Bottom-Fishing: How does the Kaiser Bottom-Fishing System work?
The Kaiser Bottom-Fishing System
Bottom-fishing is the investment strategy of buying stocks when they or their sector are unpopular, and selling them off in stages as they become popular. Penny stocks are influenced by five key cycles: a general market cycle, a sectoral cycle, a seasonal cycle, an individual company life cycle, and story driven speculation cycles. Any combination of these cycles can create peaks of extreme optimism and valleys of deep pessimism. Bottom-fishing targets the valleys of deep pessimism on the assumption that in the long run extreme market conditions never prevail.
1) General market cycle (economy related)
2) Sectoral cycle (ie Internet or gold)
3) Seasonal cycle (ie information flow cycles)
4) Life cycle (the rise and fall of insider ownership)
5) Speculation cycle (driven by expectations)
The general market cycle is influenced by the economy and is reflected in the performance of major stock exchanges. Penny stocks generally do best in the advanced stages of a general bull market, which happens to be the case today. Sectors such as resource and technology stocks follow their own cycles with the result that there are always sectors that are hot while others are cold. The seasonal cycle reflects the nature of information flow, whose gaps and spurts are most pronounced in exploration juniors with weather constrained work seasons. Another form of the seasonal cycle is the psychology of the calendar year, which weds tax strategies with a natural inclination towards optimism early in the year that wanes in summer and eventually culminates in disappointment driven tax loss selling. Every junior company has a life cycle, which starts out with a high percentage of the stock in the hands of insiders and ends with a reorganization when the insiders have little stock left., or, more rarely, when it is bought out by a bigger company. We call a stock early life cycle if the insider network owns 50% or more of the paper, mid life cycle if the insider stake is below 50% but still significant, and late life cycle when it has dropped below 10%. A speculation cycle is a period of rising prices and volumes driven by market speculation about the success potential of a company's story. A junior company can have one or more speculation cycles during its life cycle. The strength of a spec cycle will depend on where the stock is in terms of the other cycles.
1) Bottoming chart pattern
6) Project valuation
The bottom-fishing strategy targets juniors that are early in their life cycle and consequently have not yet undergone a spec cycle, or that are trading in the trough between spec cycles. Only companies with a flat-lining or bottoming chart are treated as bottom-fish candidates. For a stock to qualify as a bottom-fish buy, evaluation of its chart, structure, people, capital, story, and project value must lead to the conclusion that the probability of a spec cycle that generates a gain of 500% or more above the bottom-fish buy range is good. Structure reflects the amount of stock in the hands of people in a position to affect the destiny of the company. The potential for a major spec cycle is directly related to the track record of the people behind the company. Capital is the means by which a company acquires a venture and tries to turn it into a fundamental success. The story is the venture or project that the people motivated by structure intend to use capital to turn into hard value. The project valuation is the value assigned by the market to the project (fully diluted capitalization times price divided by net project interest). This condition, important for asset plays, is met if it is plausible that a success story would entail a theoretical value at least five times the current project value.
1) Top (spec cycle imminent)
2) Medium (needs good news to launch spec cycle)
3) Low (spec launch timing uncertain or long term)
4) Extreme (high reorganization or suspension risk)
A bottom-fish is ranked a top, medium, or low priority buy according to the expected timing of a spec cycle's launch. Top priority goes to bottom-fish which could launch a spec cycle immediately. Medium priority goes to bottom-fish which need developments beyond management's control to launch a spec cycle. Low priority is for when the timing and reason of a spec cycle launch is uncertain or long term. Extreme priority goes to bottom-fish trading below $0.10 which are threatened by a rollback or trading suspension but which may emerge unscathed. Extreme bottom-fish are "extremely" high risk, but because they are often available in huge volumes at very low prices a bottom-fisher has the potential to make a tremendous score if the rollback or suspension is definitively averted. We recommend that everybody but sophisticated bottom-fishers stay away from low and extreme priority bottom-fish. Novices or bottom-fishers who do not want to do their own homework should stick with top priority bottom-fish because these are the ones most likely to receive detailed coverage in Bottom-Fish Action and Tracker comments.
Bottom-Fish Risks (TROCL)
1) Timing of spec cycle (when, lord, when?)
2) Reorganization risk (oh no, a rollback)
3) Opportunity Cost (a dud spec cycle)
4) Catastrophe Risk (you mean he died?)
5) Liquidity (sell to whom, to whom?)
