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reddingrunner (95.19)

August 2007

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There & Back Again

August 31, 2007 – Comments (0)

After hovering in the mid-90s all summer, two weeks ago my CAPS score plunged from 97 to 7 in two days. Yikes!  Instead of being "better" than 97% of you, I was suddenly "worse" than all but 7% of you.  The stock market was dropping like a rock those two days, but I didn't think my portfolio was all THAT volatile.

As I said at the time, often the best thing to do is no-thing.

With basically the same stocks I've recovered my All-Star status and most of my points.  (I did add a couple bargains to my bin).  I expect the next six weeks to continue to be turbulent but by the end of the year the bulls will be back in charge.  [more]

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Market Timing: Macro-Approach

August 30, 2007 – Comments (0)

I don't believe in trying to time the market...

except for when I make an exception.

Here's my main exception:  As a long-term buy-and-hold kind of guy, I try to impose disciplines on myself to keep myself from trading too frequently (frequent trading is generally driven by emotion and ego).  (I'm a lot more disciplined in real life than I am in CAPS!).  

What I generally try to do is evaluate my holdings in June and sell any that I no longer have great confidence in. I try to sell during a week when stocks are rising, not falling (sell high!).  Build up my cash for awhile.   Then in the fall I wait for a correction.  If we get a good one I use most of my cash to buy the top stocks on my watch list.  If we don't, I buy anyway (at some point in November).

As we all know, stocks tend historically to be flat during the summer and early fall and often can be especially volatile in September and early October.  So it's a good time to have extra cash and wait for buying opportunities.

I'm sitting on some cash right now.  Some of my favorite CAPS picks have been doing lousy lately.  I'm looking forward to picking up a couple of them cheap, for my real portfolio, when the leaves start to fall from the trees.  [more]

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Stock of the Day: UTX

August 30, 2007 – Comments (0)

I look at a stock's numbers but I also look at the company's story.  Sometimes the story is so good that I'm willing to bend on the numbers.  UTX's numbers aren't bad at all but what is really compelling is the big picture.

If you believe (as I do) that the global building boom is still in its early stages; you've probably, like me, been buying heavy equipment manufacturers and basic materials and infrastructure related businesses.  

Now read the profile of UTX, every single word of it!
http://finance.yahoo.com/q/pr?s=UTX

You ought to be salivating now.  What's the demand for elevators and escalators going to look like in the next decade?  And, unlike steel, there isn't a ton of competition in this field.  And this is just one of six strategic components of UTX!

This is what I mean by a compelling story.  [more]

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Not a bad day

August 28, 2007 – Comments (0)

For long-termers today had a big silver lining.  Yeah, it cost me a lot of money in a sense but I knew LFC would drop after yesterday's big gain and I sold off some of my Garmin last week figuring it was overpriced.  So, in spite of my losses, here's why it wasn't so bad.  

The stocks that seemed to get hit hardest were those that had run up the most.  The stocks that have been underperforming tended not to get hit so hard.  Thus, on CAPS, my raw score dropped but my accuracy increased.  What we are seeing is a reversion to the mean.  If this keeps up, stocks that have been out of favor (a lot of my CAPS picks!) should begin to correct.

A reversion toward the mean, for both high-flyers and bottom-feeders should help to calm down the volatility we've seen lately.  Then the influence of day-traders will wane and the influence of long-termers will increase.  Stocks will move back closer in price toward their true values.  

If I'm right, this is good news.  [more]

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GARP Again

August 24, 2007 – Comments (0)

Following up on yesterday's post:

GARP is based on PEG and the G in PEG stands for "Growth" but could also stand for "Guess" since all predictions are ultimately guesses.  There are two primary ways I try to protect myself against overly optimistic growth projections:

1. My main "screen", subjective though it is, is by simply looking at the company and what it makes and its strategy and numbers and its moat and whether or not it is well-positioned to take advantage of long-term megatrends. 

(Obviously this means I end up biased toward companies and business models I can understand vs those I don't - like semi-conductors for example. By the same reasoning, I tend to avoid retailers since I'm not much of a shopper and I don't know how to separate the winners from the losers).

