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 The Weiss Bear Strategy (by Sebastian Leburn)

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Registration date : 2007-07-01

PostSubject: The Weiss Bear Strategy (by Sebastian Leburn)   Sun Sep 02, 2007 10:38 pm

The Weiss Bear Strategy (by Sebastian Leburn)
9/1/2007 7:30:00 AM



Sebastian Leburn
I'm the
portfolio manager of the Weiss Bear Strategy, and I think it's time we
talk about the risks of U.S. stock market declines.

Most
people think the risk is greatest when corporate profits are sinking or
unemployment is rising. However, some of the sharpest and most
prolonged stock market declines in history began in the best of times.

Others believe that the Federal Reserve can step in soon and end it quickly. True? Sometimes yes, sometimes no.
When the decline is primarily caused by a glitch in the financial markets, like the 1987 crash or the 1998 decline, the Fed can usually turn things around.
But when
the economy sinks into a recession or depression, the Fed's
intervention is rarely enough to protect investors from losses, which
can be severe.

How do you know ahead of time? You don't. Which leads me to my main topic:
How to Protect Yourself from the Risk of a

Stock Market Decline That You Can't Predict

I recommend a few basic rules …
Rule #1. Don't rely on forecasts. They're often wrong.
Before
crashes and bear markets, you can count on your fingers the number of
people anticipating the decline. Then, after the fact, with the benefit
of 20-20 hindsight, it seems that nearly half of Wall Street claims to have done so.

But the
reality is that modern math and science are ill-equipped to predict
discontinuous events like a crash. A more reasonable goal, in my view,
is to recognize it after it has begun … and then carefully monitor its continuing progress through time.

I think this goal is very achievable, provided you can adhere to …
Rule #2. Remove major biases from the equation.
In other words, objectively recognize when the market is changing direction. Accept it. Work with it. Don't fight it.
Unfortunately, however, during the recent bear market of 2000-2002, even after the bear manifested itself, the overwhelming majority of brokers and advisers ignored the risks of further declines.1
Rule #3. Don't try to protect yourself from all of the risk all of the time.
There
are many mutual funds and ETFs available today that are designed to go
up when a major market index or sector goes down. But like any power
tool, you should only use it when you need it. It makes no sense to
turn it on and keep it running 24/7.

For
example, consider a fund that's set up to rise 1% for every 1% decline
in the S&P 500 Index. That can serve as a good hedge.

But
buying it, leaving it in your portfolio, and then just forgetting about
it is a mistake, in my opinion. If we're in a sustained bull market, it
will just erode in value.

Rule #4. Manage your hedges intelligently.
When a decline is confirmed, recognize it promptly and then add bear market hedges. When an end of the decline is confirmed, also recognize it promptly and reduce your bear market hedges.
These are the rules I follow with the Weiss Bear Strategy.
The
Weiss Bear Strategy is not a publication. It's an individually managed
account program at Weiss Capital Management, a company that's separate
from the publishers of Money and Markets.

And unlike an inverse mutual fund or ETF that's designed to automatically move
in the opposite direction of the market, the goal of the Weiss Bear
Strategy is to help protect investors from downside risk only when we feel that the downside risk is confirmed.

So the primary goals of the Weiss Bear Strategy are twofold:

  • Minimizing the program's losses in bull markets.



  • Maximizing the program's profits in bear markets.

That's
how, even in the long bull-market period from January 1, 2003 through
June 30, 2007, we were able to keep losses under control — producing a
cumulative total return of -15.61%, net of all fees.

And
that's how, despite the relatively shorter bear-market period from
December 31, 2000 through December 31, 2002, we were able to produce a
substantial profit — a cumulative total return of 43.27%, net of all
fees.

In sum,

  • In 4 1/2 years of bull markets: a 15.61% loss.


  • In 2 years of bear markets: a 43.27% profit.

Past performance is no assurance of future results. But our goals for the months and years ahead are unchanged:

  • If
    the bull market continues, we will seek to keep any losses
    significantly smaller than the loss you'd see if you just bought and
    held an inverse fund. And we may even reduce those losses to zero, producing a positive overall result, as we have in the past couple of years.


  • If
    we experience a bear market, we will seek to produce a profit that's
    significantly larger than the profit you could make simply by holding
    an inverse fund. That's what we did in the last bear market. And that's
    what our goal is for the next one as well.


To
establish a relationship with our firm, the minimum investment is
$100,000; and you can achieve that minimum by combining an investment
of at least $50,000 in the Weiss Bear Strategy with one of our other
programs.

There
are no fees for opening an account. There is, however, an annual
management fee of 1.5% on the Weiss Bear Strategy. The program is
eligible for retirement accounts. And, naturally, it costs you nothing
to get more information and find out if you're suitable for this
aggressive strategy.

We'll be back in the office Tuesday morning. So you can reach us there at 800-814-3045. Or just give us your information at our website.
And no matter how you reach us, be sure to review
our full track record along with our
Important Disclaimers and Disclosures.

Best wishes,
Sebastian Leburn, CFA

Chief Investment Officer and Portfolio Manager

Weiss Capital Management, Inc.
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