Replies to post #9577 on Value Microcaps Motherboard

[John Bates]

Researcher, I've spent two considerable periods on margin. The first was in '97-'98 with mostly oil service stocks (near disaster), and the second with crazy techs in '99-early '00. Learning from the first experience helped me wise up enough to deleverage in '00. These days, I don't need a huge return and don't see a need for margin. Microcaps have a high enough beta for me.

[MikeDDKing]

OT: researcher59, SSKILLZ: Margin Leverage

I suspect that many on the board are leveraged but are not using margin. If you have a home mortgage and have investements it is esentially the same thing as margin. I've never used margin but have a mortgage so I am leveraged. In fact, when I purchased a new house in late 2003 and sold my former house in mid 2004, I purposely decided to hold a mortgage (my former house was smaller and was paid off). My average return since the end of 1999 is 21.5%. That is much better than mortgage rates.

In the last week I have raised more cash. I'm at roughly 17.5% cash but I still have the leverage of a mortgage. That is the highest percentage cash I have ever intentionally had. I'm continuing to raise more cash by accelerating the sale of some of my longer term investments that I feel don't have as much of a chance of appreciating. I've also moved some money to income producing investments which I believe provide more safety in a down market.

Mike

[SSKILLZ1]

Researcher 59, here goes
1)Have you ever been on margin? No I haven’t
2)53.5% cash sounds very bearish and I'm curious whether you're taking an 18-month view and how much your cash allocation shifts over short periods of time? The answer to this question is twofold. First I don’t look out 18 months, the furthest I look out is 12 months, and generally I feel more comfortable using a six-month outlook when I’m investing. As for my outlook I will share with everyone my beliefs, and I use the Russell 2000 as my example.

My Russell 2000 Forecast: (Of course this is all opinion)
1)Russell may go up for a couple of more days, will be interesting to see if it could break above the 200 day moving average, my guess if it does it will only be short-lived
2)Then I believe Russell will fall back into the low to mid 560’s, which was where the Russell broke out from last year in early October to register a gain over 15% in the last two and a half months. I believe it will bounce here maybe backup to the 200 day moving average. I believe that this may be a rally of about 4-5% whether it a couple of weeks grind or a big pop couple of days I really don’t know. I believe there is only a slight chance that the drop stops in the 560’s.
3)Will fall to about 530, then it may have another bounce this one might be permanent in my opinion, but I wouldn’t count on it.
4)The difference probably between Lens and my forecast is I actually expect the Russell to fall to about 490-500, which is about a 50% retracement from the rally from October 2002 to December 2004. I don’t expect it to go any further then this, but if it does it probably means Lens gloom and doom theory of all the indices possibly making new lows or going back to the lows of 2002 will remain very possible. (Assuming I understand Len’s theory correctly) The point is I believe the Russell will hit 490-500 and then hold and go back up.

2)As for my cash levels it can change rather significantly. I have increased/decreased cash levels up to 10-15% in a day at times, which is not as little as it seems trust me.

3)Are you timing the market? Not really, although I’m trying to keep a range of 40-60% cash right now, if a stock hits my buy target I will buy it, the problem right now is most stocks are above my buy target, so consequently I’m not really buying. Secondly, I will sell any stock that hit my sell target (or fundamentals of company change), right now as you could of guessed none of the stocks I own are near that target either, so basically my action is pretty stagnant except for taking little position here and there when they hit my target.
4)Hypothetically, how much of your portfolio would you risk on such a wager? Well if I understand your question I would probably wager 10%, which happens also to be my upper limit of how much money I would put in anyone position that even includes a specific mutual fund as well.
5)What is the average # of position I hold at any time? Currently am holding 16 positions not all of which are stocks, some are mutual funds. On average I hold about 15-25 positions if I sum mutual fund positions with stock positions.

Of course all of this is my humble opinion and strategies I share with you, hopefully this answers all your questions Researcher.