Incorporate Rules into Your Market Plan

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Physician's Money Digest, May 31 2003, Volume 10, Issue 10

Physician-investors may be uncertainabout what to do withtheir investment capital. Agood strategy to implement duringthese times is one that invests accordingto established rules. This meansyou will have to avoid certain investingstrategies, even if they're popular.

PLAYING WITHOUT RULES

A number of investment methodsrecognize that a buy-and-holdmethodology doesn't work. It hasnothing in place to lock in profits orany disaster protection measures. Anexample that illustrates this point isIntel. Intel is a strong, fundamentalcompany with a high performancerecord. The company stock hit an all-timehigh of $75.81 back inSeptember 2000. But buy-and-holdinvestors watched the stock deflate toan eventual low of $12.95.

Investors and managers with sellrules most likely sold Intel shortlyafter the stock peaked. They wereaware of signals that pointed to anevaporating demand for the stockand obvious signs that the stock wasoverbought. Let's say one of theseinvestors sold their stock at $60,which is over 20% off the high, andbought it back at $15.54, 20% abovethe low. This investor saved a tremendousamount of money and ownsabout 4 times as many shares as theinvestor who bought and held.

PLAYING BY THE RULES

Many physician-investors havenoticed the need for established rulesthat let them know when to investand when to go to a cash position. Ifthese rules are not followed with strictand precise discipline, managers canget lulled into a false rally. With thatsaid, investors' decisions will neverbe perfect. Investors cannot exactlypredict the market, which is anotherreason why rules are crucial.

The buy-and-hold strategy locksan investor in (regardless of howwell the stock is performing).Investors with rules employ the sayingthat has been on Wall Street fordecades, "Cut your losses and letyour profits run." If an investor considersa stock to be underperforming,it is immediately sold and usedfor finding a big winner.

When these investors begin tosee very positive action in the market,they dip their toes into the market.As the positions begin to makesome progress, they get deeper intothe market. As more follow-through(ie, positive market action) is seenand positions are working, theycommit more capital to their positionsuntil they're fully invested in araging bull market. Investors withthis methodology have been basicallyunscathed by the 2000 to 2003bear market, and are well positionedto take advantage of a turn.

Michael Doran is a privatemoney manager affiliated withSierra Capital Planning innorthern California. He runs afee-based business and a hedgefund for qualified investors.For more information, call 877-467-8657 orvisit www.sierrainvestor.com. ChristopherNezbeth also contributed to this article.