Chapter 2A
Mechanics of Buying and Selling - Part II Bear Market

In Chapter 2 you learned the basics of buying and selling. I kept it simple because it's important to learn the system before we go to some advanced techniques to improve our profit making ability. Now I'm going to teach you a simple adjustment to the basic Buy and Sell system you learned in the previous chapter. This adjustment is needed because of the nature of the Stock Market.

When I first wrote this book, the stock market hadn't had a sustained Bear Market in quite awhile. It was just recently that I saw the need for this refinement of the basic buy and sell techniques shown in Chapter 2. You'll see that this is a very simple refinement and it will protect your cash during a steep bear downturn in prices.

OK, what is this change? Well in the last chapter you learned that every month when you compared Portfolio Control and Share Value, you take the one with the highest value and subtract the other one:

for example

	Portfolio Control	5,000
-	Share Value	3,000
=	Buy Advice	2000

In the last chapter, I taught then you look at the SAFE amount which is always 10% of Share Value. Thus based on Chapter 2 you would finish off your calculation as so:

	Buy Advice	2,000
-	10% SAFE	300
=	Market Order Buy	1,700

So the system would have you buy $1,700. Well the basic 10% rule for SAFE for both buys and sells works fine in regular markets....BUT it won't work in an extended bear market because the extended bear market will take all your cash quickly and you'll find yourself out of cash and your stock still dropping in price. This just recently happened to some mighty fine techs and non-techs early in 2001. Note: when I use 10% SAFE, 20% SAFE etc. in reality we are actually saying 10% of SHARE VALUE, 20% of SHARE VALUE etc.

These stocks will come back in price but what can we do to save cash, buy the most possible shares at the lowest prices, and gain the maximum advantage. Well I'll tell you. All we have to do is make a simple little adjustment to the SAFE % on buys. Instead of arbitrarily using 10% SAFE for buys, we use an adjustable SAFE percentage for buys in a Bear Market. Thus in the example below:

	Buy Advice	2,000
-	40% SAFE	1,200
=	Market Order Buy	800

Thus we have reduced the buy amount from $1,700 to $800 and conserved our cash. If we had used 50% SAFE then 2000 - 1500 = Market Order Buy of 500. I'm going to leave it up to you what percent you use in any given situation. I think my examples in this chapter will help you with the decision.

Below you will see a stock - Caesar's - using both the standard 10% SAFE and using the adjustable SAFE. In this example I'm arbitrarily picking an increased SAFE percentage based on the sharpness of the price drop - I'm trying to conserve cash so I use my last dollar at the lowest price.

In this example, I will also do a little borrowing from other stocks if my cash does actually run out. I would recommend borrowing a little as I have taught elsewhere in the book but now I'm more conservative and want to keep borrowing to a minimum. Take a look at Campbell Resources in Chapter 12 and you'll see a borrowing pattern that I don't want to repeat

Now I'm going to give a quickie version of what I did with SAFE each month that was not the ordinary 10% SAFE for buys. Remember we did not change the SAFE amount for sells - we kept it at 10%.

At the end of this chapter are the two spreadsheets showing Caesars using 10% SAFE amount and Caesars using an adjustable SAFE amount. Notice the final totals using both amounts:

10% SAFE - Portfolio Value= $50,426 - $19,000 added = $31,426

Adjustable SAFE - Portfolio Value = $28,539

So for a lot less risk, you made about the same profits - also with 10% SAFE in reality your CASH amount is $12,791 - $19,000 borrowed or negative $6,209. With adjustable SAFE, we have recovered all the "negative cash" and are now in the black:

(1174) + $3,113 = + $1,939

Here are the months with SAFE greater than 10%:

Feb 90 - used 20% SAFE; price dropped from $32.75 to $25.00

Mar 90 - used 30% SAFE; price dropped from $25.00 to $22.25

Apr 90 - used 30% SAFE; price stayed the same $22.25; didn't want to buy a lot at same price, wanted to see if price would continue to drop.

May 90 - used 40% SAFE; price did drop sharply again; from $22.25 to $18.87

Jun 90 - used 20% SAFE; price rose from $18.87 to $22.00; just bought a few shares

Aug 90 - used 50% SAFE; price had severe drop from $22.00 to $13.62; still bought $4,247 (312 shares) worth, cash went negative, hoping this is near bottom so want to "buy low".

