The King

The Key to Success in the bear market

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Here we are, half way through the SLO2. SLO2 has been a different kind of experience for most of us compared to the SLO1. Having been a top10 finisher in SLO1, I have started this round with the objective of taking my trading skills to the pinnacle. When I set that objective I really didn't have any definition for pinnacle trading : ) . I think I want to measure it by the amount of success I have achieved in rankings and also individual satisfaction with the stocks I picked and the way I have constructed and rotated my portfolio. Towards this definition I feel that I am on the right path to achieve my objective for SLO2. Except for a bad 2 week period, I have always stayed in the top 50 in ranks (currently #26) and I am extremely satisfied with my stock selection and portfolio construction and rotation methodology (once again with the exception of one bad week).

Am I disappointed that I am not in the top 10 ranks ? NO. I was in fact in top 10 rankings for about 2 or 3 weeks (last 2 weeks of March and first week of April). At that time I had to make a decision. I had thought over what my objective should be. Should it be to play safe and stay in top 10 or ignore short time ranking fluctuations and aim for long term reward ? I have decided to go for the latter. That's why I didn't sell my winners. I did not reduce the size of my winners which is mostly LDK and FMCN. I believe that LDK is still undervalued and it has lot of room to grow. So I am going to keep a big chunk of it. I am prepared to go down even a few 100 ranks if LDK goes down. Like a true sports man, I will play this game with the end result in mind. I will reduce my positions if I feel that my winners have achieved fair value. This is what I did with AAPL in SLO1. When SLO1 started, I have allocated about 23% of my portfolio for AAPL and I have stayed with it through its (AAPL) thick and thin till it reached $180. I am doing the same thing with LDK now.

So what's the difference in the way I traded in SLO1 and SLO2 ?
My Core philosophy has not changed much. The RDSLF4 fund (my portfolio) typically invests in stocks that are in good sectors and trading at lower P/E while still showing decent growth. It is as simple as that. The fund does not expose itself to any single sector by more than 40%. These characteristics of this fund have not changed in SLO1 and SLO2. How ever, I am trading less in SLO2 and giving much more time for my stocks to bounce from the pits. The only time I am doing any selling is when I see a big new buying opportunity , like when I saw FMCN going down about 7% because the company came out and said that their revenues are going to be some 7 to 10% less compared to earlier projections. The market has already dumped this stock by more than 30% just because of news that its mobile unit has banned some advertisements to the user's cell phones. When the company came out and told the same thing the investors have dumped the stock by another 10%. To me this is ridiculous. You can't dump a stock by 40% because the company is going to make 7% less profit compared to its earlier projection. As our Guru Warren (Buffett) says " I'd be a bum on the street with a tin cup if the markets were always efficient"
So don't dump your stocks just because it is going down and don't load up a stock just because it's going up. That strategy works very well in Bull markets. But in Bear markets, you need to pick good stocks at bargain prices and stay with them for long time. Those who can do that, will be richly rewarded in the end. Conviction and Patience are keys to success in bear markets.

As a finishing note let me quote the following from the Berkshire Hathaway's 2005 Chairman's Letter :
"Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac's talents didn't extend to investing: He lost a bundle in the South Sea Bubble, explaining later, 'I can calculate the movement of the stars, but not the madness of men.' If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases."

PS : Buy and Hold system is not the only method that works. Buy Low and Sell High method also works well if you can time the market well. By nature i belong to the Buy low Sell High kind of a trader. But this bear market has transformed me (at least for the time being).