DeepGreen™ Tutorial

 

 

About Deep Green

The Deep Green system is designed to automate the investment management of a small to mid-size mutual fund. The ten or twenty professionals currently required to manage such investment funds can be reduced to a single person, using Deep Green. Even a professional trading room is not necessary, since all Deep Green purchases and sales are market orders. Deep Green is truly an amazing system for automating the mutual-fund-style of investing, an investing style which has produced some of the richest men in the World!

This is a quick, educational, bullet point, tutorial on the Deep Green style of mutual-fund-style investing. The lessons are plain and simple. You will learn about mutual-fund-style investing as a great business. You will learn about great stock picking. You will learn consistent budget management. You will learn about preemptive risk management.

Good luck!

Investing As A Business

The Deep Green "mutual-fund-style" style of investing is analogous to buying an apartment building and charging rent. In the apartment rental business, profits equal rents minus expenses. Instead of buying apartment buildings, Deep Green investors buy fixed income securities and collect interest. The highest quality fixed income securities are government bonds due in five years or less. It's a great business, the interest payments come regularly, the expenses are minimal, and federal bonds have never defaulted.

Our profits can be increased by investing some of our capital in common stocks; but, only by adding risk. It's still a great business because common stocks can be extremely lucrative in good times, and we control our risk absolutely by the percent of our capital exposed in common stocks. In our business we expose 15%, 30%, and rarely 50% of our capital in common stocks. This leaves us always with a meaningful capital reserve in federal fixed income securities due in five years or less. It's a good business, and we can control the amount of risk.

Interest payments plus price appreciation can be a great business.

Investing Overview

There are many forms of realizing financial gain in the securities markets: investment banking, mergers and acquisitions, day trading, arbitrage, and mutual-fund-style investing to name just a few. The Deep Green system is designed to automate the mutual-fund-style of investing. There are no market timing issues. There are no frequent trading issues. The money is always fully invested in the securities market and/or in the treasuries market. The Deep Green method is tax efficient (the minimum holding period is 12 months). Using Deep Green, a single person can manage a large investment fund.

When we think of great investors, Warren Buffett, Peter Lynch, and Ben Graham come to mind immediately. In each of these examples, great stock picking accounts for only a third of their success. In fact, every great investor needs three skills. Fail in any one of these skills, and the investor risks complete failure.

Great investors don't just pick stocks well. They also manage budgets and manage risk well.

Great Stock Picking

Great stock pickers are hard to find: 85% of all mutual funds under perform the indices. Great stock pickers get taken quickly: Ben Graham, Peter Lynch, Warren Buffett. Deep Green replaces the hard-to-find human stock pickers with millions of tireless software agents. Deep Green automates the fund of funds stock picking style: better performing stock picker software agents get more virtual money to invest; poor performing stock picker agents get less virtual money to invest. Only the best of the best software agents are allowed to provide you with weekly stock picking alerts!

Great stock pickers select stocks with significant future price appreciation. Investing is a game of statistics; but, it's not just a favorable percentage of wins over losses that makes a great stock picker. It's the one or two stocks that grow, and grow for years reaching five, ten, even twenty times their original purchase price. Every great stock picker is defined by a few enormously profitable stock picks.

Finally, great stock picking depends upon fair independent financial analysis. We never use broker affiliated analysis services. Deep Green uses only top ranked INDEPENDENT analysis services: Valueline is an excellent stock ranking service; Standard and Poors is an excellent stock ranking service; and, Investors Business Daily is an excellent stock ranking service. Deep Green combines all of these disperate input sources, studies and analyzes all week long; and, then each weekend, Deep Green publishes an alert list of stocks which we believe are poised for above average price appreciation in the coming 12 months.

Every great stock picker is defined by a few fabulously profitable investments.

Consistent Budget Management

Investing is a balance sheet business. To pay living expenses, an investor must spend from the capital account before income is received. However, expected future income depends upon the balance in the capital account. Therefore the wise investor does everything possible to preserve the balance in the capital account. Consistent budget management is essential to capital preservation.

For a consistent budget strategy, spend by the 5% or less rule. If your net budgeted living expenses are less than 5% of your investment capital on a per annum basis, numerous studies have shown that, in the worst case twenty year period, the balance in your capital account will grow. But, that is only if your net budgeted expenses, each year, are less than 5% of investing capital.

In a severe bear market, your investment capital will decline. Each year as the balance in your capital account declines, your budgeted expenses must be reduced to less than 5% of net investing capital. This means that your budgeted expenses must decrease in a bear market; but, in a bull market, you will give yourself a raise. If you dislike taking a pay cut, then start with budgeted expenses at the 3% level, letting them rise up to 5% (but not over) in a severe bear market. Using the 3% rule, numerous studies have shown that the investor will never have to take a pay cut even in the worst twenty year period.

