Book Review > The Stock Market Survival Guide, Tools for Trading Down-Trending and Volatile Markets

Other Books By the Author: Derivatives in a nutshell, Picking Winners and Trader's Tutorial.

The author's "objective in writing this book was to present various strategies that, in the event of a period of financial turmoil, can be employed to protect the average investor's portfolio and help him or her emerge unscathed (or less scathed) from a bear or choppy volatile market." (Page 166)

The strategies have been tailored in a sympathetic way for those of us with an average understanding of equities and managed funds. It was refreshing to see that you can have a strategy for owning managed funds.

For most of us (especially the financial planner on the trailing commission) these are a set and forget investment. Or as we look at our annual report in July 2003, a set and regret experience. Harper suggests you consider moving to managed funds that are multi sector and "offer investors a choice in how the assets are allocated within the fund." (Page 33)

You manage your asset allocation by some simple Technical Analysis of the charts for the S&P/ASX 200 Index and the US S&P 500 Index. He suggests you utilise two moving averages (200Day and 60Day) to generate crossover sell or buy signals to guide you in asset allocation.

"For example, a common asset mix might be 30% in overseas equities, 20% in fixed interest, and 50% in Australian equities. Acting on those signals would cut back on equity components and increase fixed interest allocation until the indices showed signs of recovery".

You can access these charts for free through a friendly broker/advisor (perhaps the one taking your trailing commission!) or on line on www.incrediblecharts.com.au.

The author suggests Perpetuals Investor Choice Fund as a consideration to utilise this strategy. There are about nine asset classes you can switch around in. "To be able to switch between asset classes yourself without incurring capital gains tax is a major advantage. This is what makes a multi-sector fund like Perpetuals Investor Choice Fund ideal for the retiree's purpose…No additional funds are required-you simply shift back and forth." (Page141)

"This is a simple defence strategy. Stay in the short-term fixed interest fund cash fund until evidence of a true economic upturn gathers pace, then switch into equities. Waiting for confirmation will inevitably mean missing out on some of the early gains. Retirees shouldn't be concerned about this. After all, preservation of capital is the main criteria. If a new bull market is indeed on the cards, it will be around for some time to come." (Page150) The author reflects that "Bull markets can be compared to a stroll up a long flight of stairs; Bear markets are more like a fast descent in a high speed elevator." (Page167)

The book contains a stimulating discussion on the use of gold as a defensive strategy and a must in every ones portfolio. Harper suggests that most investors "keep a small core holding in the portfolio at all times, and expand it significantly during times of market uncertainty." (Page 85) "Because of its contrarian nature, a gold based investment is just as suitable for retirees as anyone else: it may provide a capital gain just when most needed as it did in November 1987."

A particular category of gold shares may be of interest here, however: those that pay a good dividend. There is one especially notable stock in this category-AngloGold." (Page148)
The use of derivatives in the form of put options and out warrants is quite thoroughly presented in this book particularly the purchase of index puts or index put warrants.
"Make it a point to include a certain percentage of put warrants in your portfolio as a matter of course. Then you do not have to play a guessing game about whether the bear is waiting around the corner. During depressed markets, profits from selling the put warrant can be used to buy undervalued shares. During boom times, profits from the sale of shares can be used to buy undervalued put warrants." (Page125)

Remember, "A long bear market can do terrible things to an inflated bank stock's share price, both because of overvaluation and the possibility of a severe earnings slump in the event of a recession". Page152. The prudent thing is to protect this type of holding with derivatives.

The book concludes with considerable discussion on different tactics for bear and post bear markets. "An economic cycle usually covers an approximate nine-year span. As of early 2003, three years of a Bear market has already been endured. The key things you must know to make investment decisions are reasonably basic. Are interest rates going up or down? Have share prices been strong or weak? Is there a recession going or are things booming? What is happening to real estate prices? Generally, unless you are comfortable with the derivative strategies I have provided in this book, you should have a minimal exposure to shares until the confusion of a market such as early 2003 clears away." (Page162)

It is possible to make money in a bear market. Harper particularly likes strangle plays. "Strangle is the term that option brokers use to describe an option strategy that consists of buying both calls and puts on the same security, with the same expiry date, but with different strike prices. The intent is to establish this sort of position by paying a small premium so that it doesn't matter which side of the trade moves strongly, as long as one or the other does." (Page173)

This book is not a cookbook with a recipe for survival in a bear market. You have to respect the author for his wide knowledge of investment classes, products and market tactics. The book has been written for a wide audience from the retiree to the young starter in the game. I found the commentary on the effects of historical bear markets a sobering reminder that misadventure can be just around the corner. It is possible to manage risk and I read somewhere that "education is the best form of defence for a nation" and I feel a personal portfolio of investments.

Harper has a book that can be added to your library if risk control is a priority in your investment management.