value investing -- know how but can't stick

**zhang242463** Mon Apr 21, 2008 12:15 am

value investing -- know how but can't stick
I have been investing for years and I know exactly how to do value investing while I have problem sticking to it. I am still losing money but believe me, I know how to do it right. Here I list a few principles:

1. do not buy option. Option, particularly out of money option, has these obvious issues: low liquidity, high spread, high transaction cost. The volumn in option is very low. For example, CCU only has a few thousand contracts per day on one option yet has millions of shares exchanged per day. spread is at least 5c, that means you lost 10c in a round trip. there is 0.7c per contract charge, which means in a round trip, you lost another 1.5c. Adds all these up, option has to go up 11.5c for you to break even. Out of money option usually priced lower than 1$, one basically lost 10% when you buy some option. If the option is priced 30c, you lost 30% on the day you buy the option. Statistics shows 90% option expires worthless, and those option transactions that doesn't expire are basically changed hands and is a ZERO SUM GAME that favors underwriter. There is no big money in option!

2. Do not use margin, if you have to, do not use more than 10% to 15% of your balance. One aspect of stock is it can go up and down widely since market is insane and even though time is on your side, you might well not hold to that day. If you use 2X margin, the stock only needs to go down 15% for you to get a margin call. Almost everyone see their portfolio drop 30% at least once in a while, so even 50% margin will wipe you out. Once you are wiped out, you are done.

3. Diversification AND Rebalance. This means diversify into more than 10 stocks with 10% in each stock so that even if one stock dropped 50% in a single day, your portfolio will only drop 5%. There was a website (I can post later) that has about 10-20 stock picks over a period of 5-10 years. They analyze the return if they rebalance every 6 month and every month, it is almost consistent that rebalance every month outperform rebalance every 6 months. Rebalance has an issue with capital gain and cost, but it can be done with IRA accounts particularly if size is big.

4. Do not believe you can beat the market unless you have 5 years + tracking record. Most of us are believed we are elites and easily think we can beat others in stock market. This is wrong. You are not professional, you don't have the time to analyze. It is almost sure that you will be shown beaten by market quickly. A good method is to subscribe blast newsletter, buy index fund or buy mutual fund.

**xxyygorich** Mon Apr 21, 2008 1:14 am

Re: value investing -- know how but can't stick
BIRTP hasn't passed ur bar yet. He he.

zhang242463 wrote: I have been investing for years and I know exactly how to do value investing while I have problem sticking to it. I am still losing money but believe me, I know how to do it right. Here I list a few principles:
4. Do not believe you can beat the market unless you have 5 years + tracking record. Most of us are believed we are elites and easily think we can beat others in stock market. This is wrong. You are not professional, you don't have the time to analyze. It is almost sure that you will be shown beaten by market quickly. A good method is to subscribe blast newsletter, buy index fund or buy mutual fund.

**zhang242463** Mon Apr 21, 2008 8:45 am

Re: value investing -- know how but can't stick
BIRTP is very good, the problem is how subscribers like me handle the information.
xxyygorich wrote: BIRTP hasn't passed ur bar yet. He he.

**zhang242463** Mon Apr 21, 2008 9:39 am

Re: value investing -- know how but can't stick
please vote the article. Thanks

**blast_investor** Mon Apr 21, 2008 11:06 am

Out of money calls can be considered a special type of leverage, high leverage with huge cost base.

http://www.blastinvest.com/article/02_21_2005.htm

Leverage - margin debt

This old article in 2005 explains the down side of high leverage, and how leverage margin debt can wipe out networth.

Out of money calls are worse than margin debt in most cases. This is worst type of leverage, which can destroy and wipe out net worth pretty quickly.

**zhang242463** Mon Apr 21, 2008 6:24 pm

this is the link that shows a few model portfolios. If they rebalance frequently increase yield, but there is a transaction cost and tax issue that not discussed:
http://www.validea.com/stocks/mp.asp

**shu_wd** Sat Apr 26, 2008 3:53 pm

Hi Zhang,

Very good info. thanks

I'd like to point out three points:

1. The commission of option is not that high as in your article, if you use optionhouse or IB.

2. The original point of option is try to limit the risk, while single side option is high risk, using proper option strategy can reduce/limit your risk .

3. as you said, most of option go worthless. So from Probability point of view, you can sell covered calls. -But don't do this unless you absolutely know how to do it.

zhang242463 wrote: this is the link that shows a few model portfolios. If they rebalance frequently increase yield, but there is a transaction cost and tax issue that not discussed:
http://www.validea.com/stocks/mp.asp

**xuedong_zhang** Sat Apr 26, 2008 6:31 pm

Comparing use some margin (20%) to increase to overall return,
I prefer to use out of money call and puts on part of my portfolio.

Of course, you still need idea whether the stock is overvalued or undervalued (in mid term, which may correlated to the overall market).

blast_investor wrote: Out of money calls can be considered a special type of leverage, high leverage with huge cost base.

http://www.blastinvest.com/article/02_21_2005.htm

Leverage - margin debt

This old article in 2005 explains the down side of high leverage, and how leverage margin debt can wipe out networth.

Out of money calls are worse than margin debt in most cases. This is worst type of leverage, which can destroy and wipe out net worth pretty quickly.