Great investors watch expenses carefully!

Preemptive Risk Management

For a great preemptive Risk Management Strategy, manage risk anticipating a four year severe bear market. Plan to invest in fixed income securities as well as common stocks in a mixture that allows your principal to recover from a four year severe bear market in 2 to 3 years of average returns.

The great investor manages risk by choosing appropriate levels of capital commitment to fixed income securities versus common stocks. The larger the capital commitment to fixed income securities, the lower the risk. The larger the capital commitment to common stocks, the greater the return. Investing is a game of risk versus return.

For example, assuming that a standard five stock portfolio were selected each year with average annual returns of 65% per annum, a capital commitment of 15% to these five stocks would produce average annual returns of approximately 14% with very little risk. A capital commitment of 50% to these same five stocks would produce average annual returns of approximately 35% but with much greater risk.

WARNING! Index averaging is a popular strategy for managing risk, and it is a strategy which we strongly caution against! While index averaging would have produced average annual returns of 11% in the last century, during the bear market of 1929 thru 1932, index averaging produced losses of over 80%. No amount of diversification, including index averaging, will protect the investor against catastrophic events or major bear market crashes. Use diversification to protect against statistical risk. Use cash reserves to protect against catastrophic risk.

Implement your risk management strategy preemptively, before you incur losses.

Investing versus Trading

Deep Green is an automated mutual-fund-style investing system NOT a stock trading system. Each weekend Deep Green publishes an alert list of stock picks which we believe are poised for above average price appreciation in the next 12 months. In addition, Deep Green publishes a list of thirteen approved risk management strategies of which three involve only fixed income securities and common stocks (suitable for tax exempt accounts), and ten involve fixed income securities, common stocks, and derivatives (suitable only for taxable accounts). The investor may purchase only stocks found on the weekly alert list, and may implement only one of the thirteen Deep Green approved risk management strategies.

Deep Green may be used by both the small investor and the large investor all without the services of a professional trading room. The small investor (a few thousand dollars an up) purchases a few stocks in the November, December, January time frame and sells, after a year, the following January. The large investor (up to 500 million dollars) purchases all alert stocks each week and sells, after a year hold (income tax accounting is on a FIFO basis). A new alert list is published each weekend, and all orders can be entered as market orders over the weekend. The large investor can manage up to $500 million, entering two hundred small market orders each weekend, all without the services of a professional trading room.

Purchase only stocks which you are prepared to hold for 12 months or longer. Frequent, unnecessary trading will greatly depress returns. Frequent trading is extremely costly, not only in terms of commissions and income taxes (only 15% for long term capital gains), but more importantly, in terms of spreads (the difference between the bid and ask price of a stock). Frequent trading depresses returns in two ways: much greater trading costs; much higher income taxes.

Our Deep green investing motto is: Trade less, take home more.

Fear and Greed

There are only two emotions on Wall Street: Fear and Greed.

Investing is both lucrative & dangerous. Bull & Bear markets are commonplace. Bull markets will double your money in a few years. Bear markets will steal 80% of your money in a few years. Plan for profits and plan for losses. You will have profits. You will have losses. The time to Manage your losses is before they occur.

Bull markets enrich investors. There are many bull market stories. In the bull market from 1920 thru 1929, the SP500 rose over 500%. In the bull market from 1933 thru 1942, the SP500 rose over 1000%. In the bull market from 1995 thru 1999, the SP500 rose over 220%. In the bull market from 1995 thru 1999, MSFT rose over 1200%. In the bull market from 1995 thru 1999, DELL rose over 7500%. The average bull market lasted 5 years in the last century, and the longest bull market lasted 9 years.

Bear markets impoverish investors. There are many bear market stories. In the bear market from 1929 thru 1932, the SP500 fell over 80%. In the bear market of 1987, the SP500 fell over 30% in three months and it fell over 25% in one day. From October thru November 1987 Intel fell 48%. From February thru September 2000, IBM fell over 49%. In the bear market from 2000 to 2002, the SP500 fell over 40%, the NASDQ fell nearly 70%, and SUN Microsystems fell over 90%. Your bear market plans should include losses of over 80% on all common stocks. The average bear market lasted 18 months in the last century, and the longest bear market lasted 32 months.

Investing is a game of risk versus return.

Investing Realities

Business Cycles are a reality of investing life. The short term Business cycle is four years. The worst bear lasted 2.7 years (1929-1933). The bear is over (short term cycle) after first 50% bounce. The long term business cycle is 20 years. The worst bear market lasted 13 years (1929-1942). The bear is over (long term cycle) after return to past highs.

