An investment strategy has been born of much reading, discussions, successes and faiures. It consistents of the purchasing, holding, and rare selling of high-tech stocks who's business models are understood. A high risk approach, consisting of long term holdings of 10-20 stocks and long-term call options, combined with use of short-term puts if market conditions are expected to deteriorate.
There are a different types of assets and derivatives that are held. These are
Current Holdings: Microsoft, Cisco, IBM, Nokia, Inktomi, US Index, Nortel are current holdings, although concerns about Microsoft and the DOJ are felt.
Potential buys: Nokia, Network appliances, Tcoma, Sun, Real networks, AOL, Ascend, Euro Stock,
What is out of favour:
Market Timing
Stocks are held for a long term to defer payment of capital gains, and are sold only if the fundamental business model changes. Drops in the market are handled through the use of purchase of put options rather than stock sales. If the market goes up, then the stocks are still held and the option purchase is lost. If the market goes down, the stocks are still held and the option goes up in value. The put option is sold when it appears the market has bottomed.
This strategy is a result of the somewhat disasterous Oct 1998 month. The market crash of October was correctly predicted, and most stocks liquidated, example: Microsoft peaked at $119, sold at $113, bottomed at $90. Cisoc peaked at $108, sold at $102, bottomed at $75. Nokia peaked at $94, sold at $84, bottomed at $70. The market did a "dead-cat" bounce halfway down. I bought in completely on the slight rise, ie MS at $100, Cisco at $90, Nokia at $80, AOL at $100, Amazon at $110. The market then bottomed out. I lost nerve and sold close to the bottom. The market then nicely recovered to Dec 1 prices of : MS $130, Cisco $100, Nokia $110, AOL $180, Amazon $200.
I did not take part in the incredible runup. The high techs recovered 50-100% from the bottoms, and all broke their previous highs within 2 months of the crash.
Thus the market timing strategy did not work. Fisher states "It doesn't make good sense to steop ut of a position where you have a 90 percent probably of being right (ed: stock increasing in price long-term) bcause of an influence about which you might at best have a 60 percent change of being right". Further, "It has been my observation that it is so difficult to time correctly the near-term price movements of an attractive stock that the profits made in the few instances when the stock is sold and subsequently replaced at significantly lower prices are dwarfed by the profits lost when timing is wrong".
Purchasing of insurance puts at the peak would have avoided the problem of knowing when to buy back in and losing nerve on the downside.
When to buy
When to sell
What to sell
Common myths
Readings