About the Fire Sale Portfolio (tm)

It is a commonly accepted fact that it is impossible to exactly call the top and bottom of any market cycle. In February of 2001, many people believed the bottom was at hand. While we were cautious, we recognized many people had money burning a hole in their pockets and wanted to throw money at the market. We chose a collection of technology stocks which, when grouped together, we felt presented an intriguing opportunity for profit.

Other than trying to be clever, we named the portfolio the Fire Sale Portfolio™ because the stocks we chose were well off their highs. Technology stocks were damaged goods in the minds of many professionals, some of whom predicted they would never come back. The sale of heavily discounted, damaged goods is often called a 'fire sale' and we liked the imagery.

Not by a long shot. Much of the mail we've received has been critical of our timing and the performance of the portfolio. While there is no ducking performance and we refuse to do that here at NymbleInvestor.com, it is important to understand the specific rules and rationalizations behind this portfolio as originally described. Here are the rules and goals we set out for the Fire Sale Portfolio™ as described when we launched it in February 2001:

This is an ultra-high risk portfolio so it can only be a small percentage of a person's total investing capital. We have chosen a portfolio size of $35,000. Most people consider risk portfolios to be excessive anything over 20% of liquid assets. Don't go whole hog.

We wanted a basket of stocks to spread the risk around. In addition, we want to manage risk by including established companies or companies with established science and good future prospects.

We're looking for a maximum downside of 50% of the total portfolio and a gain of 100% or more in 12-18 months or less.

If you don't have $35,000 to risk, scale back the buys accordingly. You could also try LEAPS, since all of these are optionable, but try and keep your ultimate risk level the same. Perhaps a better alternative would be a service like folioFN which allows you to control a large number of stocks with a little amount of cash without the accordant per-transaction trading fee hit.

This was also designed to be a low-maintenance portfolio. Subsequent to the original implementation, we made the decision to evaluate the portfolio quarterly and excise companies whose fundamental situation had deteriorate to such a large degree that it made no sense for them to remain in any kind of portfolio. A good example of this was the removal of PurchasePro (NASDAQ:PPRO) in late May, 2001 given the collapse of the management team collapsed and SEC involvement.

Sure, but there was no way to know that for sure in February. That's the thing about market tops and bottoms -- they are apparent only after the fact. Do we wish we'd launched this in April 2001? From this point in early July 2001, that's a no-brainer question. If April 2001 doesn't end up being the low, then we'll wish we had launched it even later! That's the nature of timing. Keep in mind, however, we anticipated a 50% decline in the portfolio in exchange for a 100% upside in 12-18 months. That's high risk/high reward -- and the point of a portfolio called "Fire Sale."

Detailed performance of the entire portfolio, as well as a listing of all components and any changes, can be found in the Performance section of our site. It is updated daily. We update the bottom-line performance of the Fire Sale Portfolio™ daily on the home page of this site.