Deep Green investors focus on two basic investment products: Fixed Income securities; and Common stocks.

For Deep Green, common stock volume is an important issue. We invest only in the 400 highest volume traded common stock securities, which transact a minimum of $50 million per day in trades. Deep Green stocks must be from well known companies, and must be heavily followed by the Wall Street analyst community.

For Fixed Income Securities, Deep Green only recommends short term bonds of five years or less maturity. Short term fixed income securities are resistant to swings with interest rates. Short term fixed income securities are safer. Long term is 20 years or more. Long term fixed income securities are subject to wild swings with interest rates. Long term fixed income securities are unsafe. We purchase only US Government fixed income securities: Federal TBills, TBonds, or Federal Agency Bonds with five year maturity or less. We call these cash equivalents.

Income Tax is a reality of investing life. Long Term capital gains are 15%. Short Term capital gains are 35%. States can charge income tax.

Income Tax has different brackets. Long Term capital gains are 15%. Must hold investment for 12 months or longer. Short Term capital gains are 35%. State income taxes can be hefty. California income tax is 9%. Tax Minimization Strategies are a necessary evil for Deep Green investors. Brits & Canadians can pay NO taxes if they domiciled in zero tax basis countries such as Cayman Islands, Belize? US Citizens Always owe Federal income taxes, and are liable on world wide income regardless of domicile. US Citizens can minimize income taxes. Long Term capital gains are only 15% and can be achieved by holding securities 12 months or longer. Seven states have no state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Two others, New Hampshire and Tennessee, tax only dividend and interest income.

No investor can avoid business cycles and taxes forever.

Our Weekly Stock Alerts

Each weekend the most successful trader agents, inside Deep Green, publish their stock alerts in these pages. Each alert links to the selected stock and to the trader agent who issued the alert. A large body of analytic data is published on each stock and each stock's industry. Each week stocks are listed in order of past performance and future estimated annual price appreciation. In addition, each Deep Green trader agent is listed in order of past performance by 1 year, 3 year, 5 year, and 10 year rates of return.

After reviewing the published stock alerts, each weekend, the Deep Green investor places market orders to purchase one or more stocks for 12 month hold. Only stocks, published on the Weekly Alert List may be purchased. In addition to publishing ten approved risk management strategies involving stock options for the advanced investor, Deep Green publishes three approved risk management strategies for the basic investor: low risk, standard risk, and high risk. The Deep Green investor may only implement one of the approved risk management strategies.

Strategy 01, the low risk stock fund risk management strategy, commits 15% of investing capital to common stocks (chosen from among those on the Weekly Alert List). The remaining 85% of investing capital is commited to US Treasury or US Agency fixed income securities with a maturity of five years duration or less. Market orders are placed over the weekend.

Strategy 02, the standard risk stock fund risk management strategy, commits 30% of investing capital to common stocks (chosen from among those on the Weekly Alert List). The remaining 70% of investing capital is commited to US Treasury or US Agency fixed income securities with a maturity of five years duration or less. Market orders are placed over the weekend.

Strategy 03, the high risk stock fund risk management strategy, commits 50% of investing capital to common stocks (chosen from among those on the Weekly Alert List). The remaining 50% of investing capital is commited to US Treasury or US Agency fixed income securities with a maturity of five years duration or less. Market orders are placed over the weekend.

Each weekend Deep Green publishes the track record (since Jan 1987) of every top trader agent. These reports all contain three line items: Stocks LowRisk, Stocks StdRisk, and Stocks HghRisk, providing the historic calendar year returns for the low risk, standard risk, and high risk management strategies. Since inception, in Jan 1987, the Complete Weekly Alert List, of over 100 stocks each week, has consistently outperformed the market average by 93% per annum. Furthermore, in every week, there has been at least one stock which doubled in the following 12 months.

Each week we publish our top favorite stock (the best of the best for the week). Three out of four of our top favorites have been winners. Our average top favorite has doubled in the following 12 months.

Deep Green picks great stocks!

Advanced Option Strategies

Deep Green publishes ten approved risk management strategies, for advanced investors, involving tax efficient Long Term Equity Anticipation Securities (LEAPS). Each weekend Deep Green publishes a complete list of fair option prices for each stock, including those on the weekly alert list. All Leap option positions are opened, using limit orders, in the October, November, December, and early January period. The Leap option positions are then held for 12 months and executed, at expiration, the following January. Once again the option postions are not traded. They are opened and held until expiration when they are sold or exercised.