The two main megatrends I rely on are the aging of the baby boomers and the worldwide economic and building boom which I believe is still in its infant stages.  Thus I'm bullish on natural resources and commodities and construction equipment and financials and health care and ... well, you get the picture.  It's easier to feel confident about a company's growth if it is in a growing sector.  Duh! 

2. I also look for companies whose future growth projections are lower than past growth (five years vs five years).  While past growth often isn't sustainable, analysts also don't like to project more than 15% future growth:  even if they think a company might grow faster, so few do that a conservative bias leads them to generally say 15% if they think growth will be 15% OR HIGHER.  When a higher rate IS predicted, I become very interested (if the P/E is still reasonable).  

So, give me a company (for example) that I can understand with an historical growth rate of 40% annually, a predicted 5-year growth rate of 18%, a P/E of 15, in an industry I expect to grow faster than the economy (or with a big moat) and I'm ready to take a close look.

This isn't the only way I pick stocks for CAPS, just the main way.  [more]

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GARP: World According To

August 23, 2007 – Comments (0)

I'm basically a GARP investor which means that the PEG ratio is crucial to my decisions; though it isn't the only factor. Critics will say that the problem with PEG is that the G really stands, not for "Growth," but for "Guess".  A company's future growth projections are nothing but semi-educated guesses and are often wrong.

Actually, the pressure on the analysts who publish these "guesses" is intense.  They are the cream of the crop and if they don't get it right most of the time; they're toast.  Same for their experienced bosses who review and OK their guesses.  The future being what it is (uncertain); mistakes will be made.  But NOBODY buys a stock without making guesses about the future.

Some like to look at book value as the main factor in investing.  I don't get it.  For one thing asset valuation is as big a guess as you will find.  What are FedEx's trucks worth, or Walmart's inventory, or Ford's factories?  How much could they fetch on the open market and (most importantly) why would that information, if you could guess right, even matter.

Ultimately all that matters is profits, particularly the future growth of profits, and whether or not the stock's current price reflects that accurately or overstates or understates.  Granted, earnings are not the same as profits, and book value does count for something (though not as much as many think).

A company with a P/E of 80 in a sector with a historical average P/E of 20 is going to end up at 20 eventually - and you don't want to be late getting out!  A profitable company with a P/E of 20 in a sector with a historical average of 20 will, if it grows at 20% a year, see it's stock rise 20% a year...  on average.

That's my story and I'm sticking to it!  [more]

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ETR: The most overlooked ratio in investing!

August 22, 2007 – Comments (3)

Curiously enough, only about 40% of active CAPS players have an accuracy rating of 50% or better; meaning they're doing worse than if they picked stocks blindfolded (and sadly, at the moment I'm one of 'em).

But (and here's the curious part) approximately 60% of active CAPS players are beating the market in terms of raw score, meaning that for one-fifth of us our winners are beating the market by more than our losers are losing to the market.

I suspect that this latter number is juiced up by the large number of players making "underperform" calls on obscure stocks- you can earn points this way even if your underperforms go up (as long as they go up less than the market); and you can make LOTS of points on a few real dogs.  But I'll bet you there aren't many (any?) CAPS players making money this way in real life!

The numbers may also be juiced a little by the fact that small caps and foreign stocks have been outperforming the S&P since CAPS started.

Bottom line:  it really is almost impossible to beat the market over the long run.  Most of us investors really are inflicted with a poor ETR (Ego to Talent Ratio).

What will happen to CAPS scores when the market really does have it's next big fall, say a couple of consecutive 10% or more down years?  It'll be ugly!    [more]

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Today's insight: Edwin Lefevre

August 21, 2007 – Comments (0)

"It never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!"

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The one stock you must own.