The bottom-fishing strategy involves buying bottom-fish, monitoring their continuing eligibility as bottom-fish, and selling the position off in stages as the stock works its way through a spec cycle. The Kaiser Bottom-Fishing System flags stocks as bottom-fish, monitors their status as bottom-fish, provides detailed analysis of the spec cycle when it gets underway, and suggests selling windows through the issue of partial sell recommendations. Because the bottom-fishing strategy is a statistical approach to penny stocks, it is recommended that bottom-fishers maintain a portfolio of at least six different companies to diversify away the special risks associated with bottom-fish. These risks are that the timing of a spec cycle may be far down the road, the stock might undergo a reorganization, the story that drives the spec cycle could be a dud that turns ownership of the bottom-fish into an opportunity cost, a catastrophe affecting key people or the story could curtail the stock's life cycle, and liquidity may be so poor that a bottom-fisher would have a tough time unloading a position at will without a loss.
Bottom-Fish Buy Brackets
When we classify a stock as a bottom-fish buy we provide our readers with the essential details related to the bottom-fish criteria. We also assign a bottom-fish buying range that reflects the equilibrium price range within which a bottom-fish fluctuates while it awaits a trigger for a spec cycle launch. For standardization sake we have fixed the bottom-fish ranges at <$0.10, $0.10-$0.19, $0.20-$0.29, $0.30-$0.49, $0.50-$0.75, and $0.76-$1.00. For higher priced bottom-fish we set the bottom-fish accumulation range on the basis of the stock's bottom-fish trading range. We used to consider only stocks below $1 as bottom-fish candidates, but in view of the broad capitalization range we see these days, such a restriction serves no purpose. The bottom-fishing strategy requires that you not chase the stock above the bottom-fish buy limit. Bottom-fish by nature have poor liquidity, so we avoid calling a stock a bottom-fish buy at a specific price. When we call a stock a bottom-fish we are saying it has the potential to launch a spec cycle that takes the stock 500% or more above the upper limit of the buy bracket. We assume our readers will accumulate positions within this range. When we calculate bottom-fish performance for bragging purposes we assume the upper limit as the cost base. Actual gains experienced by bottom-fishers may thus be better than what we post. We don't regard a bottom-fish gain as meaningful until it passes 200%.
It is up to the reader to decide which bottom-fish he or she wants to accumulate for their bottom-fish portfolio. Bottom-fish should not be chased beyond the upper limit of the accumulation range. On occasion we change the buy bracket to a lower bracket if the stock has developed a new bottom. In that case we "close out" the old bottom-fish recommendation, record the loss in the recommendation history, and set a new bottom-fishing range. We change the priority ranking if our opinion about the timing or potential of the bottom-fish changes. If a stock rises above the bottom-fish range we check to see if the move signals the launch of a spec cycle. If not, we consider the bottom-fish a "technical hold" and make no comment. By nature bottom-fish are volatile and can fluctuate outside the bottom-fish equilibrium range for insignificant reasons such as buying or selling pressure from a bottom-fisher. Any bottom-fish trading above the bottom-fish range which we have not reclassified as a "spec cycle hold" is deemed a "technical hold". Bottom-fishers should refrain from further buying when a technical hold prevails.
The Spec Cycle Hold System
If we conclude that a speculation cycle has begun we will issue a notice through a Bottom-Fish Action or Tracker comment declaring that the stock is now a Spec Cycle Hold. From that point on our coverage is geared toward managing the selling strategy for readers who bought the stock as a bottom-fish. At times our spec cycle commentaries may be very optimistic about higher prices, but readers should not interpret this as buy recommendations. Bottom-fish coverage is for people who bought the stock as a bottom-fish. We want to avoid as much as possible the self-fulfilling prophecy role where a bottom-fish is doing well only because subscribers are buying the stock. The Kaiser Bottom-Fishing Report is all about speculating on the speculation process, and things become rather complicated when we are the speculation process. Initially the bottom-fish will be tagged as a Spec Cycle 100% Hold, but at certain stages of the spec cycle we will issue partial sells in increments no smaller than 25%. These partial sells will be issued in the spirit of the "sell some to soon and some to late" rule, and are intended only for readers who bought the stock as a bottom-fish. This does cause confusion in the market when others hear or report that Kaiser issued a sell, but that is their problem and not one for subscribers to the Kaiser Bottom-Fishing Report. Readers do not need to follow these partial sells religiously; just use them as a risk management guide for your bottom-fish portfolio. When you see "Spec Cycle 50% Hold" it means we have recommended the sale of at least half the original bottom-fish position. Performance calculations take into account the partial sells and are based on the closing price prior to the issue of a Partial Sell. Because we wish to minimize the market impact of partial sells, we try to avoid issuing them during downtrends unless we are closing out a position. Until the partial sells add up to 100% and the bottom-fish is tagged a Spec Cycle 0% Hold, the Kaiser Bottom-Fishing Report will continue to cover the bottom-fish. Depending on where we are in the market and sectoral cycles, a spec cycle can last two months or two years. Once a bottom-fish has been reclassified as a "spec cycle hold" the only recommendations we issue are "sells" until the stock has been "closed out". Once a bottom-fish has been closed out it is eligible to be adopted as a new bottom-fish buy if it meets bottom-fish criteria. A stock closed out as a bottom-fish may continue to be the subject of analytical coverage as a "game-fish". We describe game-fish as representing good, fair or poor speculative value in the context of the rational speculation model, but we do not offer buy-hold-sell recommendations for game-fish.
