Investment Strategy for Core Portfolio

In construction of the Core Portfolio, we consider ourselves as investors not speculators. We try to avoid putting money into highly speculative stocks such as penny stocks, momentum stocks, etc. We try to identify stocks with long term investment values. So, we adhere to the following rules for our investment strategy:

1. We only invest in NYSE, NASDAQ and AMEX listed stocks;


2. We do not short stocks;


3. We will not buy stocks in margin;


4. The stocks should have good liquidity.

In general we invest in two types of stocks:

1. Beaten-Down stocks. That is, we select stocks only from those which have lost at least 90% of their value from their all time highs or have lost at least 50% from their recent highs.



2. Earning-Growth stocks. In this case, we will look for stocks with recent accelerated earnings or for stocks which became profitable after many quarters of losses and the profitability will persist into the future.

For the first type of stocks, we will further limit our selections to those which

• Either have no/little debt and have enough cash


• Or have strong money support from big investors to implement their turnaround business plans.

For the second type of stocks, we will concentrate stocks under $20.00/share.

• In most cases we will sell the stocks if the investment gives us 100% annualized return.


• Our holding period is normally limited to one year, this may be true even we may have to take a loss for the investment we made one year ago. In rare cases, we may hold stocks longer than one year.


• Our holding period, however, may be affected by market conditions. During a down market, we may execute quick trades for quick profit. If the broad market is in a downtrend, 70-80% of the stocks, even the best stocks, will follow the trend. During the process, there are rebounds. But the rebounds most likely are short lived. For such cases, our strategy will be to look for oversold companies, which were profitable, were traded near their book values and a base has been built. We will buy on a dip, take advantage of market rebound and exit quickly for a nice profit.


• Our holding period may also be affected by sudden price movement. If the stock gained too fast in too short period of time, we may consider selling it. In most cases, the quick run cannot last even for the best run companies.

In general we do not submit a stop loss order after the selected stocks were bought. Instead, we may implement our multi-buy strategy, averaging down. We will take a loss in two cases:

1. We have hold a stock for more than one year and its price is still lower than its purchase price;


2. Unexpected news broke out concerning the company¡¯s financial situation and we have to re-evaluate the company and may take a loss to avoid further loss.

Profit Protection:

If a stock gained 8% or more after purchase, we should not let the profit slip away. Turning a profit into a loss is a very painful experience..

Never put all eggs into one basket. Diversification will reduce investment risks. On the other hand we should not over-diversify. For our portfolio, we will limit our holdings to 20 stocks at anytime. The positions will not be equally weighted however. Their specific weightings will depend on our level of comfort for a particular position.

Trading Strategy for Short Term Trading Portfolio

Our short term trading system, originally called "5Day3Percent" trading system was designed to try to make a quick profit on possible bounce back of short term extremely oversold stock during bear markets.

The trading strategy is very simple:

• Each week we buy 5 stocks Monday with an equal amount of money and the holding period is limited to one week;


• Stop-loss is set to -4%;


• Minimum profit taking price is set to +3% from our purchase price;


• If the stock continues its up trend after it gained 3% from our purchase price, we will continue holding it until the stock pulled-back from its high;


• If the stock did not touch either -4% stop-loss or +3% profit taking limit, we will use its Friday's close as its sell price.

We use our own set of short term technical indicators to scan the whole universe of stocks for oversold equities. Stock fundamentals, trading volumes, sectors are also part of the selection criteria's.

We have made several changes on our trading strategy. The most important one was made last December when we change our view on market direction from Bear to Neutral. We made the following changes:

• We may buy momentum (hot) stocks. In bull market, many stocks with good earnings, new products, new contracts, new drug approval, etc may see their stock prices skyrocketing in very short period of time. The prices of such hot stocks will be back to reasonable levels eventually. But if you just follow the short term bull trend, you may make big profit in short time frame;


• We may hold bounce back stocks longer. Many beaten down stocks may have much higher gains than the normal 3% level. Many may bounce back 50% - 100% in few weeks. Therefore our holing period may be longer than one week. Now we will limit our holding time frame to three weeks.


• Instead of setting a stop-loss of -4%, we may implement our short term multi-buy strategy. This is different from bear market environment where the stock bottom is hard to predict. Now many stocks are so cheap for us to dump even it continues losing its value after our short term buy. In this case, we may add our position to average down our buying price.