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Sell Your Stocks Arghhhhh

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    ROBERT B. GORDON Sc.D

    SELL YOUR STOCK AND FUND LOSERS RIGHT NOW
    It's Time to Accumulate Tangible Assets

    April 25, 2002



    INTRODUCTION

    One of the worst mistakes a novice or inexperienced investor can make is to "marry" a losing investment, hoping for a recovery or to get even. Among the unfortunate results is tying up funds that could be better employed. This is particularly true right now with the bright prospects for securities of gold mining stocks which have been making spectacular price increases in the past year.

    Despite the fact that gold metal has been in a 20 year bear market since its peak price of $800 in 1980, investors who purchased gold for between $35 and $40/oz in 1971 have had a fairly good return on their investment. According to a recent article, the average annual rise in the gold price worked out to a compounded rate of 11.5 per cent over a thirty-year period between 1971-2001 (1). Included of course was the exciting bull market rise and subsequent scary decline which raised havoc with most if not all long term investments in gold.

    Having been fortunate to make my initial buys of gold at the 1971 prices mentioned above, and having survived the bull/bear market, I see no greater long term potential than that offered by gold and silver today. By private letters to my sons and young adult grandchildren and published articles on the internet, I have been presenting various investment programs for investors of all ages and circumstances.

    In this article, I describe a number of gold and other programs so that readers can select or adapt one that best suits their needs and circumstances. Since the number of gold stocks and mutual funds is rather small, and ample information is published on the internet, I do not name the vehicles used in my examples. My goal and intent is to stress the principles involved in building and protecting portfolios for continuing long term success.

    As readers of my earlier articles are aware, I am not licensed to give financial advice. In all of my articles, I stress the investment vehicles that I would use for the present set of circumstances if my age was miraculously reduced to one of the targeted age groups.

    (1) Financial Daily from THE HINDU group of publications, Internet Edition, Sunday, Feb10, 2002

    PEERING INTO THE FUTURE

    We are bullish on gold for the long term but cannot predict its future price movements.
    The Elliott Wave data indicates that the 21 year bear market may be in its final phase but it is best used to determine the dominant trend, not the timing of the next big move.Based on the current EW status of the stock market, it is a reasonable guess that there will be some very exciting moves in precious metals over the balance of this century

    For readers who do not follow Elliott Wave Theory, let me give a brief status report on the stock market. The bull market wave that peaked in early 2000 was the end of Wave III of a multi-century long five wave Grand Supercycle Wave. We are now in a corrective wave IV that may last for the rest of this century. Robert Prechter, author of the earth- shaking "At the Crest of the Tidal Wave" book has predicted it will take the form of a giant
    "trading range" formation with a number of large up and down moves that will be seen as new bull and bear markets. The most recent example of a fourth wave, at a lower level of trend, was the "trading range" market from 1966 to 1982 when the Dow oscillated between 500 and 1000. At the much larger Grand Supercycle trend, the trading range for the Dow might conceivably oscillate between 1000 and 12000!

    We can say one thing for sure. If Prechter's analysis holds true for the stock market, the precious metals market will probably be an exciting place for properly situated investors

    SOME WAYS TO INVEST IN GOLD

    Gold can be accumulated in physical form as coins or bullion. It can be owned as shares of gold mining companies and as shares of both closed end and open end mutual funds. In the gold rally we expect, there will undoubtedly be new products such as exchange traded funds. At this time there is one etf in Canada (TSE:XGD) but none so far in the U.S. With the recent advent of a number of mutual funds holding short positions, we expect they may decide to short gold in the next gold bear market. Until that event, we will depend on other means to help in the down cycle.

    For young investors, we believe that a long term dollar cost averaging program in physical gold or gold shares, or both, should do very well. For older investors, we do not recommend a 100% gold program unless it incorporates a hedging program to protect large profits, if and when they occur.

    In our 62 years of investing, half of them with gold, we have experimented with many ways to grow capital safely. We have learned the benefits of diversification and rebalancing of assets. We have learned the need to recognize mistakes and make needed changes in a portfolio. In the last 3 years we have learned the need to use appropriate hedging to protect gains in a bear market. There will surely be a number of gold bull/bear cycles in the future whose magnitude cannot be determined in advance.

    In the remaining sections of this article, we will suggest different investment approaches for 3 age groups. We hope that our readers will find them helpful. We discuss the needs of these 3 groups:

    Youth, 20-30, limited capital and a full investment life ahead.

