Many years ago, I received a frantic call from a gentleman that had "bet the farm" on a speculative stock that was mentioned on CNBC. He was losing his shirt on the position and wanted to know what to do with it. Even though I felt very bad for him because he had been paralyzed in an auto accident and bet his entire injury award, $360,000 on the stock, I refused to offer him any advice. But I wondered, "How could he be so stupid?"

This incident led to my classic essay, dated 05/24/96, "Where's the Beef?" More recently, 05/11/07, I wrote about a guy who lost $500,000 on the quiz show, "Are You Smarter than a Fifth Grader? Two weeks later, I wrote another essay called, "The Risk of Ruin." It was about position sizing, actually.

Position sizing is a very important part of portfolio management and, in fact, it is the first thing one should consider when putting money at risk. Before making any investment, whether it be for the purchase of a car, house or stock, one must ask, "How much can I afford, or am I willing, to lose on this investment?"

The answer to this question has several parts, the first being that of asset allocation, i.e., "What percent of my net worth can I risk in this particular asset class?" Once this has been translated into dollars, you know how much money you have to work with. Let's suppose the amount is $10,000. The next question becomes one of, "How should I invest it?"

It is generally believed that one should not risk any more than two percent of their stake in any single stock position. Even that seemingly small amount is too much for me. I believe that one should not risk any more than one percent of their stake in any single stock position. (See my 02/06/09 essay on Risk Management). What? One percent of $10,000 is only $100. How can I make any serious money investing only $100 at a time?

Hold on, silly boy. There's a big difference between what you invest and what you risk. For example, you may invest $1,000 of your $10,000 stake in any single stock position and still limit your risk to $100 by using a 10% Stop-Loss order. Or you can invest $500 in any single position and use a 20% Stop-Loss order. In fact, there are an infinite variety of investment and Stop-Loss combinations you can use to limit your risk to one percent of your stake. My essay, "How to Set the Right Stop-Loss Percent," dated 02/20/09, explains exactly how investment decisions and Stop-Loss percentages are tied together in Position Sizing.

In regard to managing the Model Portfolio, we start with a stake of $100,000 at the beginning of the year and normally elect to have 10 positions with a 5% or 10% intraday Stop-Loss, depending on how we feel. At the end of each day we calculate new Stop-Loss Prices from the higher of our purchase price or the highest closing price since purchase. Our goal is to get the Stop Price above the purchase price as soon as possible.

In the current campaign, which started on Monday, June 22nd, we used 50% of our available funds to establish 10 positions. Therefore, we are effectively risking only 5% of our stake even though we're using a 10% Stop. Moreover, we have not been replenishing vacated positions since the downturn has appeared to fizzle-out.

One of the errors many investors make is they think that making money in the stock market is only about picking the right stocks. It could be if you're right all the time. But nobody is right all the time. So the secret to success is that of making money in spite of your losers. In fact, many of the most successful money managers say that of even greater importance than stock selection, is Position Sizing and Portfolio Management.

Referring back to my essay of March 6, 2009, "Itching to Rally," it was clear to me that investors wanted to buy stocks very badly. They were discounting all manner of bad news, believing whatever lies were being told and ready to climb the slippery slope of hope. Boy, did they!

The Price of the VectorVest Composite is up 31% from its March 9th close and investors' sentiment has undergone a mighty change. Investors now believe that the bear market is over and stock prices are more likely to go up than down. The only problem is that they are not convinced. Why should they be?

The bear market isn't over and it won't be for a long time to come. The economy is in terrible shape and there's no guarantee it's going to get much better soon. All the talk about the housing market hitting bottom on June 30th, "green shoots," and GDP going up in the fourth quarter is just a lot of hooey. For months, Dr. Ben Bernanke, Head of the Fed, has been saying that the economy will be growing by the end of the year. Yet, the minutes of the Fed's April FOMC meeting, released Wednesday, shows a forecast of a worsening economy in 2009.

Yesterday's news that Standard & Poor's said the U.K. has a 1 in 3 chance of getting its credit rating downgraded from the AAA sent stock prices plunging around the world. It also raised concerns about the U.S.'s AAA credit rating, sending both the U.S. dollar and U.S. government bond prices lower. Government data showing on-going jobless claims at a record high and a Philadelphia Fed survey showing further contraction of manufacturing activity also dampened hopes for an early end to the recession. So what are bullish investors thinking?

They're thinking that bad news offers new opportunities to buy stocks at lower prices. Their strategy has changed from "selling the peaks," when they were bears, to "buying the dips," now that they're bulls. Instead of sliding down the slippery slope of hope, they're Climbing the Wall of Worry.