Note These brief thumnail strategy sketches are for advanced investors with experience trading Leap option contracts. Investors with no experience trading Leap option contracts may skip this section.

The advanced investor may open Leap option positions only against stocks, published on the Weekly Alert List. Furthermore the advanced investor may buy to open only when the actual option price is less than the Deep Green published fair option price, and may sell to open only when the actual option price is greater than the Deep Green published fair option price. Only stocks with Leap options of 12 months or longer term may be optioned, and all Leap option orders are limit orders at more advantageous prices than the published Deep Green fair option prices.

Deep Green publishes ten approved Leap risk management strategies for the advanced investor, who may only implement these approved Leap risk management strategies. Each weekend Deep Green publishes the track record (since Jan 1987) of every top trader agent. These reports all contain ten line items providing the historic calendar year returns for each of these Leap risk management strategies:

Strategy 04, the low risk stock plus fund risk management strategy, commits 15% of investing capital to common stocks (chosen from among those on the Weekly Alert List). An additional 3% is deployed buying leap calls to open, with a one year or longer expiration and holding to expiration, with a strike price 50% above the current market price of the stock. The remaining 82% of investing capital is commited to US Treasury or US Agency fixed income securities with a maturity of five years duration or less. Market orders are placed over the weekend.

Strategy 05, the standard risk stock plus fund risk management strategy, commits 30% of investing capital to common stocks (chosen from among those on the Weekly Alert List). An additional 5% is deployed buying leap calls to open, with a one year or longer expiration and holding to expiration, with a strike price 50% above the current market price of the stock. The remaining 65% of investing capital is commited to US Treasury or US Agency fixed income securities with a maturity of five years duration or less. Market orders are placed over the weekend.

Strategy 06, the high risk stock plus fund risk management strategy, commits 25% of investing capital to common stocks (chosen from among those on the Weekly Alert List). An additional 10% is deployed buying leap calls to open, with a one year or longer expiration and holding to expiration, with a strike price 50% above the current market price of the stock. The remaining 65% of investing capital is commited to US Treasury or US Agency fixed income securities with a maturity of five years duration or less. Market orders are placed over the weekend.

Strategy 07, the low risk combo fund risk management strategy, commits 15% of investing capital to common stocks (chosen from among those on the Weekly Alert List). An additional 5% is deployed buying leap calls to open, with a one year or longer expiration and holding to expiration, with a strike price 25% above the current market price of the stock. On 15% of the fund, immediate income is received from selling leap puts to open, with a one year or longer expiration and holding to expiration, with a strike price at the current market price of the stock. The remaining 85% (includes the income from the leap put sales) of investing capital is commited to US Treasury or US Agency fixed income securities with a maturity of five years duration or less. Market orders are placed over the weekend.

Strategy 08, the standard risk combo fund risk management strategy, commits 20% of investing capital to common stocks (chosen from among those on the Weekly Alert List). An additional 7.5% is deployed buying leap calls to open, with a one year or longer expiration and holding to expiration, with a strike price 50% above the current market price of the stock. On 15% of the fund, immediate income is received from selling leap puts to open, with a one year or longer expiration and holding to expiration, with a strike price at the current market price of the stock. The remaining 80% (includes the income from the leap put sales) of investing capital is commited to US Treasury or US Agency fixed income securities with a maturity of five years duration or less. Market orders are placed over the weekend.

Strategy 09, the high risk combo fund risk management strategy, commits 25% of investing capital to common stocks (chosen from among those on the Weekly Alert List). An additional 10% is deployed buying leap calls to open, with a one year or longer expiration and holding to expiration, with a strike price 50% above the current market price of the stock. On 15% of the fund, immediate income is received from selling leap puts to open, with a one year or longer expiration and holding to expiration, with a strike price at the current market price of the stock. The remaining 70% (includes the income from the leap put sales) of investing capital is commited to US Treasury or US Agency fixed income securities with a maturity of five years duration or less. Market orders are placed over the weekend.

Strategy 10, the balanced stock fund risk management strategy, commits 45% of investing capital to common stocks (chosen from among those on the Weekly Alert List). An additional 5% is deployed buying leap calls to open, with a one year or longer expiration and holding to expiration, with a strike price 25% above the current market price of the stock. The remaining 50% (includes the income from the leap put sales) of investing capital is commited to US Treasury or US Agency fixed income securities with a maturity of five years duration or less. Market orders are placed over the weekend.

Strategy 11, the balanced leap fund risk management strategy, wherein 15% is deployed buying leap calls to open, with a one year or longer expiration and holding to expiration, with a strike price 50% above the current market price of the stock. The remaining 85% (includes the income from the leap put sales) of investing capital is commited to US Treasury or US Agency fixed income securities with a maturity of five years duration or less. Market orders are placed over the weekend.

