The Weiss Stock Bear Market Strategy
Stock-Markets / Financial Crash Sep 02, 2007 - 09:51 PM GMT
Sebastian Leburn writes: I'm the portfolio manager of the Weiss Bear Strategy, and I think it's time we talk about the risks of U.S. stock market declines.
Most people think the risk is greatest when corporate profits are sinking or unemployment is rising. However, some of the sharpest and most prolonged stock market declines in history began in the best of times.
Others believe that the Federal Reserve can step in soon and end it quickly. True? Sometimes yes, sometimes no.
When the decline is primarily caused by a glitch in the financial markets, like the 1987 crash or the 1998 decline, the Fed can usually turn things around.
But when the economy sinks into a recession or depression, the Fed's intervention is rarely enough to protect investors from losses, which can be severe.
How do you know ahead of time? You don't. Which leads me to my main topic:
How to Protect Yourself from the Risk of a Stock Market Decline That You Can't Predict
I recommend a few basic rules …
Rule #1. Don't rely on forecasts. They're often wrong.
Before crashes and bear markets, you can count on your fingers the number of people anticipating the decline. Then, after the fact, with the benefit of 20-20 hindsight, it seems that nearly half of Wall Street claims to have done so.
But the reality is that modern math and science are ill-equipped to predict discontinuous events like a crash. A more reasonable goal, in my view, is to recognize it after it has begun … and then carefully monitor its continuing progress through time.
I think this goal is very achievable, provided you can adhere to …
Rule #2. Remove major biases from the equation.
In other words, objectively recognize when the market is changing direction. Accept it. Work with it. Don't fight it.
Unfortunately, however, during the recent bear market of 2000-2002, even after the bear manifested itself, the overwhelming majority of brokers and advisers ignored the risks of further declines. 1
Rule #3. Don't try to protect yourself from all of the risk all of the time.
There are many mutual funds and ETFs available today that are designed to go up when a major market index or sector goes down. But like any power tool, you should only use it when you need it. It makes no sense to turn it on and keep it running 24/7.
For example, consider a fund that's set up to rise 1% for every 1% decline in the S&P 500 Index. That can serve as a good hedge.
But buying it, leaving it in your portfolio, and then just forgetting about it is a mistake, in my opinion. If we're in a sustained bull market, it will just erode in value.
Rule #4. Manage your hedges intelligently.
When a decline is confirmed, recognize it promptly and then add bear market hedges. When an end of the decline is confirmed, also recognize it promptly and reduce your bear market hedges.
These are the rules I follow with the Weiss Bear Strategy.
The Weiss Bear Strategy is not a publication. It's an individually managed account program at Weiss Capital Management, a company that's separate from the publishers of Money and Markets .
And unlike an inverse mutual fund or ETF that's designed to automatically move in the opposite direction of the market, the goal of the Weiss Bear Strategy is to help protect investors from downside risk only when we feel that the downside risk is confirmed.
So the primary goals of the Weiss Bear Strategy are twofold:
- Minimizing the program's losses in bull markets.
- Maximizing the program's profits in bear markets.
That's how, even in the long bull-market period from January 1, 2003 through June 30, 2007, we were able to keep losses under control — producing a cumulative total return of -15.61%, net of all fees.
And that's how, despite the relatively shorter bear-market period from December 31, 2000 through December 31, 2002, we were able to produce a substantial profit — a cumulative total return of 43.27%, net of all fees.
In sum,
- In 4 1/2 years of bull markets: a 15.61% loss.
- In 2 years of bear markets: a 43.27% profit.
Past performance is no assurance of future results. But our goals for the months and years ahead are unchanged:
- If the bull market continues, we will seek to keep any losses significantly smaller than the loss you'd see if you just bought and held an inverse fund. And we may even reduce those losses to zero , producing a positive overall result, as we have in the past couple of years.
- If we experience a bear market, we will seek to produce a profit that's significantly larger than the profit you could make simply by holding an inverse fund. That's what we did in the last bear market. And that's what our goal is for the next one as well.
To establish a relationship with our firm, the minimum investment is $100,000; and you can achieve that minimum by combining an investment of at least $50,000 in the Weiss Bear Strategy with one of our other programs.
There are no fees for opening an account. There is, however, an annual management fee of 1.5% on the Weiss Bear Strategy. The program is eligible for retirement accounts. And, naturally, it costs you nothing to get more information and find out if you're suitable for this aggressive strategy.
We'll be back in the office Tuesday morning. So you can reach us there at 800-814-3045. Or just give us your information at our website .
And no matter how you reach us, be sure to review our full track record along with our Important Disclaimers and Disclosures .
Best wishes,
Sebastian Leburn, CFA
Chief Investment Officer and Portfolio Manager
Weiss Capital Management, Inc.
1 Many Wall Street analysts even maintained their "buy" or "hold" ratings on companies that were going bankrupt. See "47 Brokerage Firms Recommended Shares of Failing Companies Even as They Filed Chapter 11 in 2002," Weiss Ratings press release , June 3, 2002.
This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .
Money and Markets Archive |
© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.
