number of red and green marbles, how did the investment fare?

The return is negative, but there is no way to tell how badly things turned out, because what matters is not the proportion of winners to losers, but the number of losers.

As the number of draw increases, the terminal value of the investment declines.

After about 1,000 draws from the jar, the investment is nearly worthless. #

# In the stock market, such an investment could not survive. No security should have an expected return of zero. No one would buy it. Consequently, its price would fall until it offered a return consistent with its risk.

Learnng point:

Over time, even small losses can be a problem if too many of them occur.

Risk and the Time Horizon

There is an important distinction between:

• the probability of losing money and
• the amount of money that you might lose.

Suppose you model a $100 investment by flipping coins. Heads means you win $1, and tails means you lose 50 cents. After one flip, there is a 50% chance of a loss. This declines to 25% after two flips and is down to 12.5% after three flips. After 10 flips, the probability of a loss is only 0.10%.

The maximum loss, however, increases with each succeeding toss of the coin. The maximum loss after one flip is $0.50, after two flips is $1.00 and after three is $1.50.

If you define risk as the probability of losing money, then risk decreases as the time horizon increases.

However, if you define risk as the amount of money you might lose, it increases as the time horizon lengthens.

Learning points:

1. In general, the longer you hold a common stock investment, the lower the likelihood that you will lose money.
2. On the other hand, the longer you hold the investment, the greater the amount you might lose.
3. The extent of the risk depends on how you define it.