Sep 90 - used 50% SAFE; price continued to drop to $11.37; still bought $3,423 (301 shares) worth, want to get cheap shares and hope slide is over.

Oct 90 - used 30% SAFE; price rose slightly to $12.25, still bought a few shares - $1,485 or (121 shares) cause this is still a great price to be buying shares - we are negative in cash to ($6,028)

Now looking at the spreadsheet you'll see the "Bear Market" for Caesar's ended here and we could go back to normal. You see by Jun 91 we have recovered all our cash and you'll see we have made a profit, going from $23,955 in Oct 89 (top of the spreadsheet) to $28,539 in Jun 91. This despite the fact the price of Caesar's was $35.12 in Oct 89 and in Jun 91 is only $24.37, 1 31% drop in price.

Again you see the beauty of the system. But because of "Bear Market" we need to add another tool to our AIM arsenal in our war with the stock market. Also note - in old days paid much higher commissions - thus for adjustable AIM spredsheet I used newer lower commission rate of $12 - flat rate up to 5,000 shares. 

Standard 10% SAFE
CAESARS

DATE	REMARKS	SHARE	SHARE	SAFE	CASH	SHARES	SHARES	PORT	BUY	MKT ORD	6%	COMM	PORTFOLIO
		PRICE	VALUE			BOUGHT	OWNED	CONTROL	(SELL)	(SELL)	INT	AMT	VALUE
						(SOLD)			ADVICE	BUY
10/89		35.12	12118	1211	11837		345	12222	104	0	59	-	23955
11/89	Adj S/C	28.50	13680	1368	8017	+136/36	480	16082	2402	1034	40	46	21697
12/89		32.75	16899	1689	6972		516	16599	(300)	0	35	-	23871
1/90		-	-	-	-	-	-	-	-	-	35	-	-
2/90		25.00	12900	1290	7042	96	516	16599	3699	2409	35	64	19942
3/90	+ $2,000	22.25	13617	1361	6592	228	612	17804	6443	5082	23	94	20209
4/90		22.25	18690	1869	1423	-	840	20345	1655	0	7	-	20113
5/90	+ $2,000	18.87	15855	1585	3430	154	840	20345	4490	2905	7	69	19285
6/90		22.00	21868	2186	458	-	994	21798	(70)	0	7	-	22326
7/90		-	-	-	-	-	-	-	-	-	7	-	-
8/90	+ $10,000	13.62	13543	1354	10462	506	994	21798	8255	6901	7	122	24005
9/90	+ $5,000	11.37	17063	1706	8456	629	1500	25926	8863	7157	17	124	25519
10/90		12.25	26080	2608	1181	67	2129	29505	3425	817	6	44	27261
11/90	Adj S/C	14.25	31293	3129	322	-	2196	29914	1379	0	2	-	31615
12/90		15.12	33215	3321	324	-	2196	29914	(3301)	0	2	-	33539
1/91		15.37	33761	3376	326	(31)	2196	29914	(3850)	(474)	2	35	34090
2/91		14.25	30851	3085	769		2165	29914	(937)	0	4	-	31620
3/91		18.00	38970	3897	773	(287)	2165	29914	(9056)	(5159)	4	95	39743
4/91		19.00	35687	3568	5866	(116)	1878	29914	(5768)	(2200)	29	63	41548
5/91		21.87	38544	3854	8043	(218)	1762	29914	(8630)	(4776)	40	92	46587
6/91		24.37	37635	3763	12791	(151)	1544	29914	(7451)	(3688)	64	78	50426

