Now, I have a lot of people asking, "then why were you franticly buying stocks the weeks before the worst 3 days in history?" The reason was to position a certain amount of assets in a "hedged contrarian position." So, now we're back to the beginning question, "what is a hedged contrarian position?"

A hedged contrarian position is a diversified portfolio in which you hedge both a cash position and own a small group of diversified stocks that are "contrary to the market's opinion."

cash

• literally "cash" - United States of America's currency in $20's, $50's and $100's
• federally insured bank and checking accounts
• credible money market funds
• US Treasury Bills
• accounts receivable (though they shouldn't be counted as money, they should be considered in a deflationary environment.)
• foreign currency

However, 100% cash is not a very diversified portfolio... ask any Russian. Of course, having a mix of the "cash" types listed above will give you some diversity. What would happen if their was a deflationary period? It would be good news/ bad news. The good news -- the longer you hold on to your cash, the less you will need to spend... at least in the short term. The bad news -- interest rates would likely drop, and your rate of return would diminish. As our interest rates fall, investors will look around the world for better interest rates causing the dollar to fall in value.

Deflation leads to Depression leads to Devaluation leads to Inflation.

Let's hope the Chairman of the Federal Reserve Board, Alan Greenspan, can continue his excellent record. It will be a hard road ahead. Lowering interest rates could cause the deflation/inflation cycle to accelerate. Not lowering interest rates could cause a recession.

What is a contrarian stock?

The Lyonvest portfolio consists entirely of contrarian stocks. At the time of their purchase, the following "contrary" attributes held true:

• ARCO - the price had been declining for months, the oil glut looks prolonged, and contrary to popular belief the threat of terrorists driving the price of oil up looms. The yield at the time of the purchase was about 4.75%... about the same as the interest rate on a money market account.
• Ralston Purina - the price had been declining for months, commodities glut looked prolonged, and they own Eveready. Because of y2k and extraordinary weather events, the population is likely to "shift the demand curve" for batteries.
• Nord Resources - they mine copper, nickel and other metals used in making batteries. They also explore for gold. Gold can be a nice supplement to cash in times of uncertainty. It was purchased during a price decline.
• Brush Wellman - manufacture beryllium, which gives copper additional qualities. It was also purchased in a declining price mode.
• Hines Horticultural - this one was bought for a real "worse case" scenario. They have a division that deals with peat. In the event of food shortages caused by y2k or climatic events, high intensity gardening will likely increase dramatically.
• Ruger - another worse case scenario stock. In the event of terrorism on US soil, gun sales will likely sore.
• Veridien - they make and/or distribute antibacterial products. As the recent floods in China show, hundreds of thousands of people can become sick from weather or terrorist activities.

What can you do with your savings that contains no risk?

How do you hedge a contrarian position?

First, you must have a position.

Remember, we are just talking about your liquid and semi-liquid savings. The Lyonvest Portfolio is a group experiment and that offers but a glimpse of what a personal portfolio should look like. However; it can be used as a model for the "diversified stock portfolio" portion of your overall financial plan.

Remember, an individual should only invest money using this strategy if they plan on being in for the long haul.

This means you must have a savings plan that includes:

1. saved money
2. and, a preconceived notion for:
   1. the preservation of value
   2. the potential for capital appreciation
   3. guaranteed income

Then, you hedge the position.

To reduce risk even further, there are several additional sub-strategies that can be implemented. The sub-strategies often include "hedging" your position. An easy way to discover some good ways to hedge your position is to ask "what if?" questions, such as, "what if the Federal Reserve Board lowers interest rates? What if the Federal Reserve Board does nothing with interest rates? What if the Federal Reserve Board raises interest rates?"

By doing enough of these "what if?" scenarios, you will be able to see some "contrary to the contrarian" patterns develop... what happens when you were right with a your original contrary position... and what happens when you were wrong... and what happens if nothing happens. Once you have run though the different scenarios, it will be easier to devise a plan to make money in nearly every case. And at the very least, you will be able to devise a plan not to loose value in your savings. When you make a plan that helps limit your worse case scenerio, it is called hedging.

The Lycos acquisition is a good example of how a hedge can be accomplished in the real world.

1. First, start with a good underlying company. When it comes to Internet companies, there are only a few publicly traded companies that "really have something." Yahoo, Spyglass, Netscape and Lycos are a few that come to mind. They have either developed technologies with lasting value or built services on the reality of the world wide web. Lycos invented the spider. They have pursued their ownership rights over this technology.

2. Next, you should try to time your purchase appropriately in the stock's trading cycle. This could mean purchasing the stock near its 52-week low, or well below its 52-week high, or immediately prior to a spike in the price, etc. Lycos represents the later two. It was purchased at 57% of its 52-week high, as well as, immediately prior to an upward spike in its price. Of course, you must take advantage of the spike by either selling at its peak, or selling a coverd call during the frenzy of the upside, or.... (On the point of "trading cycles," you should determine the amount of time you want to spend monitoring the stock's price. Trading on shorter cycles will require a greater amount of time. Since we wanted to show an example of a complete life-cycle, we choose an Internet stock that has a short trading cycle. But since we don't have that much spare time, we generally like longer trading cycles.)

3. Finally, you add a twist... or two. The twist can vary. (Some of our stock picks took the dividend yield into account. For instance, ARCO's yield was 4.75% when money market interest rates were the same. This would represent a hedge against falling interest rates. ) The twist with Lycos was to instantly sell a covered call. We received an 18.9% return on our investment the first day.

Ideally, the "call option" would have been exercised by the buyer before we reached the downside of the price spike (see the example graphic above. By the way, another good time to buy is at the bottom of the spike's other side.) Then, we would have received another 5.5% on our money and been back into a cash position... all within two weeks. That would equate to an annual rate-of-return of about 634%. Too bad it isn't a perfect contrarian world.

In any event, we have made money and continue to have the opportunity to make more. And, by combining this individual acquisition into a group of unrelated stocks, the risk factor will approach zero.

Post-mordant

In my personal portfolio, I have reduced the overall stock holdings to less than 10% of my net worth. Then, I positioned as many stocks as possible with covered calls... locking in thousands of dollars in profits prior to the market drop. I've also increased the diversity by adding stocks like Coleman (camping/survival gear/generators) and Royal Dutch (a foreign oil company).