Last week I wrote, "I don't think a buy and hold strategy is the complete answer to mitigating risk." This statement was made in light of the data which showed that the holding period, i.e., time, is a major factor in generating profits in the stock market. While I do believe the holding period is an important factor in turning profits, (VectorVest has demonstrated it hundreds of times in our performance tests of high VST stocks), there's a lot more to managing a portfolio than simply waiting for it to go up.

The first thing one should do when building a solid stock portfolio is pick the right stocks. Although this sounds trite, it's something that must be done. Stock selection is covered in Chapter 12 of my book, "Stocks, Strategies and Common Sense." Simply put, one should start out by selecting safe, undervalued stocks that are rising in price. Pick a variety of high Relative Value, high Relative Safety stocks with steadily rising prices. Review my essay of 08/04/06, Shopping for Bargains. Study the graphs of high RS stocks and look at the phenomenal earnings performance these companies have had. Exemplary earnings performance is the key to picking long-term winners.

So, when would you sell one of these guys? There are two things I watch very carefully. First, of course, is price performance. If a stock's price starts to fall while the market is going up, something is going wrong and it's probably earnings. So EPS is the second thing to watch. Unfortunately, it is not easy to spot an earnings problem ahead of time. Take Chico Fas, CHS, for example. Its price peaked at $48.90 on February 21, 2006, then it started going down. Was there a problem? Its EPS graph looked a little shaky, but the stock's price was doing fine. When Chico's price dropped $6.40 a share on six times normal volume on March 2nd, however, it was time to consider selling the stock. It closed at $17.95 yesterday and its graph of EPS and GRT shows the reason why.

VectorVest puts a Stop-Price on every stock and it shouldn't be ignored. Take Enron, for example. Its price peaked at around $90 late in 2000, then bounced up and down for several months. It finally broke below its Stop-Price of $68.20 in the Spring of 2001, got an "S" rating, and made its final descent. Its financial data looked terrific, but it kept going down and getting more sell signals as the months went by. The bad news finally started coming out at about $20 a share. There was still time to get out with something, but, as you know, a lot of people didn't. The company, which had won all kinds of praise from Wall Street Wizards, went bankrupt and its price fell essentially to zero.

This is why you never want to dollar average while a stock's price is going down. And please, diversify your holdings, even if it's company stock. Many years ago I suggested to a Microsoft employee that he put at least a third of his fortune into Treasury bonds. He has thanked me profusely since then.

The buy and hold philosophy has many, many advocates and it has a wonderful ring to it. But it's a risky strategy unless you start out with good stocks. Therefore, risk management, knowing when to sell, diversification and asset allocation are equally important. Patience is a key ingredient to making money in the long-term, and I wish I had more of it. Combine good stocks, risk management and patience and you'll make profits.

Next week, I'll write more on Risk, Patience and Reward II.

On July 28, 2006, USA TODAY ran an article in its Money Section entitled, "Stocks' Bumpy Ride is Scaring Off Investors." Three days later, it ran another article with the headline, "Investors Search for Direction in Market Swings." Both of these articles hit the mark because they reported exactly what we have been seeing. How bad is the situation?

As far as the bumpy ride and investors' search for direction goes, we know all about these issues because we have been writing about them all year long. This past week was no exception with a swift change in direction on two big up days, and a reversal day today. So what about volatility? The latter article cited above displayed a bar chart showing that the S&P 500 Index moved 1% or more on 125 days in 2002. This number declined steadily each year after 2002, reaching 30 days of 1% or more movement last year. As of today, there already were 24 days with S&P 500 moves of 1% or more this year.

A better way of examining volatility is to look at an All Daily Graph of the S&P 100 Volatility Index, VXO. You may learn more about the VXO by reading my essay of 11/07/03. This graph shows that the VXO peaked at $50.48 on July 23, 2002, then worked its way down to a low point of $9.47 last year on July 20th. The largest spike since then, $22.25, occurred on June 13, 2006, the day the most recent downturn hit bottom. When one compares today's VXO levels to those of the past, one would have to conclude that current volatility is still low. However, it has been increasing from the low point, and therefore, has risk.

I had read that the recent downturn was caused by traders of commodities, currencies, bonds and stocks who wanted to reduce risk as inflation and interest rates were rising around the world. I can accept this and consider it to be a normal economic risk that comes with the business of investing. However, we now have a renewed awareness of abnormal geopolitical risk. It's harder for me to accept this type of risk and I believe it deserves special attention.

The first article cited above deals primarily with normal, economic risk and quotes experts' advice to, "Stay the course and just hang on." This advice is reinforced by quoting Richard Bernstein, chief investment strategist at Merrill Lynch, who reminds investors that a simple risk-reduction tool is time. An accompanying bar chart shows that the chance of losing money when investing for one day is 46%. This chance decreases steadily until it reaches 0% after ten years. The article also says that "A study by Ibbotson Associates showed that an investor with a portfolio that included a mix of large-cap stocks and U.S. government bonds never had a negative return in any rolling 10-year period dating back to 1926."

I have seen such studies before and I believe them to be true. However, I don't think a buy and hold strategy is the complete answer to mitigating risk. Next week, I'll write more about Risk, Patience and Reward.

MICROSAUSAGE.
After getting beat up by analysts for the last year or so Microsoft finally decided to use more of their enormous cash hoard to buy back more stock. (See my essay of 02/18/05.) $20 billion was earmarked for a "Dutch auction" and $20 billion for their long-term repurchase program. Today it said that only $3.8 billion worth of stock was tendered in the Dutch auction. So they will add the unused portion of the money to their long-term program which should be completed by June 2011.