Adjustable SAFE
CAESARS

DATE	REMARKS	SHARE	SHARE	SAFE	CASH	SHARES	SHARES	PORTFOLIO	BUY	MKT ORD	6%	COMM	PORTFOLIO
		PRICE	VALUE			BOUGHT	OWNED	CONTROL	(SELL)	(SELL)	INT	AMT	VALUE
						(SOLD)			ADVICE	BUY
10/89		35.12	12118	1211	11837		345	12222	104	0	59	-	23955
11/89	Adj S/C	28.50	13680	1368	8017	+ 135/36	480	16082	2402	1034	40	46	21697
12/89		32.75	16899	1689	6972		516	16599	(300)	0	35	-	23871
1/90		-	-	-	-	-	-	-	-	-	35	-	-
2/90	20% SAFE	25.00	12900	1290	7042	45	516	16599	3699	1119	35	12	19942
3/90	30% SAFE	22.25	12482	1248	5941	42	561	17159	4677	933	30	12	18423
4/90	30% SAFE	22.25	13417	1341	5021	8	603	17626	4209	186	25	12	18438
5/90	40% SAFE	18.87	11530	1153	4847	84	611	17719	6189	1577	24	12	16377
6/90	20% SAFE	22.00	15290	1529	3276	7	695	18508	3218	160	18	12	18566
7/90		-	-	-	-	-	-	-	-	-	7	-	-
8/90	50% SAFE	13.62	9561	956	3127	312	702	18588	9027	4247	7	12	12688
9/90	50% SAFE	11.37	11529	1152	(1120)	301	1014	20712	9183	3423	-	12	10409
10/90	30% SAFE	12.25	16109	1610	(4543)	121	1315	22424	6315	1485		12	11566
11/90	Adj S/C	14.25	20463	2046	(6028)	46	1436	23167	2704	658		12	14435
12/90		15.12	22415	2241	(6686)	-	1482	23496	1081	-	-	-	15729
1/91		15.37	22786	2278	(6686)	-	1482	23496	710	-	-	-	16100
2/91		14.25	21119	2111	(6686)	19	1482	23496	2377	266	-	12	14433
3/91		18.00	27018	2701	(6964)	(38)	1501	23629	(3389)	(688)	-	12	20054
4/91		19.00	27797	2779	(6276)	(73)	1463	23629	(4168)	(1389)	-	12	21521
5/91		21.87	30406	3040	(4899)	(171)	1390	23629	(6777)	(3737)	-	12	25507
6/91		24.37	29713	2971	(1174)	(128)	1219	23629	(6084)	(3113)	-	12	28539

Note; this note from Ron inspired me to add my thoughts on how much to adjust AIM for the different kinds of stocks. See my thoughts below Ron's insightful note.

Hello Fellow AIMers: Readers of my notes know by now that I don't pretend to be an expert. The other ladies and gentlemen who contribute to this great newsletter really know their stuff. They have refined Mr. Lichello's original formula to peak performance. I'm just another small investor like many of you out there who read this and was impressed by the system and continue to marvel at how good it works. I am honored that they let me throw in a few thoughts. When I send in my notes every month I have no idea what will accompany me in this newsletter. Last month I posed the question, what do we do in a bear market when prices get so low we run out of cash. Well apparently this has been on many peoples minds, and it sure has been on Jeff's.

He added a great new chapter in his book where he has increased his SAFE from 10% to possibly 50%. I urge you all to read it again, it's great! Just when you think these guys can't refine AIM any more they do it again. I am 40 years old and like many ofyou most of my investing life has been in a bull market. So this extended bear market is both new and hard for me. Now when I first read about the split SAFE, another great refinement that swayed towards ELIMINATING the buy SAFE for bull markets, especially mutual funds which tend to always go higher eventually, this really makes sense to me. So what does this tell us? How do we know how much or which way to adjust this SAFE figure? To me it seems we have to adjust it to the market andeach individual equities personality. Look at each stocks' 52-week high and low and get the feel of it. There is no set way of determining this. Perhaps we all should learn a little technical analysis and look at a few chart patterns. AIM is a great tool, but remember no tool is any good unless you make it work. So friends this bear market isn't all bad. It taughtus AIMers a great refinement. Change the SAFE to fit your needs.

Jeff's Thoughts on Stock's Personalities

Ron came up with a great way of viewing stocks I hadn't thought of. Yes, I feel stocks do have "personalities" just like people. And wwe need to view these personalities to figure out how these stocks are going to behave in a bear market. In reality it's the "personality" of investors holding the stocks that decides whether we have a wild one or mild one.

Here are my quick thoughts on the different stock personalities and how to handle them in a Bear market:

The Conservative Personality

The conservative ones are the Blue Chips of the world - these are the Dow Jones Industrial Average stocks. These stocks have been around forever, these stocks made it through the Great Depression of the 1930s. You've probably heard of some of these: IBM, DuPont, American Express, CitiGroup, Coca-Cola etc.

These stocks will not show such drastic plunges - a good example is my Dow Jones Model Portfolio - never had to increase SAFE % very much with those stocks - while had great increases with the Techs in the "Conservative" portfolio. These stocks normally do noteven show highs and lows greater than 100% in a year. Thus stocks with the conservative personality will not require very radical changes in AIM during a Bear Market. You might wind up upping your SAFE amount to 20% instead of the normal 10% of share value. Again like Ron says, it helps to do a little work yourself. One reason I post the highs and lows for stocks for a stock for the prior few years is to give you an idea of the personality of the stock. I feel most of these stocks will not require radical AIM surgery during a Bear Market.

