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The Six-Pack: Philosophy and Q&A
An old-time e-friend asked me to resend my SIX-PACK strategy that I first posted in July 1998 as the best way to make money in the Scam Market and the best defense against the System of the Crooks that the Scam Market was transformed to serve in mid-1990s with the abuse of Scam Options (I had determined that Cisco Systems was essentially a gigantic fraud operation as a result of permitted accounting fraud, And now we have the proof). Anyway, I am reproducing below what I wrote years ago. Also, just to give an idea of how patience does pay off I am attaching a spreadsheet of the perforce of the smallest of the three "Six-Pack," more like 36-Pack!, accounts that I managed (all bottomed on 07/13/07). All ""Six-Pack" accounts were more than 10X on 03/09/09 from their 07/13/07 lows. For full disclosure, I didn't do well with shorting Scams, something I specifically told others not to do, until two years ago. Thankfully, the "Six-Pack" delivered just as I had expected.
Jas
PS: I answered many questions and gave examples of actual trades and performance during 1998-99 on the old Longwaves Forum, but those posts are not retrievable. The big pay off came years later.
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The Six-Pack: Philosophy and Q&A
Nothing succeeds like success. Our success has invited criticism from our usual critics and some questions and clarification from those who genuinely want a better understanding. We are delighted with both. We love our critics as old Ben used to say: We must thank our critics because they let us know our faults. Knowing our faults (and weakness in our arguments) is far more important to us than knowing our virtues.
DURATION AND PORTFOLIO CHANGES:
As a starter, the Six-Pack is not a long-term strategy if that is 20 or 70-year time span. It is specifically designed for those who believe, as ESPU camp here and I do, that we are at a major peak that is equal or of greater magnitude than those of 1966 (with the second or third gasp in Jan'73) and 1929 in the US. If one were to construct the Six-Pack equivalent in Jul-Sep'29 or Dec'65-Feb'66 and let it play out for the next 9-12 years (the cycle of utility), it would produce great results. It should be clarified for once and all that the constituents of the Six-Pack will change during its cycle of utility based on the criterion for inclusion having changed and to be replaced by a new one that fits the criterion. I can't over-emphasize the importance of the correct selection, as is the case with all superior performers. Our initial target period is 3-4 years or 1000% gain whichever comes first. At that point we will reassess after taking out greater part of our gains. Those who are looking for greater gains definitely need a different strategy with much greater risk.
"TIIMING" PHILOSOPHY
I am a value player and it is more than likely that I out-performed Dan in 1989-95 period during which the market was at or below historical valuations. Benjamin Graham is my mentor and his observation that THE PRICING AS A TIMING PHILOSOPHY (TOOL) IS OVERLOOKED is an understatement (To quote Graham and Dodd, "... the major consideration for the investor is NOT WHEN he buys and sells, but at WHAT PRICES. This is an aspect of the 'timing' philosophy that has been almost completely overlooked. ... the time when an investor should clearly NOT BUY common stocks is during the upper ranges of a bull market.") A value player (or manager) thinks and acts very differently than a never-to-be-ending-bull-market growth money manager (or a broker). The latter espouse mantras like "let your winners ride." Ride to what heights and what risk levels? What happens if they fall more spectacularly than they rose? As value players we like to buy our puts when they are relatively cheap and sell them when they are dear to others during panic (which fortunately happens often enough, e.g., four opportunities in BKX puts since I first bought them on Oct. 27, 1997 at the open!) So, Dan, I am not a technician but use the prices as the timing tool! I do pay attention to what many other market participants are saying and doing. To have ones views be corroborated by many other independent methods greatly adds to the degree of confidence that can be assigned.
SELECTION METHODOLOGY
Every serious investor and a portfolio manager must have an investment theme (or philosophy) when it comes to the selection of what should be included in the portfolio. In one word our theme for the Six-Pack (and Nine-Pack that includes TRV, DIS and IIX) is – MANIPULTION. The most important part of the manipulation that we were way ahead of almost everyone else in identifying is the accounting manipulation when it comes to acquisitions, stock options and "earnings management" in general. (Working for the undisputed master at this game helped a lot! Four "one-time" charges in a quarter and some in almost every quarter!). Another form of manipulation is the behavior of the corporate managers to feed the frenzy in their stock by timely comments, stock buy-back announcements and the timing of the splits (King Dell). Yet another, and by far the most pervasive, is the general "bull marketers" whose only product is nothing but the "bull marketing" itself, led by none other than Abby Joseph Cohen. Profit making being the ultimate religion how can we question their motives. Some have adapted this as a cult or a religion (as the BLW camp here). And why not. With mantras like "It is a Bull Market until it is not," a truism if there ever was one, how can they help but attract followers. Of course, one needs more to keep his flock in line, like the Sign Posts of our own Brother Dan. There are too many lazy and ill-informed multitudes of people out there seeking unreasonable gains (you deserve to be rich!) and a religion that makes it possible to hold such hope. Finally, being value players how can we not take over-valuation into account in our selections. We believe that CSCO, DELL and AMZN more than qualify for over-valuation and manipulation (hence NDX and IIX) and so do BKX, DIS and TRV (who better at the game of manipulation than Eisner, the media mogul, Weill, the broker (lately a banker too), and many of the bankers). SPX is a general-purpose holding.
TRADING TACTICS
We don't chase the market but rather we let the market come to us. We buy puts on GTC (good till cancelled) orders at limit prices when others can't bear the pain of holding them any longer or have other needs (as generous souls we take comfort in our charitable works). We sell our puts at outrageous prices, also with the limit GTC orders, when others are seeking protection from the consequences of their bad judgement in not selling the underlying at high prices. Occasionally, more often than we like, we put our puts to rest with sadness in our heart. Yes, Geoff, a value player adds to his losers if his research was good in the first place! If the loser is due to bad selection in the first place or real change subsequently – get out fast. The puts have a theoretical limit as to how high they can ever go, unlike the high flier stocks like Dell, and it is not smart to hold on to a "depreciating asset over time" when a very high price is being offered and other attractive "assets with great appreciation potential" are waiting in the wing.
ASSET ALLOCATION
We don't want anyone to have all his or her assets in Six-Pack. Those who are more sophisticated options players a portfolio of short options (naked), mostly calls, is a great compendium to the Six-Pack. I myself have 50K+ short options on Dell alone! That is how I plan to pay for my puts in a sideways to slightly up (10-15% year) market. I have US treasury zero that I bought in July'97 and few other odds and ends including a US treasury bond fund (closed-end, MIN) that yields almost 7%!
It is a speculative activity, but no more than having 70% or 100% of your "investment" capital in US stocks. DON'T LET THE "BULL MARKETERS" TO HAVE YOU BELIEVE THAT HOLDING ON TO THE US STOCKS AT CURRENT LEVELS IS A "SAFER" INVESTMENT THAN CASH OR SIX-PACK OR BONDS AND NOT A SPECULATIVE ACTIVITY.
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