After attending the Las Vegas MoneyShow for more than 15 years, this was our best experience, by a long shot. The mood and sentiment of the attendees was upbeat and the feeling of confidence was back in the air. It was so nice to have so many satisfied customers visit our booths, hear our presentations and come to our reception.

The success stories I heard were most gratifying. Several customers told me how they got out of the market when we warned of the long bear market on November 2, 2007, and many others were raving about their gains since the March 9th bottom. One gentleman showed me a "real money" portfolio that was up 187%. Another showed me a portfolio that was up 242%. Still another said he bought Jail Break options on our C/Up signal in March, and he's up 525%.

A relatively new customer said, "VectorVest saved his life." He lost his job last December and began trading silver and gold futures to make some money, but he was losing his shirt. Then he discovered VectorVest and put Jail Break to work when we nailed the bottom. He gave his testimonial before 450 people at one of my presentations and showed everyone an equity chart of his portfolio which was going at a 45 degree angle. Do we appreciate this kind of feedback? You bet we do, and we gratefully say Thank You From Las Vegas.

PARADOX OF THE PEAKS.
Mr. Warren Buffett said it best, "The time to be fearful is when everyone is greedy and the time to be greedy is when everyone is fearful." Intuition, however, tells us to do just the opposite--we like to buy stocks when the market is soaring and back-off when the market is falling. Indeed, VectorVest advocates buying rising stocks in rising markets and selling falling stocks in falling markets. So who's right, Mr. Buffett or Mr. VectorVest?

Both: Mr. Buffett likes to buy stocks at bargain prices and he knows that stocks are at low prices when the market is at five-year lows. Mr. VectorVest also likes to buy stocks at bargain prices and he knows that stocks are at low prices when his Market Timing indicators are exceptionally low. In both cases, people are fearful when the market is low. Indeed, the Investor's Intelligence Indicator of Investment Advisors Sentiment hit an all-time low of 21.3% Bullish Advisors on October 31, 2008. (Please see the Investment Climate Graph.) The trick to making this approach to bargain hunting work, however, is to know when the market has stopped going down. Mr. Buffett makes no claims in this regard. Mr. VectorVest has done it time after time.

Currently, the market has risen dramatically from the March 9th bottom and Mr. VectorVest has become more fearful as the Price of the VectorVest Composite has gone higher and higher. Many of our Users have noted that our key Market Timing Indicators had risen to extremely high levels, thereby suggesting Bullish conditions. Inexperienced Users may have believed that was a good time to be greedy, but it was not. It was a time to become fearful. That's the lesson of the Paradox of the Peaks.

Yes, VectorVest will be attending the Money Show at the Mandalay Bay Resort and Casino in Las Vegas, May 11-14, 2009 and, of course, we would love to see you there.

For the first time ever, we're going to have two booths: We'll be demonstrating VectorVest US, answering questions and offering Special Prices on all of our Products and Services in booth 701, and we'll be demonstrating VectorVest RealTime in booth 805, which is nearby. We will have computers set-up in booth 805 so that you can take V V RealTime for a "test drive." We will also be introducing a new tool for V V RealTime that is unlike anything you have ever seen. This tool is so good that I'm tempted to guarantee you'll make money with.

Of course, we'll also be giving several great presentations at the show. On Tuesday, May 12th, I will speak on "Stock Valuation & Stock Market Cycles" at 2:15 PM, and I will also speak on "How to Pick Stocks" at 3:15 PM. Mr. Steve Chappell will speak on "Timing the Market" at 4:15 PM. On Wednesday, May 13th, Mr. Chappell will speak on "ETF Magic" at 3:15 PM and Ms. Angel Clark will present "Cherry Picking for Big Winners" at 4:15 PM. You won't want to miss any of these great talks, so come early.

To top off the fun on Wednesday, we're having a CUSTOMER APPRECIATION RECEPTION at the hotel starting at 6:30 PM. Please come to booth 701 to get the exact location of reception since it has not yet been designated.

Finally, we'll be offering a TWO-DAY INVESTMENT SEMINAR at the hotel on Friday, May 17 and Saturday, May 18, 2009. Please note that this Seminar will be aimed 100% toward helping you make money with VectorVest. The complete agenda and other details for the VectorVest Two-Day Investment Seminar may be obtained by clicking on the following link: http://www.vectorvest.com/training/2day_nv.htm.

To register FREE for the Money Show, please visit www.vectorvest.com/training.htm and click the link to the Money Show on the left hand side of the screen, then click on the Register online link.

Did you ever think you could go to Las Vegas and be virtually certain to return home as a winner? It will happen when you Come See Us In Las Vegas.