The Radical Personality

I feel I should apologize to you for calling my Conservative Portfolio my Conservative Portfolio. It has been anything but conservative in this bear market. I originally felt it was conservative compared to other high techs - primarily the content high techs like iVillage, Dr. Koop, eToys etc. I felt content providers would come and go (I did recommend ones I thought had a chance to succeed). I felt the hardware providers - the Ciscos, Sun Microsystems, Lucent Technologies would always succeed. And they probably will - but they will give you a heck of a ride. Based on my experience with Cisco & Sun - I will give you the new "fight the bear" info or "Son of Bear Market" - how to Turbo-Proof AIM when the unthinkable happens like the tragic World Trade Center Terrorist Attack. At the end of the chapter, I will show you Cisco & Sun through the disaster and how I tried to "Bear-Proof" what was left of them. Again like Ron, I was a litle late to catch on but like he said, learn from your mistakes and be ready for the next unspeakable horror - I'll show you what I did.

I knew these "Radicals" did have bigger swings in high/low prices but I underestimated investor's foolishness in dumping these stocks for huge losses - again I fell victim to underestiminating the stupidity of investor's. I won't do that again.

Now I have a better grasp on how these "high techs" will handle in a Bear Market. So here are my new thoughts on how AIM should handle these stocks.

The one way to easily distinguish conservative and radical personality stocks is the high/low differences they have. As I said above, conservative/Blue Chip Dow Jones stocks rarely have high/low differences greater than 100%. But our radicals, even the radicals I thought were conservative - exhibit high/low differences significantly higher. Cisco's high was 82.00; low was 20.31 for a 304% difference; Sun's high was 64.66; its low 17.00 for a 280% difference; and Lucent's high was 66.62; its low 9.81 for a 579% difference.

It's these differences that require adjusting AIM so as to not exhaust our cash too soon. Remember by going 2/3 stock, 1/3 cash we don't have a lot of leeway andwe want to make the most of buying as low as possible. So in addition to the advice earlier in this chapter, here are some additional ideas for radical stocks.

Rule # 1 - Use a 20% SAFE (20% of Share Value) for all buys right from the start.

I am saying do this from day one when you own a "high tech"/radical-type stock. You don't change the SAFE 10% Sell amount. Also during sells let the cash build up.

Rule # 2 - When you adjust Stock/Cash ratio on radical stocks, only use half the amount the calculations say:

For ex: If stock value is 3,000 and cash is 3,000:

Normally your calculations are 6,000 X 1/3 = 2000 cash and you have 1,000 extra cash and buy 1,000 worth of stock. For radical stocks, just buy 500 more and leave that extra 500 in the cash account as a cushion.

Rule # 3 - Keep extra cash in your Money Market Account for outstanding buy opportunities

Let's say you are going to start with $15,000: $10,000 in stock and $5,000 in cash. If you have an extra $5,000 to put in your Money Market Account - do it!

Rule # 4 - You can always follow Robert Lichello's original investing strategy - 50% Stock, 50% Cash....for Radical Stocks

I want to emphasize I still think high techs and other on the NASDAQ are good stocks and are our future for America. What we are experiencing now is just a typical Bear Market affecting both good and bad stocks. Again remembeer the words of J. Paul Gett: "buy when the news is bad".

Latest Ideas

The real world is the best lab so below I'll show you what the Bear did to Cisco & Sun. It's not pretty, but both as well as many other "techs" have recovered significantly from the tragic events of September 11. Check the two spreadsheets for Turbo-SAFE - I had to stop the bleeding so I took radical action on radical stocks.

