One Way To Handle This Bear Market
Principles of the Stock Market

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Have You Seen This?

SCHWARTZ STRATEGY DETAILED.  The Principle of Proper Money Managment.  Especially important during a bear market.  I know many readers aren’t prepared to keep jumping in and out of the stock market, trading in other words, each time the stock market begins some type of rally.  As I suggest.  Many of you just want to make some long range investments and stay put thus it’s terribly hard to follow my in and out advice.  But that’s also pretty hard to do – buy and hold right now -- since the near and intermediate term outlook is still so iffy.  Sorry about that but I can’t do anything about it.  Either you operate like Warren Buffett, buying down here with plans you can outwait any trouble ahead, holding for years if necessary.  Or you fashion some type of middle ground, somewhere between buy and hold and trading around daily.  So here’s one suggestion, along the lines of what I do every day. 

Schwartz Daily.  First, as I’ve long recommended, you hedge your portfolio.  Starting with taking a Big Picture view.  If you agree with me about the big picture, that since today’s economic and stock market predicament is the worse most everyone has ever seen, that this bear market will have to last at least another year, roughly two years minimum in total, then you add a couple bear market index plays to you overall portfolio with plans to hold them for some time, say throughout 2009.  Obviously if you don’t hold any inverse ETFs or inverse mutual funds right now, you want to initiate them on some strength like possibly this year end rally occurring now.  As soon as you can’t wait any longer or if you read here that this rally is nearing its end, you put on these inverse plays.  Or hedges as I call them since I’m not trying to make a ton on this bear just avoid getting clawed up  really badly.  Again, or second, once that’s done you check each position each morning and see how they’ve done over the pervious trading day.  You check after big up days, big down days and after modestly moving market days like yesterday.  What you’re looking for is how your overall portfolio did versus the general stock market and how each individual long and short did.  For example, yesterday my two inverse or short hedges both fell, obviously, because it was an overall up stock market day.  My Short NASDAQ 100 ProFund (symbol SOPIX) fell -2.19% and my ProFunds Bear ProFund (symbol BRPIX) lost -1.15%.  On the other hand my longs, ProFunds Consumer Goods Ultra (symbol CNPIX) rose +0.76% yesterday.  Similarly my ProFunds Utilities Ultra (symbol UTPIX) rose +3.09%, my ProFunds Biotech Ultra(symbol BIPIX) rose +1.13%, while my ProFunds Telecom Ultra (TCPIX), disappointing, fell -3.68% yesterday.  So third, you check out why any discrepancies show up and decide if you want to change the mixture or positions.  Disclaimer!  I hold small positions in the investments above but can and do change my positions anytime.

Two other obvious major factors are (1) your overall percentage invested versus your sidelined cash.  I’ve been running most of this year about 20% invested, including  my longs, shorts and non-corollary positions like whether I’m long or short the dollar, Treasuries and gold and 80% cash or cash  equivalents.  And (2) what percentages of each position you hold, for example my two shorts mow total about 5% versus my four longs totaling about 10.75%.  So as you can easily note, I’m mostly in cash, about 84% now and what I’ve got in I’m positioned for a rally.  But when I see no signs of a rally, I shift to leaning more short than long.  What I would love to see are my longs doing well between now and the end of the year while my shorts don’t hurt me.  Then a chance to take profits in my longs while leaving my outstanding shorts alone, let them keep running since overall we’re in a bear market.  Summing up, numerous investors and traders operate this way.  With the plan that their shorts will go up and their longs will go up as well.  That’s the ideal anyway.  Just another strategy for you to ponder and maybe adapt as your own.  Good investing!



Posted 12-11-2008 8:53 AM by Richard Schwartz