Strategy 12, the extreme stock fund risk management strategy, commits 95% of investing capital to common stocks (chosen from among those on the Weekly Alert List). The remaining 5% is deployed buying leap calls to open, with a one year or longer expiration and holding to expiration, with a strike price 25% above the current market price of the stock. Market orders are placed over the weekend.

Strategy 13, the extreme leap fund risk management strategy, wherein 25% is deployed buying leap calls to open, with a one year or longer expiration and holding to expiration, with a strike price 25% below the current market price of the stock. The remaining 75% is deployed buying leap calls to open, with a one year or longer expiration and holding to expiration, with a strike price 25% above the current market price of the stock. Market orders are placed over the weekend.

Deep Green provides fantastic option leverage!

Multiple Year Strategies

Deep Green publishes thirteen approved risk management strategies, three involve simple stock ownership, and ten for advanced investors involve tax efficient Long Term Equity Anticipation Securities (LEAPS). All of these approved risk management strategies hold their investments for a twelve month period and are therefore tax efficient. However, if a stock continues to appear on the Weekly Alert List and continues to have good future prospects, there is no reason to sell the stock after twelve months. Deep Green publishes several methods for converting the thirteen approved risk management strategies into multiple year strategies.

The simplest method of converting a one year risk management strategy into a multiple year strategy is to extend the account rebalance period. For instance, Strategy 02, the standard risk management strategy, commits 30% of investing capital to common stocks, and 70% of investing capital is commited to US Treasury or US Agency fixed income securities of five years duration or less. After every twelve months, the account is rebalanced back to 30% stocks and 70% bonds. If, instead of every twelve months, we rebalance the account every twenty-four, thirty-six, or fourty-eight months, then the standard risk management strategy is automatically converted into a multiple year risk management strategy.

We arbitrarily name these simple multi-year rebalance strategies Multiple Year Loeb Strategies after the successful investor Gerald Loeb. Although extending the rebalance period is a simple change, it can have a dramatic effect on the total cummulative risk management. Assuming a rebalance period of four years, a bond interest rate of 5%, and a severe bear market with an 80% loss on all stock positions, the following list shows the maximum four year risk for each of the three Deep Green approved simple stock strategies.

The worst side effect of a multiple year rebalance strategy is a dramatic increase in the volatility of annual returns. For instance, in strategy 01 low risk, there is only 15% at risk in stocks in any one year. Suppose the rebalance period is extended to four years, and the stock position doubles every year for the first three years. If a severe bear market occurs in the fourth year, the stock position will have grown to 56% of the total account. Bear market losses will occur against 56% of the account instead of 15%. Annual returns may be more volitile than if the account was rebalanced every twelve months, even though the total cummulative four year risk was dramatically reduced.

Volatility of annual returns can be controlled with the simple accounting trick of taking reserves against unrealized capital gains. For instance, if we start year one with 15% in stocks, and stocks triple, we have bond profits of 4.25% and stock profits of 30%. If we rebalance at the end of year one, life is simple. We sell our stocks, declare an annual return of 34.25%, and pay income taxes on our gains. If we do not rebalance at the end of year one, life is not so simple. We declare an annual return of 34.25% for year one; but, if year two deflates our stocks to what we paid for them, we will show a year two annual loss of 24.6%. To prevent this volatility, in year one we delare an annual return of 4.25% and reserve 30% against unrealized capital gains. This simple accounting trick reduces volatility of annual returns and correctly sets the expectations of our investors by letting them know that the 30% reserve against unrealized capital gains is still at risk and could vanish at any time.

Finally, we can convert any of the Deep Green approved long option strategies, 04 thru 08, into multiple year rebalance strategies by the simple act of exercising the long options and NOT selling the delivered stock. Additionally, we can even protect the purchase principle by buying additional LEAP puts at the original strike price.

Deep Green provides multiple year risk management leverage!

Where on the Web can I find out more about investing?

There are many sources of information about investing on the Web. However many of these are really marketing or sales related. Out of this morass of generally available investing "tips", there is one source of introductory investing training material which we think might be of interest. It is not strictly "mutual-fund-style" investing, like Deep Green; but, nevertheless, we think it is worth your while.

How do I contact Korns Associates?

For more information, email Korns Associates at:

mkorns@korns.com
Korns Associates
1 Plum Hollow Drive
Henderson, Nevada 89052
voice mail: (702) 837-3498
fax: (702) 837-7908
mkorns@korns.com