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Random Musings Regarding Market Timing

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July 20, 2010 – Comments (22) | RELATED TICKERS: ARNA , JGBO.DL , REV

Yes, I know, no one can perfectly time a market and I'm not saying that I can either, but over the course of the past twelve years I have definitely had a better than 50/50 chance of properly predicting the directional movement of a stock, group of stocks, or index. So don't go bursting my bubble just yet, and don't go grabbing your copy of "A Random Walk" and start waving it at the computer because that's not what I'm getting at. I'm just going to throw out a series of possibly unrelated thoughts on market timing and see if they somehow make sense by the end of this blog, ergo why this is titled "Random Musings." This will also be somewhat shorter than most of my blogs because I think I know what I want to say and it won't take seven pages to say it. 

Market timing isn't an exact science. In fact, it's not really a science at all. To some extent it's a gut feeling, but more or less when I'm trying to time an entry or exit point, or simply determine whether or not a company, sector or index is a buy or a sell, I basically ask myself one question....

Is this stupid?

Seriously! I'm not kidding! Just ask yourself, does this make sense or is this stupid and that will get you about a 65%+ accuracy in the stock market. I'm not saying you'll be the next multi-millionaire, but it will put you on the path to making your own financial decisions instead of dogpiling my picks as Bullishbabo pointed out (lol). 

So clearly if I were you I'd want to know if there was a formula for "stupid" and unfortunately I'd have to tell you no. I can't say that I've done hours of due diligence on every company I've come across, nor can I say that I can recall every financial fact about the 2000 or so companies I've followed throughout the years, but chances are I've done the 5 minute quick snip-it of that company on more than 3 occasions in the past year or two and based on that alone can determine whether or not what I'm seeing is in fact... stupid!

So what is stupid? Well, it depends what you mean by the word "is"... Thank you Mr. Clinton! Actually stupid to me is usually some sort of unwarranted deviation from the norm. Sometimes this can be just company specific and sometimes sector specific, but I usually describe it as a deviation from the norm. 

Examples you say? Ok, how about Revlon (NYSE: REV) trading at $13 despite a massive debt pile and a seriously negative book valuation. All they did to restructure their debt is push off the repayment another three years while tacking on an even higher interest rate! That is stupid!

Not all stupid has to be bad however! Let's take the example long recommendation from today, Jiangbo Pharmaceuticals (NASD: JGBO). Jiangbo is a Chinese generic drug and supplements company that has about $6 in net cash on hand and produces about $2-$3 in operating EPS each year. They closed today's trading session at $7.50 a share. So basically the company is trading at $1.50 over net cash and will make 133%-200% more than that difference in profit each year. That my friends is stupid! 

Are you catching on here that timing certain stocks and the market is actually not as hard as investors make it out to be. Keep in mind I'm not trying to catch an exact bottom with falling knives, nor am I trying to call a top on overheated companies or indexes, but I am trying to get close so as not to be stuck in a losing position that continually goes in the opposite direction. 

I admit that very basic point and figure technical analysis can help in identifying "stupid" stock entry and exit levels so it wouldn't be a bad idea to brush up or at least become familiar with the most basic tenets of technical analysis (ie. trend lines, channels, head and shoulder formations, pennants, triangles..the very basic stuff). Use what you know about technical analysis in its most basic form to give you a rough indication of where you think the stock will fall or rise to before you make your buy or short recommendation. And here's the key part to this... don't be stupid yourself. If you determine that stock XYZ makes good fundamental sense to buy at $22.50 according to your chart, maybe put a buy order in at $22.65... what's a couple pennies? Keep in mind other people are also trying to not be stupid out there and will be waiting for the exact same bounce point. This way you don't miss your entry level, you get in relatively close to the bottom, and if it doesn't hit, then you're not hurt. Be utopic in your entry points, but smart about the level you choose to input as your buy or short. 

Do all things "stupid" have to pertain strictly to brick and mortar fundamentals? Absolutely not. Although I am constantly ragging on biotechnology companies it usually comes with a reason. Sometimes I don't even need to look at a balance sheet to see that a company is in trouble. If you are a company like Arena Pharmaceuticals (NASD: ARNA) and you have no product and you'll be waiting until 2013 before you even remotely have the chance of having one, and your stock price is up 200%... then something has gone stupid! You see folks, this isn't tough, you CAN do it too! 