Bottom-Fish Duds and Closeouts
There will, unfortunately, be cases where a bottom-fish turns into a dud such as when management decides on a reorganization after a story fizzles or when something happens that kills any potential for a 500% speculation cycle. Such bottom-fish get designated "Bottom-fish Dud - Hold 0%". Where we are repricing a bottom-fish range to reflect the reality of a new bottom trough we quietly "close out" the old recommendation and reclassify the stock as a bottom-fish with a new buying range.
10 Rule Bottom-Fishing Strategy
In addition to bottom-fish criteria, the bottom-fishing strategy requires a state of mind that runs counter to natural human emotions. The following 10 Rule Bottom-Fishing Strategy sums up our investment approach.
Rule #1 - Buy them when nobody wants them
Buy a penny stock before a speculation cycle gets underway, such as early in its life cycle, when it is seasonally depressed, or when it is in the trough between spec cycles. We buy before promotion starts or a positive industry consensus develops. Bottom-fishing is truly contrarian in that almost everybody thinks you are wrong.
Rule #2 - Buy a basket to diversify away the risk
Always diversify a bottom-fish portfolio. While we think our bottom-fish have potential for 500% or better gains, each stock is vulnerable to the TROCL risks: timing, reorganization, opportunity cost, catastrophe and liquidity. On its own each bottom-fish has a high failure risk and a big reward potential, but as a group they have a reward potential that outweighs their collective failure risk.
Rule #3 - Don't be a top picker
Always sell some too soon, some too late. Everybody dreads making a mistake. When we sell too soon we correct the mistake by doing something foolish. When we miss the top we deny the mistake. The dread, not the mistake, is the enemy, so we pre-empt the dread through a strategy that guarantees we will almost never get it right. Some we will sell too soon, some too late, and at the end of the day it will average out into a nasty tax bill. We believe in the speculation process, not the story's happy ending.
Rule #4 - Divorce your winners
Never buy back a sold position unless the speculation cycle is over, a bottom has developed, and signs of a new speculation cycle are evident. We don't think we are clever enough to trade stocks, are too busy with real jobs and lives to monitor markets constantly, and know our enemies are gambling impulses and our emotions. Momentum trading is an addiction with the familiar motto "I know when to stop". Bottom-fishing has its good and bad periods, but it never wipes you out if you stick to the strategy.
Rule #5 - Don't chase other winners
Re-invest profits in other bottom-fish. Jumping onto a momentum play and riding it higher is the natural impulse after a big win, but we resist the temptation. As we take profits on bottom-fish undergoing a spec cycle we reinvest them in other "boring" bottom-fish, or sit on the cash if good bottom-fish are scarce.
Rule #6 - Know why you own it
Always have a reason for buying or holding a stock and periodically check if that reason is still valid. Not knowing why you own a stock, and why you profited or lost through it, gives you the same degree of control over your financial destiny as enjoyed by ocean flotsam. Without some sort of expectation and timeframe, you cannot manage opportunity cost or your risk/reward exposure.
Rule #7 - Read between the lines
Talk to management to get a better grip on the story and a feel for the company's "voice". Anything in print is history, and very quickly so if the source is credible. You must take responsibility for tracking your bottom-fish and verify your expectations and timeframes with management. Don't look for inside information, because if you get it and act on it, you are breaking the law. But the law does not forbid you to listen to the tone of insiders and read between the lines. The "voice" is not a reliable input for buying decisions, but it is a valuable resource for selling decisions. Don't worry that you are not a technical expert. With skillful questioning you can prompt most insiders to reveal any red flags.
Rule #8 - Spend some of the profits on real things
Regularly pull money out of the bottom-fishing account to set aside for future taxes or purchase hard assets. The impulse to let it ride is powerful. But most bear market cycle shifts are recognized only in retrospect. Do not get caught with unfunded tax liabilities, and don't forget that the purpose behind investing is to make money to buy real things, not end up with a great big pot of paper wealth.
Rule #9 - Don't mix bottom-fishing and trading
Apply the bottom-fishing strategy in a special account and do your trading elsewhere. Nobody can perfectly resist the temptation to take a flyer. But each flyer is a slippery slope for the bottom-fishing strategy. Physical separation is the best protection.
Rule #10 - Be open-minded
Never believe you know or have seen it all. Certain structures in the speculative market never change, but the form and scale in which they manifest themselves do change. By the time we have figured out how something works, the rules are probably changing. Open-mindedness and flexibility combined with cautious skepticism is the best attitude for bottom-fishers.