August 17, 2007 – Comments (0)

According to this report:

http://blogs.barrons.com/techtraderdaily/2007/08/17/apple-rbc-sees-strong-back-to-school-mac-sales-finds-sustained-iphone-momentum/?mod=yahoobarrons

Apple continues to rapidly increase its market-share in the pc market.  Apple has always had the best OS (by far!) but people shied away because Windows ruled the world.  At some point Apple's increasing share will tip the barrel.  The first step was the ability to run Windows on Macs- done.  The next step is for software developers to stop ignoring Apple in favor of Windows: soon to be.  

The third and final step:  there's no good reason NOT to own a Mac as your computer of choice.  When Apple's share of the PC market tops 50% and keep rising, how much do you think the stock will be selling for?   [more]

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Worst 48 hrs in CAPS history?

August 16, 2007 – Comments (1)

I joined CAPS in April, climbed steadily up to a score of about 97; hung around there all summer until two days ago and then, in the last 48 hours dropped to a score of 7. Since late July my point total has dropped by about 700 points vs the S&P.

Ouch.  I wonder if I just set some kind of CAPS record?!

Two possibilities:  My strategy is sound and if I just sit tight, everything will be fine in awhile.  Second:  My strategy is wrong for these times and I need to adapt.

Fortunately CAPS serves as my watch list:  it's been frustrating to see stocks that I like, but hadn't bought yet soar.  Now I can wait until the bleeding stops and pick up a few at these fire sale prices (Since June I've been holding more cash in my real portfolio than at any time in the past five years).

I thought I was moderately diversified but all my sector bets have been big losers the last two days: financials, materials, energy, emerging markets.

For those of you watching me sink, I have no confidence at all in my portfolio over the short term.   And I don't know how long the short term will last.  Eventually these stocks will bounce back and soar.  At any given moment I'd say the odds of them heading rapidly up or rapidly down in the next few weeks are about 50/50.

In real life I won't be buying anything for the next 8 weeks.   [more]

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Going down with the great ones?

August 14, 2007 – Comments (1)

I got bullish on asset management firms when I saw how many of my favorite money managers, gurus, and other value-oriented geniuses were stocking up on C, LEH, GS, etc.  On a day like today I have to wonder when the bleeding will stop.

But I remember:  these great gurus earned their records by buying good stocks at good prices and holding on to them until the market's long-term rationality paid off.   A lot of geniuses are looking dumb right now, but most of them will hold on to their stocks and, if history is a guide, be sitting pretty a year or two from now.

I've been here before too... in real life.  After the big crash of 6 years ago my portfolio was in shambles.  I looked at my stocks, let them be, stopped tracking my portfolio for awhile while I calmed down, didn't make any buys or sells for three years.

During that time I absolutely CRUSHED the market.  

And actually, though I have lots of financials in CAPS (and I be hanging on to 'em, pardner), I haven't bought any for my real portfolio (which is still soundly beating the market) since I have more ideas than money.  I'll be looking at them really closely come mid-October though.  Maybe I can turn my CAPS loss into a real-life gain.  [more]

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I can never be a yes man :-(

August 13, 2007 – Comments (4)

Even though all my picks are "outperforms", I'll never be identified by CAPS as a "Yes Man" since that icon only goes to those players who NEVER pick a single underperform.  (I had a few, but I've dropped them).   

No, it doesn't keep me awake at night, but I wish I had a way of identifying players who are essentially "yes men" even if they have had the occasional underperform call.  As it is, there are only 15 players in CAPS who have the "Yes Man" charm with 100+ picks and scores of 90 or better.  I bet there are a lot of others who are essentially "yes men", but there's no easy way for me to find them so I can look at their picks.  [more]

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I'm a Mega-Bull: Here's why.

August 13, 2007 – Comments (0)

I'm also a heretic and this is my heresy: "It IS different this time."

Yeah, we heard that in the irrationally exuberant 90s, just before the crash.  And we've heard it many times before but the more things change, the more they stay the same.

So here's my case:  Heads of state are not always rational (e.g., North Korea), but they usually are.  They understand risk/reward analysis.  If they want more power (they do), in the past they would often launch a war of aggression or oppress their own people.  It was the easiest way, despite the risks, to increase (or defend) their own power.

