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Magic Charts Newsletter
December 3rd, 2001 |
This issue includes...
1) "How is the sample portfolio ?"
2) "Working with a debit percentage"
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1) "How is the sample portfolio ?"
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Our sample portfolio is on 83,5% gain this year, It was on
84.8%, but due to the costs of buying new stock the number is
slightly declined.
There is a screen shot on the bottom of this page.
Moore Corp and Office Depot are out of the trouble zone, and
we decided it was time to buy some new shares. Our aim is to
go over the 100% this year!
We used the 'Buy the Winner' view in our Magic Charts program
to selekt the following stocks based on there performance the
last month and last 3 months, and there charts.
A.C. Moore Arts
Ameristar Casinos
Bio-Reference
Bradley Pharma
Digital River
McData Corp.
Mercator Software
Multimedia Games
Racing Champions corp
Red Hat
Symantic
And we increased our position in Autozone.
We had about $220.000 to 50% debit, so we bought them for
$18.500 each.
More on the debit percentage in the next chapter.
If you like to try our Magic Charts program, you can
download a demo from our site at:
http://www.magiccharts.com/download
We even added a free trial subscribtion for one month! see
the demo program for instructions!
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2) "Working with a debit percentage"
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We have had some questions regarding working with the debit
percentage, so here is how it works;
When you buy stocks for say $10.000 your bank is willing to
lend you money on those stocks, normally 60 - 70% of the
stock value.
If you borrow 60% of that $10.000 = $6.000, If you buy stocks
for $6.000, you can also borrow 60% on those stock = $3.600
and so on.
Ultimately, you can borrow 1,5 times the $10.000 when you go
to 60%, so you can buy stocks for $ 25.000. with 70% it is
even 2.33 times the $10.000 so you can buy for $ 33.300.
It is not wise to go to the maximum amount, because if your
portfolio declines a bit, the bank forces you to sell stocks.
That is why we use 50% debit for our portfolio. In that case
we can double the our initial amount to $20.000 and our
portfolio can decline to $ 16.000 (-/- 20%) before we get to
the 60% debit. Since we have decided that we sell stock when
they close 20% under their highest point, this should be
sufficient. (we have even more room when the bank allows up
to 70%)
Why do we use a Debit Percentage ?
You pay about 8% interest on the Debit Percentage,
everything you make with the borrowed money above this 8% is
pure prophet.
When you use a 50% Debit Percentage, you have a 100% leverage
on your portfolio, because you invested $10.000 and you get
the results of $20.000!
When your portfolio grows, you can buy new stocks by lending
money on the extra space in your portfolio, and that way you
can buy new stock, without selling old stocks.
So if we start a portfolio of $10.000 with 50% debit we buy
for $20.000 stocks. That means we have a portfolio total of
$20.000 and a balance of $-10.000, and our total value is
$10.000 (20.000 - 10.000)
If our portfolio rises to a value of $22.000, a gain of
$2.000, we gain 20% on our starting $10.000.
We can calculate for what amount we can buy stocks with the
following formula: (Percentage debit / 100- Percentage debit)
x total value + balance
So in the new situation this will be 50 / 100-50) x
$12.000 + $ -10.000 We can buy for $2.000 extra shares and
you have a $24.000 portfolio!
What are the risks ?
A portfolio with a debit percentage works both ways, it rises
fast, but declines also very fast because of the leverage.
Part of the reason of the 1929 crash was that a lot of people
where forced to sell stocks, because they had borrowed money
on there stocks and when the market went down they run out of
space and with a lot of people on the selling side, the prices
dropped like bricks.
What do we do to prevent
this ?
When the market becomes uncertain, and we sell stocks because
they reach there minus 20% level, we don't fill our portfolio
again to 50% debit, but we leave the portfolio like that.
That way, we keep the strong stocks in our portfolio, and the
debit percentage declines and so the leverage declines.
When we decide that is is time to buy, we can decide to go
back to the 50% or not.
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Copyright 1998-2001 by Magic Charts. All rights reserved.
This document may not be copied in part or full without
express written permission from the publisher.
Trading in stocks involves risk. You can lose money. We are
not making recommendations to buy or sell any stock. We share
our views about how to trade stock.
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Magic Charts sample portfolio per 30-11-2001
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