Ugly Sell Off, Margin Money Management

 


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BIRTP Performance

Market sold off sharply in the past week, so did Blast Investor Real-time Plus model portfolio. Nasdaq index is down -5.08% year to date. The S&P 500 index is down -2.09% year to date. The Blast Investor Real-time Plus (BIRTP) model portfolio continues to beat the index handsomely, with year-to-date gain of 48.34%. Since inception, BIRTP model portfolio is up 136.64%, significantly outperforming the S&P500's 6.5% return.

Anxiety in Blog Private Club
One of side effect of this sell off is anxiety and nerves I can observe in our Blog Private Club. Headlines such as “oh my god, what's wrong" [ hidden link ] certainly would put BIRTP blog readers on edge. While BIRTP past newsletter publications mostly focused on stock picks, now it is time to sit back and review issues which are much more important than pure stock picks.

Pitfall that Hinders Success
The process of successful stock investment is far more complicated than simply picking stock winners. It was quite common that an average individual investor would have picked couple of stocks that rose 50% or even 100% in relatively short time frame. This was particularly true in the bubble time of late1990's. However, if we look around our friends or around our neighbors, we really can not find that much of successful stock market millionaires. Why is that?

By my observation, one of pitfalls that has hindered success of individual investors is margin money management.

Margin Management - Winners or Losers?

If you have not read my free article titled Leverage - Margin Debt, Please read it. Pay close attention to the 2 hypothetical cases in the article. In both cases, the investor picked same stock and held the stock for the same time frame. However, one result was success of 20% return, another case was wipe-out.

This is just too important issue so that I have to emphasize again and again. Don't assume successful stock market investment is all about stock picking. Think about it, 2 stock investors who invested into same stock and held it during same time frame, one was a winner who become richer and richer every year, another was a loser who lost everything in stock market.

Making big money in stock market is not all about stock picks, it is also about sound money management. If one followed Warren Buffet's USG pick from 2001 exactly at his entry price around $14, he/she might have lost her/his shirt when USG dropped below $10 later on if she/he put USG on 100% margin at $14 a share. Was there anything wrong with Buffet's pick of USG in 2001? Certainly not, who can argue with 40% annualized return on USG investment that Buffet had enjoyed over past 4 years?

This over-margin urge is purely due to greed in investors’ psychology. Investors tend to want their money to work harder and harder to maximize the big return with higher and higher leverage. They are unaware of the hidden trap of money management issues or they are incapable of avoiding the traps. Even though BlastInvest BIRTP service can not advice on personalized investment issues, we want to help and this is the tip that I can offer to any of you directly if you have this problem.

Beating the Dreaded Greedy Urge with Fear

In long term investment based value investing philosophy, we typically do not want to sell a stock during a sharp sell off. We want to hold or even buy on sharp sell off and we want to sell during big rally. This is all nice in theory, but it is not very clear cut in real life stock investment. This philosophy only works well when a portfolio is reasonably diversified and with reasonably small margin leverage. If a portfolio is full of margin at 100% level of equity, this philosophy is no longer correct.

Let me make it clear. First of all, I am not afraid of any big sell off. In fact, I view recent big ugly sell off as pretty normal market correction. I do not believe that I can predict short term directions of market, nor do I have interest in predicting them. Therefore, BIRTP will just sit tight and buy and hold at this ugly period.

However, I believe the fear of the hypothetical wipe-out caused by over-leveraging is real fear. I want you to be fearful and I want you to be afraid so that you can use this fear to fight the greedy urge to use more and more margin!

If you are already in this over-leveraging situation, start to act as soon as possible, and be fearful. You do not have to sell all of the margin positions at one time, you can sell some immediately and sell another portion at later time at rebounce. But, do not do wishful thinking and pretend that this is not an issue. The hypothetical wipe-out situation can happen to any stock pick, including those same stock picks in BIRTP portfolio.

If you are already having the similar margin level as BIRTP does, do not rush into buying more cheap stocks at this sell off using more and more margin. Yes, you may be lucky to catch the rebounce this time by fully leveraging up your account. Next time, you may not be that lucky and the wipe-out risk is real and there.

BlastInvest Margin Management Philosophy
BIRTP model portfolio operates like a hedge fund. BIRTP model portfolio money management is pretty aggressive, seeking the maximum value and super performance within the margin of safety of value investing method. We are not shy about using margin leverage to deliver the whopping investment return to our readers. Our model portfolio operation is not bound by bureaucracy of mutual fund world. Our current nearly 50% year to date performance is evidence of our success.

However in general, we do not believe BIRTP's style of aggressive money management is for everyone. If you like the aggressiveness of BIRTP margin management, and you are passive investor following BIRTP, you are fine because the BIRTP model portfolio already have my past decades of stock experience in it. For those who are not comfortable with any margin, newsletter offers flexibility so that you can use BIRTP picks, but with no margin.

Final Thought on This Big Sell Off
Are we close to the end of this sell off? I do not know. Is this question that important for BIRTP model portfolio? Not really. Regardless of the end or not end of sell off, I am confident that in the long run, BIRTP model portfolio would do fine in its performance.

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You are invited to use any or all of these value investing articles in your publication or website. The only requirement is the inclusion of the following, after each article. . .

* Article by Henry Lu of BlastInvest LLC, a premium investment newsletter publisher in Connecticut. Visit http://www.BlastInvest.com for FREE “how-to" investing assistance, web services and more.

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