    Mid-life, 45-55, employed, experienced and needing consistent growth.

    Near retirement, 60-70, needing capital preservation and sure growth.


    GOLD ACCUMULATION FOR YOUNG ADULTS

    Oh to be young again with all the experience of a full life of investing! In trying to help our children and grandchildren, there are several problems. First, their preoccupation with other aspects of their life and then, perhaps, their extreme optimism and desire to test the unknown rather than heed the lessons of history.

    Assuming the existence of a cash fund for emergencies, I would suggest that young adults commence and steadily maintain a dollar cost averaging program in two separate.
    classes of precious metals, starting with at least $1000 in each class, then adding equal dollar amounts on a monthly or quarterly basis:

    1. Physical gold and silver bullion in the form of new or circulated coins with no
    numismatic value. Start with roughly equal amounts of gold and silver.

    2. A diversified precious metals mutual fund in a tax free account. There are a number
    of fine funds available with a $1000 minimum investment and $50 or $100 additional
    purchase amounts.

    Depending on the buildup in portfolio value over time, I suggest the following periodic management actions.

    (a) Periodically determine the dollar amount of physical gold, physical silver and of
    mutual fund shares.
    (b) At least annually, through asset transfers or changing purchase levels, rebalance
    the dollar amounts in each class. Return to 25% gold, 25% silver, 50% fund shares

    Rationale: Over a period of years it is reasonable to expect major, independent variations in the prices of gold and silver bullion and of precious metal fund shares. The suggested rebalancing will extract profits from the higher price assets and reinvest them in the lower valued asset class. Over a period of decades, this management action will tend to level out the peaks and valleys and have a beneficial effect on the total return and the peace of mind of the investor during stormy market conditions. And best of all, the time needed to manage the assets will be very low, allowing the investor to concentrate on all other aspects of his or her life.

    A MID-LIFE PORTFOLIO IN TANGIBLE ASSETS

    This portfolio assumes that the investor has acquired enough experience and has enough time available, say several hours per month, to make decisions on portfolio rebalancing and hedging needed to preserve and grow assets through any troubled market times. Without these requisites, we suggest that adults start with the program recommended for young adults, pursue it for several years and then start this portfolio at a modest starting level of assets until sufficient market experience has been acquired.

    This portfolio is concentrated in two major classes of tangible assets based on concerns about the inevitability of continuing inflation and the possibility of severe financial crises in the decades ahead. Based on everything we have learned or experienced in our 8 decades, we have chosen to own shares in precious metals and in fully owned, professionally managed, diversified real estate. As in our earlier example, we use portfolio rebalancing as one means of taking profits from strong markets and reinvesting in weaker markets. Then we add the option to protect bull market gains with short sales within the same asset class. Properly setup and managed, we expect this portfolio will do very well under all normal market conditions and has the capability to survive some big storms as well.

    In this portfolio we will emphasize gold stocks, silver stocks and diversified precious metals funds. These assets will be held and managed by rebalancing so long as the investor desires to do so. We will suggest that experienced investors consider using short sales of carefully selected securities for protection in major bear markets.

    This mid-life program can be started with as little as $10,000 in a tax free portfolio and has no artificial limit on size. It is possible to own all suggested securities in a single brokerage account if desired. It is certainly desirable to own all hedged securities in one account in the event of a brokerage failure. This will minimize risk to the portfolio value during the usual long bankruptcy process.

    We envision a typical portfolio to hold an asset distribution in the ranges below but there is no special reason why those limits must be held.

    Gold mining stocks - 15 to 25%
    Silver mining stocks- 15 to 25%
    Precious metal funds- 15 to 25%
    REIT stocks or funds - 35 to 45%

    We will discuss each class in some detail to point out its advantages and disadvantages.
    There is a limited number of senior gold stocks, all of which are held by most gold mutual funds. We envision this portfolio holding a group of promising junior gold stocks for long term appreciation. If spectacular gains develop in the junior golds, they can be protected in down markets by holding a short hedge in a conservative gold stock such as ASA, a closed end fund.

    Since most silver production is a by-product from copper, zinc etc. mining, there are no major silver companies that can be owned by funds for a significant impact. Therefore, ownership of small to medium silver stocks can make a significant contribution to the success of this portfolio over the long run. Silver is in very short supply and, at its present $4.50 price, this essential metal may keep rising the next time the price reaches $50/oz.