Cisco Systems from Model Portfolio

DATE	REMARKS	SHARE	SHARE	SAFE	CASH	SHARES	SHARES	PORTFOLIO	BUY	MKT ORDER	6%	PORTFOLIO
		PRICE	VALUE			BOUGHT	OWNED	CONTROL	(SELL)	(SELL)	INT	VALUE
						(SOLD)			ADVICE	BUY
5/00	2 FOR 1 SPLIT	57.00	69882	6988	46431	11	1226	77474	7592	604	232	116,313
6/00		67.75	83807	8380	46056	-	1237	77776	(6031)	0	229	129,863
7/00		64.37	79632	7963	46286	-	1237	77776	(1856)	0	230	125,918
8/00		68.25	84425	8442	46517	-	1237	77776	(6649)	0	231	130,942
9/00		64.31	79551	7955	46750	-	1237	77776	(1775)	0	233	126,301
10/00		62.75	77622	7762	46984	-	1237	77776	154	0	234	124,606
11/00		56.06	69346	6934	47219	27	1237	77776	8430	1496	235	116,565
12/00		52.75	66676	6667	45952	98	1264	78524	11848	5181	229	112,628
1/01		48.17	65608	6560	40975	186	1362	81115	15507	8947	204	106,583
2/01		38.06	58917	5891	32188	546	1548	85589	26672	20781	160	91,105
3/01		28.19	59030	5903	11464	1101	2094	95980	36950	31047	57	70,494
4/01	50% SAFE	20.63	65913	6591	(19583)	613	3195	111504	45591	12636	-	46,330
5/01	50% SAFE	17.98	68468	6846	(32219)	841	3808	117822	49354	15124	-	36,249
6/01	40% SAFE	19.05	88563	8856	(47343)	73	4649	125384	36821	1397	-	41,220
7/01	50% SAFE	16.65	78621	7862	(48740)	490	4722	126083	47462	8152	-	29,881
8/01	30% SAFE	18.74	97673	9767	(56892)	170	5212	130159	32486	3185	-	40,781
9/01		-	-	-	-	-	-	-	-	-	-	-
10/01	100% SAFE	12.09	65068	6506	(60077)	134	5382	131752	66684	1616	-	4,991
11/01	40% SAFE	16.95	93496	9349	(61693)	98	5516	132560	39064	1668	-	31,803
12/01	10% SAFE	20.02	112392	11239	(63361)	488	5614	133394	21002	9763	-	49,031

Sun Microsystems from Model Portfolio

DATE	REMARKS	SHARE	SHARE	SAFE	CASH	SHARES	SHARES	PORTFOLIO	BUY	MKT ORDER	6%	PORTFOLIO
		PRICE	VALUE			BOUGHT	OWNED	CONTROL	(SELL)	(SELL)	INT	VALUE
						(SOLD)			ADVICE	BUY
5/00		76.50	46359	4635	28235	29	606	53192	6833	2198	141	74,594
6/00		90.50	57468	5746	26167	-	635	54291	(3177)	0	130	83,635
7/00		89.94	57112	5711	26298	-	635	54291	(2821)	0	131	83,410
8/00		94.94	60287	6028	26429	-	635	54291	(5996)	0	131	86,716
9/00		112.19	71241	7124	26531	(88)	635	54291	(16950)	(9826)	132	97,772
10/00		113.06	61844	6184	36539	(12)	547	54291	(7553)	(1369)	182	98,383
11/00		111.00	59163	5916	38098	-	533	54291	(4872)	0	190	97,261
12/00		89.31	47602	4760	38289	22	533	54291	6689	1929	191	85,891
1/01	2 FOR 1 SPLIT	30.44	33788	3378	36542	594	1110	55256	21468	18090	182	70,330
2/01		30.44	51870	5187	18544	238	1704	64301	12431	7244	92	70,414
3/01		24.56	47696	4769	11357	629	1942	67923	20227	15458	57	59,053
4/01	50% SAFE	17.44	44838	4483	(4101)	482	2571	75652	30814	8399	-	40,737
5/01	40% SAFE	17.09	52176	5217	(12500)	398	3053	79852	27676	6808	-	39,676
6/01	20% SAFE	18.85	65051	6505	(19308)	276	3451	83256	18205	5195	-	45,743
7/01	50% SAFE	15.19	56613	5661	(24503)	62	3727	85854	29241	936	-	32,110
8/01	40% SAFE	15.64	59260	5926	(25439)	215	3789	86322	27062	3358	-	33,821
9/01		-	-	-	-	-	-	-	-	-	-	-
10/01	170% SAFE	7.96	31872	3187	(28797)	245	4004	88001	56129	1947	-	3,075
11/01	100% SAFE	10.04	42660	4266	(30744)	364	4249	88975	46315	3655	-	11,916
12/01	40% SAFE	13.39	61768	6176	(34399)	323	4613	90803	29035	4331	-	27,369