It seems to me that Microsoft could spend a whole lot more on stock repurchases over the next five years. $36.2 billion to those guys is just Microsausage.

In over 15 years of tracking the market, I have never seen as many short-term changes in direction as we have had in the last eight months. No sooner does the Price of the VectorVest Composite go up for a week or two, then it starts going down. After going down for a few weeks, it goes up. Swing traders like this kind of action, but it's hard for investors to make big money. So what's going on?

I have a theory. It may be all wet, but here it is. When Dr. Alan Greenspan was Chairman of the Federal Reserve Board, he presented an aura of knowing what he was doing, but not telling anyone what it was. Since becoming the new Chairman of the Fed, Dr. Ben Bernanke has presented an image of not knowing what he is doing and telling everyone about it. In other words, Dr. Greenspan was perceived to be a leader who knew what he wanted to do and how to get it done. Dr. Bernanke is perceived to be indecisive, contradictory and possibly incompetent.

Leaders, be they right or wrong, exude confidence and have the conviction to move forward. Vacillators are afraid of being wrong, delay making decisions until the last moment and are always seeking more information. While it sounds very reasonable to let forthcoming economic data determine monetary policy, Dr. Bernanke has created uncertainty in what he will do and has given reason for investors of all stripes to second guess him on every bit of economic data that comes down the pike.

Take this week's Federal Open Market Committee Meeting for example. Investors were betting he would pause in raising interest rates for the 18th straight time, but they were also wondering what effect the Q2 Productivity report would have on his decision. While the report showed that productivity slowed and year-over-year labor costs rose at the fastest rate in five and one-half years, both of which will lead to higher inflation, he paused anyway. Core inflation already was well above his stated guidelines, so we now have the issue of whether he means what he says.

This question caused stock prices to go down Tuesday when the FOMC decision was released. Moreover, several astute articles have appeared since Tuesday questioning the wisdom of Dr. Bernanke's decision. As Wednesday's Wall Street Journal put it, "The Federal Reserve has seemed unsure how to proceed on monetary policy for several months, and yesterday they proved it." In my view, uncertainty and a bumpy market will rule the roost as long as we have an indecisive Fed that vacillates until it sees The Last Data Point.

VectorVest is pleased to announce the release of VectorVest Europe effective immediately. All VectorVest subscribers are eligible to receive a FREE 30-day trial of this wonderful product. Simply log on to www.vectorvest.com, click on the members button, enter your user name and password and select VectorVest Europe.

VectorVest Europe covers more than 1,700 stocks, trading on the Amsterdam, Vienna, Brussels, Paris, Xetra, Madrid, Irish, Milan and Lisbon exchanges. End of day data will normally be available by 13:30 US Eastern Standard Time. The text is English and all monetary values are given in Euros.

VectorVest representatives will be demonstrating VectorVest Europe along with VectorVest OnLine America and VectorVest Canada at The World Money Show in London, England on September 29-30, 2006. Admission is free. To register, simply go to the VectorVest website, click on Events and follow the instructions. We will also be giving free Product Reviews in Brussels, Paris, Frankfurt and Amsterdam on October 3, 4, 5 and 6, 2006, respectively. Final details regarding exact locations will be available on our website next week. You will be able to register to attend any of these events via the internet at that time.

Once the trial period has ended on September 4, 2006, current subscribers to VectorVest OnLine may receive VectorVest Europe at the low rates of US$20.00 per month or US$199.00 per year. Try it, you'll like it. VectorVest Europe.

SHOPPING FOR BARGAINS.
The current issue of Barron's Magazine has "TIME TO BUY" emblazoned on its cover. Oh, oh, I thought, "the heat has gotten to them." But it really wasn't that bad. The cover story, written by Senior Editor Andrew Bary, suggested 10, large cap stocks which he expects to rebound. These stocks are shown in a Special WatchList called Bary's Big 10.

By viewing this WatchList, you could see in an instant that this is not a bad list of stocks. But I think there are better bargains out there. I like to look for very high RS stocks that have been clobbered and are starting to rebound. For example, the very top stock, EXPD, in Stock Viewer when sorted by RS descending, had an "S" Rec yesterday, but it went up $1.84 per share on above average volume. The 1-Year Daily graph of EXPD shows that it has been beaten down from $58.28 on July 3rd to $40.52 on August 2nd, even though the company has an exemplary financial track record. It was up more than a buck in early trading today, but has turned lower since then. Nevertheless, I plan to buy it when it starts going up again.

I bought OSK after it exploded $3.51 on high volume on Tuesday. It went up on Wednesday and Thursday and opened sharply higher this morning. It has now slipped into the red, but I'm still glad I bought it. I also bought some UNH shortly after the market bottomed on June 13th. I missed the nice run in WAG because it started going up while the market was still going down. I've got my eye on GGG, however.

Here's a summary of what I do to find bargains: 1) Sort Stock Viewer by RS Desc. 2) Look for high RS, low RT stocks that have a big up day on high volume. 3) Check ProTrader graphs for bottom formations, such as a candlestick Hammer. 4) Buy the stock if the market appears to have bottomed and the stock price is going up.

It's only fair to say that I'm impressed by Mr. Bary's ability to time the market and select stocks, given the low state of his tools and techniques. Nevertheless, I find it much easier and more profitable to use VectorVest when Shopping for Bargains.

P.S. This technique is illustrated as this week's "Strategy of the Week." Please visit the VectorVest University for a voice and visual demonstration.