We’ve all heard stories about an investor who bought the right stock at the right time and made enormous profits in just a few weeks or months. Such instances are rare. That is why they attract attention. But novice investors hear these stories about fast fortunes and mistakenly expect that quick gains are the norm and not the exception.

A couple of weeks ago I noted that the Nasdaq is currently trading at about the same level as it was at the beginning of 2004. In other words, investors who purchased an OTC Index fund at the end of 2003 have seen no increase in their account value. But wait, it gets worse. An investor who purchased the same fund at the start of 2000 saw his investment decline by almost 75%. That same account has now recovered about half of its value. But an investor who started with $100,000 in that index fund in 2000 still only has about $50,000 in that account today.

Major bear markets are the reason buy-and-hold investing is not a viable strategy for most investors. If one buys at the wrong time the impact on an account can be devastating. If one is forced to cash out during a bear cycle, the impact could conceivably reverberate through a family for generations. As a result of the bear market that began in 2000, I personally know several people who suffered terrible losses in their retirement savings. Some of them had to delay retirement and others had to return to work.

At Strategis Financial Group, we espouse a philosophy of active risk management. The concept is simple. We try to lessen portfolio risk by choosing investments that are in strong uptrends. During periods of market weakness, we try to move those positions to cash or to hedge them with offsetting short positions. The actual application of the concept is very complex and fraught with uncertainty. It also requires some long-term commitment. We normally advise investors that it can take up to five years to experience the benefits of a strong bull cycle. The last one occurred in 2003.

Perhaps I can explain it best with an analogy about fishing. When I am planning a fishing trip, I do everything I can beforehand to improve my chances for success. If it is a new water, I study the kinds of fish that live there. I research the topography and habitat. I try to learn what methods have been used successfully there in the past. When possible, I talk to people who have fished there recently to get up-to-date reports. As the date approaches, I check moon cycles and watch weather reports.

All these preparations increase the chance for a successful trip, but they do not guarantee it. There are too many uncontrolled variables. For example, I once scheduled a trip to Canada in early August. Usually that is a prime time for fishing. This was a backpacking trip so weight was a consideration. We limited the amount of food we took, because we thought we could supplement our meals with fish. Unfortunately, an unexpected cold front struck on the day we arrived. Nighttime temperatures were below freezing and the fish completely stopped feeding. That meant we did too. We were very hungry for several days.

On a different trip this spring trouble with the boat’s engine and high wind forced us to fish from shore in protected coves. We caught fish, but not nearly as many as anticipated. A few weeks ago on a trip to Lake Powell we experienced incredible fishing where we caught a fish on virtually every cast. They were 1-year-old fish only about 12 inches long. But they were so prolific that we could rarely get our baits past them to the deeper water and bigger fish we were really seeking.

Sometimes investors mistakenly believe that the term “active risk management” means that an account will be traded frequently. That is usually not the case. Usually trades only occur when market risk appears to be high or when an investment fails to perform as expected. Going back to the fishing analogy, an angler isn’t usually going to move to a new spot if he is already catching fish.

Once in a while, the forces of nature seem to combine to produce a fantastic fishing trip. The weather will be beautiful and the fish will bite non-stop. Like an investment that doubles in six months, these types of fishing trips don’t occur very often. But one such trip is often enough to give a fisherman hope for many years.

Since the start of 2004, market conditions have made it difficult for investors to make any profits. Trading ranges have been narrow and there have been no long-term trends. If the market can somehow advance through the end of this year, it would provide the best profit opportunity since 2003. For the past couple of weeks, market internals improved and technical and fundamental indicators have largely turned positive. If we can get another short-cycle advance in the next week or two, it could provide a foundation for the strongest market rally we’ve seen in quite a while.

Keep your fingers crossed.