Today the easiest way; the path with the least risk and the greatest reward; is to plug their nation's economy into the (U.S. led) global (semi-) free market economy.  It's a no-brainer.  Granted, anything with the word "free" in it carries big long-term risks for dictators and such; but (as they might say in China), we'll deal with that as we go.

Plus, their success is dependent on the continuing strength of the US economy.  If we stop buying, they're screwed.   Suddenly, every ambitious nation in the world has a big stake in seeing the American economy grow and prosper.

The world has never seen a state of affairs like this before.  Never.  That part, for sure, really IS different this time.

Result, an era of cooperation (however uneasy and suspicion-laden) between the nations of the world never before seen.  Radical Islamic terrorists threaten to blow up Wall Street?   It's the worst thing that could happen to China or Russia or even Saudi Arabia.   Even if they don't have warm feelings toward us, they need us.
  
And as globalization continues, we need them.  This historically unique spirit of cooperation will create a synergy that cause the S&P500 to outperform compared to it's averages of the 20th century (soon to be known as the neanderthal era of the stock market).

Eventually this trend may well lead to some ugly scenarios (multinational CEO's holding far more real power than elected officials, for example).  But in the meanwhile; stuff like the Sub-Prime "crisis" will be blips.   Stocks are the place to be.  [more]

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All-Stars, Schmall-Stars

August 11, 2007 – Comments (3)

You've gotta love a CAPS all-star with a score of 99 and an accuracy of 80+% on 300+ picks, right?  That's what I thought too but when I went to JTODDO4's page I discovered that of his 57 current picks he's got 4 winners and 53 losers!

Big losers, too:  you coulda got rich just picking the opposite of what he's got.  (Apparently his strategy is to never sell a loser, hoping that somehow someday it will be up 5% and then he can sell it as a winner).

Not to pick on him (or her?); just to add my voice to the wish that when CAPS gets revised they find a way to achieve a higher correlation between CAPS scores and the players most worth following.  [more]

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Gather round kids, and learn from a geezer...

August 09, 2007 – Comments (0)

Took some time last night to look up my CAPS picks on Yahoo Finance (fwiw).  For those I could find stats for (approximately 2/3), here's what I learned about this old fool, by the numbers:

My median P/E is 15.5. 

My median PEG is a paltry 1.1

Projected five year growth rate (median) = 16%

Last five years growth rate (median) = a whopping 40%.

Not bad. Not bad at all.

And in case you were wondering, only about 1% of all CAPS players...A) Have ratings of 90 + (B) accuracies over 50% + (C) on 100+ picks.  

And many of those have achieved their "success" by picking dogs to underperform or by concentrating heavily on one sector (usually energy).

While my portfolio is far from an index (what would be the point?), it could at least pass for a real-life mutual fund, something most CAPS "all-stars" could not claim.

And though I've only been CAPping for three months and am still tweaking constantly, this portfolio is designed to beat the S&P over the long haul - many of my picks are still just sitting around waiting for the right catalyst (just like LUK and GRMN finally found their groove this summer).  [more]

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Eat my shorts...

August 08, 2007 – Comments (0)

... and you'll starve to death.  Unlike most of the leaders, I currently don't have any underperforms in my CAPS portfolio.   I'm using CAPS to learn how to pick good stocks; I don't short in real life so I'm not interested in studying one-star pink sheet stocks to learn how to pick the losers (though sometimes it looks so easy that I do get a little tempted- but I have better things to do with my time).  
And like many others I think CAPS should only award points to underperforms that actually go down (true shorts); if the stock market goes up 20% and your "underperform" goes up 10%, you aren't going to make any money (long or short) in real world investing.  [more]

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He's baa-yack!

August 06, 2007 – Comments (0)

Had such a great time in Switzerland that I added a couple of Swiss stocks to my portfolio today.  While I was gone my scores went up and down and finished about where they were when I left.  If you look at today's picks (August 6), you can see that I'm bullish on multinational mega-cap stocks- their big run seems to be just now revving up.  Other than that it's my usual themes- aggressive global expansion; high growth at a reasonable price.

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