    Depending on the size of the overall portfolio, it may hold one or more mutual funds which should be selected for superior past management excellence. The fund holdings of large mining companies will balance the smaller companies owned in the stock portfolio.

    A few people have questioned my past recommendation of REIT's for long term investments, so here is my rationale. Yes, their current strong price run-up will not last. The current real estate bubble may collapse and cause a ten year bear market in all forms of real estate. But, this is a long term program of 30 years or more. On the other side of the valley, there will be unbelievable bargains for investors with cash to buy. In the meantime, with prospective profits from gold and silver and short hedges on the REIT stocks or funds, our portfolio holder will have the assets to seek huge gains in high quality real estate.

    There are about 50 large REIT companies and a hundred more small ones. They are mandated by law to disburse nearly all the net income of their properties which results in very high dividends in normal economies. Although owning the individual companies will yield higher dividends, the superior management of the best mutual funds will probably prove best for most investors.

    REITs may specialize in Commercial, Industrial, Apartments or other areas or may be highly diversified, both by type and geography. There are dozens of REIT mutual funds to consider for purchase. There are also at least two exchange traded funds (etfs) in the real estate field which can be readily sold short to protect bull market gains.

    For an investor who has spent some time in the 'trenches' and wishes to spend less time managing and more time boasting about his or her skills, we suggest a good look at our mid-life portfolio. As in the youth portfolio, we recommend periodic rebalancing via transfer of assets from the stronger gainers to the lesser. This concept, almost lost in the recent mania, is at least several centuries old. It was originally developed to help large institutions keep their huge bond and equity portfolios near the desired ratio of say 60% bonds and 40% equity. It is a sad commentary on our pension fund managers that, in the 1995-2000 mania, they threw caution to the wind and took their equities up to 80 or 90% and thereby lost irretrievable billions in the bear market.

    Since the future market conditions are unknown, we cannot give any details on how short positions could or should be set up to protect large portfolio gains. At age 84, and with very limited prior experience, I undertook to use short mutual funds to protect my life savings. Through the subsequent sharp up and down market swings, I have learned to do it quite well It should be much easier for an investor to learn about short hedges at mid life while still earning a living. If the market that Robert Prechter and I expect ahead comes to pass, my advice to younger investors is to start now and learn how to handle both sides of the market.

    A BALANCED PORTFOLIO FOR INVESTORS NEAR RETIREMENT

    After 22 years of retirement, this portfolio gives me my biggest problems due to the wide range of prior experience and of risk tolerance in senior investors. We have decided to err on the side of conservatism since investors can always augment this portfolio with ideas taken from the previous portfolio discussed above.

    Following our previous line of reasoning, we continue to recommend holding gold and silver, but in smaller amounts and in categories requiring almost no management time. They will be there, ready to participate in any future large gains in the precious metals.

    We also continue to recommend an allocation to REIT's for their consistent high dividend yields. But we do not use the greater amounts of tangible assets for younger investors. In their place we we assign a major portion of assets to providing stable income and to much needed asset protection. Here is our suggested allocation range for each asset category:

    Short term U.S. Treasury bonds - 15 - 25%
    Balanced fund (60 bonds, 40 equity) - 15 - 25%
    REIT mutual funds - 15 -25%
    Fully managed short equity fund - 10 - 15%
    Inverse bond index short fund 10 - 15%
    Precious metals fund - 5 - 10%
    Circulated silver coins - 5 - 10%

    We have had rather heavy experience with every asset class on this list and recommend it for serious consideration by our older readers. We especially like the middle of each of the suggested percentages and feel they are about right for most investors. Do not be turned off by the choice of 7 assets type for, well selected as suggested below, this portfolio is capable of providing income, growth and protected capital gains with a minimum of attention. We strongly recommend an annual check of the total dollars in each category and rebalancing transfers only to redistribute major gains in one or more categories.

    Let me state at the outset of this discussion that I currently own each of the seven asset classes and have had a long experience with all but the two short funds. But in a major two year market decline, such as we have endured, experience in using short funds can be built rather rapidly.

    If we select the middle of the ranges, our retirement portfolio looks like this:

    Fixed Income - 32% Short bonds - 12.5%
    Diversified equity - 8% Short equity - 12.5%
    REIT equity - 20%

    Precious Metals - 15%

    Like the young adult portfolio, this is a permanent portfolio, unchanged except for any periodic additions or withdrawals. Please note that the bond total is split 72% long and 28% short and the equity total is split 69% long and 31% short. In bear markets, the short funds will add to gains or minimize losses and in bull markets, the short funds will reduce gains. Based on our experience in the current bear market, we think the short ratios are about right but they can be changed either up or down at the end of any full market cycle if deemed desirable by the investor.

