Annotated Models
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The strategy model for Applied Materials Inc. also appears promising. Closer inspection, however, reveals substantial differences as compared to the model for Apple.
With this stock, the training target was achieved. The phase of heavy losses in 1996, however, signals danger. The model would have to be regarded as problematic. Yet, following this low, the model has managed nearly linear equity development and in particular has impressively mastered the last quarter of 1997 as well as the difficult first quarters of 1998. For this reason, it deserves a closer look.
What is particularly exciting in this model is the fact that shortly after the beginning of the production period, it is confronted with a break in the development of the security. That is to say, the stock behaves in a similar way as in the first half of 1995. In any case, NeuroStrategy is able to master the problem. While the stock loses heavily over the last 300 days, NeuroStrategy is able to triple the investment in the same period.
During the period of productive use, the ordeal in the third quarter of 2000 has an unsettling effect. Let us therefore take a closer look at the period of production.
Closer inspection reveals that over the entire period, NeuroStrategy was able to operate within the profit wedge. This puts the worry about the interim losses into perspective. Conspicuously, during the first half of the year, NeuroStrategy was mainly focussed on maintaining the value of the investment. This indicates that the situation was assessed as critical. The signal chart confirms this explicitly.
In contrast to the strategic model for Apple, the signal chart for Applied Materials shows that NeuroStrategy is often unsure about this instrument or at least that it regards the stock as very risky. The strategy therefore bets on risk management and avoids taking full positions. With the knowledge regarding the enormous increase in value over the last eight years, the model tends to stick with a long position. Instead of quickly changing the position in critical phases, it adjusts the volume of the investment. NeuroStrategy accepts interim losses, waits out temporary downturns and thus manages to remain overall on the side of profitability.
Yet, the warning is clear and is confirmed by the losses in weeks 39 and 40: AMAT is a risky stock. Trading it profitably requires daily repositioning. Thus, the model is fine for the trader who does not have to pay any broker's fees and who can react quickly in terms of small volumes. But what about the investor who must consider transaction fees?
The broker's commission clearly diminishes profits. Nevertheless, NeuroStrategy is able to pursue the target of a "preservation of value" during the first half of the year and remain within the range of profitability, in spite of losses in the subsequent period.
Without asset allocation and dependent entirely on long positions, things get problematic. The security is thus unsuitable for a fund. In the third quarter, NeuroStrategy operates at a loss. It is true that the losses can be recouped by year's end, and at 50%, the return is within a pleasing range. Yet, it is doubtful whether investors would have kept their faith in the strategy during the painful interim phase.