    We chose to hedge the long bond position with a fund that is alway short a specific bond index since they react in opposite directons to interest rate changes. But in the case of the long equity funds we chose a fully managed short fund to provide the best opposing market position. For those investors who are leery of using short mutual funds, let me assure them that, in our 3 years experience, they are bought, sold and held exactly like any long mutual fund. The only important dfference is that when long funds go up in price, the short funds go down and vice versa. That is exactly why they are needed to protect assets and investor nerves in difficult markets.

    Well managed balanced mutual funds of the type chosen here have done very well so far in this bear market. The better one have produced quite steady gains in the range of 10 to 12% annually over the past 12 years to April 2002, However they will do poorer in a period with rising interest rates. That is why we use the short bond fund to help keep the assets stable over a full bond market cycle.

    Our chosen equity portion is heavily weighted to REIT's for their very high dividend income and their presumed ability to carry permanent tangible asset values through any major economic disaster that may occur in the future. Our choice of 15% for the gold and silver portion can be varied to suit any individual preferences.

    FINAL THOUGHTS FOR OUR READERS

    We end this paper with some general comments on our investment suggestions. It must surely be recognized by all readers with some investing experience that our heavy use of tangible assets and protective hedges would never be recommended by any typical, conventional financial planner. We did not get our ideas from a correspondence course in financial planning. We got them from life-long learning in the investment school of hard knocks. Our academic education ended after 8 years in college in 1939 so we understand what the specter of another depression means to investors. We were heavily involved in the Go-Go, NIfty Fifty period in the Sixties and the major bear market that ended in December 1975 but was not recognized as such until months later.

    There are virtually no money managers in Wall street today who were active when the market finally bottomed in late 1975. Anyone who was there would laugh out loud at the frequent calls of a bottom at this juncture. Based on my personal experience and backed up by the Elliott Wave Theory, I know we are several years from the first bottom of many to come. Today many stock valuations are higher than they were at the 2000 top and the number of bulls vs bears and the % allocation to equities is near an all time high.

    In our considered opinion, the market indices have much further to decline before reaching a tentative bottom. With bonds just now beginning their bear market, this means that nearly all conventional assets will be in synch to the downside. This is why we are placing heavy emphasis on precious metals and on protective hedges for other major assets.

    Readers of all ages and circumstances have many options in using the material in my three suggested portfolios. The mid-age portfolio could adopt ideas from the youth portfolio and the retirement portfolio could use part of the mid-age ideas. Hopefully, there are some useful ideas for many readers. We will try and respond to reader qestions.

    For information on available short funds and for a free tutorial on Elliott Wave theory go to www.bearmarketcentral.com. The internet has many sources of information on precious metals and REIT stocks and funds. Try www.quicken.com or www.morningstar.com. For almost anything go to search engine www.google.com.

    We wish readers of all ages, a safe journey through any troubled waters ahead. We welcome e-mail communications but cannot give specific advice on stocks, funds etc.






    ROBERT B. GORDON Sc.D
    Sun City West AZ
    April 25, 2002
    [email protected]


    *****

    It is the author/publisher's goal of this letter that the reader may have his or her interest piqued in such a manner that will compel the individual to do their own further diligent research on the topic, issue or company discussed herein. The author/publisher of this publication has taken every precaution to provide the most accurate information possible. The information & data were obtained from sources believed to be reliable, but because the information & data source are beyond the author's control, no representation or guarantee is made that it is complete or accurate. The reader accepts information on the condition that errors or omissions shall not be made the basis for any claim, demand or cause for action. Because of the ever-changing nature of information & statistics the author/publisher strongly encourages the reader to communicate directly with the company and/or with their personal investment advisor to obtain up to date information. Past results are not necessarily indicative of future results. Any statements non-factual in nature constitute only current opinions, which are subject to change. The author/publisher may or may not have a position in the securities and/or options relating thereto, & may make purchases and/or sales of these securities relating thereto from time to time in the open market or otherwise. Neither the information, nor opinions expressed, shall be construed as a solicitation to buy or sell any stock, futures or options contract mentioned herein. The author/publisher of this letter is not a qualified financial advisor & is not acting as such in this publication. Investors are advised to obtain the advice of a qualified financial & investment advisor before entering any financial transaction.




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