All you have to do is ask yourself if what you're looking at makes you scratch your head and say "Damn...that is really stupid!" Go with your instincts and you will normally be right. 

I just finished reading what I've written so far and it made me laugh... I expect this to provoke some discussion, hopefully it won't be too stupid =)

UltraLong

22 Comments – Post Your Own

#1) On July 20, 2010 at 9:58 PM, GeneralDemon (< 20) wrote:

A big tip-of-my-hat to you for trying to knock down ARNA for the chimpcontest. Could you also take down stupid, stupid PANL?

Much obliged Senor.

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#2) On July 20, 2010 at 10:09 PM, TMFUltraLong (99.95) wrote:

I'd have to agree with you that Universal Display (PANL) does look stupid! 41 times sales and 11 times book with no profits until 2012! The magic entry looks like 22.52 on the short side.

UltraLong

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#3) On July 20, 2010 at 10:58 PM, WallstreetKnight (43.27) wrote:

Are you leery of the fact that so many chinese securities are... "george foremaning" their books?

I see what you're seeing about JBGO, but there are a lot of people in the market place, how does this escape the Street, or even undergrad business majors who can understand a financial statement?

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#4) On July 20, 2010 at 11:02 PM, TMFUltraLong (99.95) wrote:

Jiangbo is a small, relatively unfollowed company. You play its wild fluctuations and go from there. I didn't expect it to get under $7.52 but it did.

UltraLong

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#5) On July 21, 2010 at 12:20 AM, megalong (< 20) wrote:

One theory on why Chinese small caps are cheap:

If you lose money on Jiangbo, you look like an idiot in front of your boss, your clients and your wife.  If you lose money on well-known names like Allied Irish Bank, Seabridge Gold or Patriot Coal, you just had bad luck.

I think the new Chinese smallcap bull market is starting soon though.  I would expect some of the larger companies like CYD and CBEH to lead the way, with the smaller companies and those still on the OTC muddling around and eventually following.

I own shares of CYD, CBEH, CPHI, CNOA.OB and LTUS.OB among others.

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#6) On July 21, 2010 at 12:29 AM, WallstreetKnight (43.27) wrote:

 I don't know if that's necessarily true. 

I think it's just the security lacks sufficient liquidity - then tack on the inherent risk with investing in a micro-chinese company.

The metrics are amazing.  I don't see why anyone would not take a dabble.  Bad example ultralong - this stock is making me feel stupid for not already being in.

Whats the old adage... if its too good to be true?  Still mulling this one. 

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#7) On July 21, 2010 at 12:45 AM, megalong (< 20) wrote:

There are as many reasons to own a stock (or not own a stock) as there are investors, that is just one idea.  Another is the idea that many Chinese small caps are fraudulent, another is that Chinese real estate bubble is going to pop and destroy the economy.

I think the biggest reason is that there is an overwhelming supply of Chinese companies over the last few years. To a certain extent they are competing for the same investment dollars.  And money has been flowing out of US emerging market funds the last few years and into bond funds. That is unlike Europe where money has been flowing into emerging market funds.

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#8) On July 21, 2010 at 12:58 AM, awallejr (81.55) wrote:

If I thought those numbers about JGBO were real, you are right it would be stupid not to consider the stock.  I just think it is stupid to trust any numbers coming out of China.

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#9) On July 21, 2010 at 1:00 AM, goalie37 (91.45) wrote:

I use something similar to your "Is this stupid?" question.  I always ask myself, "Is this stock at this price an investment or a speculation?"  Once the due diligence is done, this question makes everything clear for me.

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#10) On July 21, 2010 at 1:03 AM, ChrisGraley (29.75) wrote:

I thought this post was going to be about market timing?

I'm already an expert on stupid and don't need any pointers. I might have even invented stupid. Don't tell Al Gore though. he'll claim that he did. He's already claiming to have invented the internet and a new form of Shiatsu massage called "rub it while I giggle."

My biggest success with market timing seems to be when I don't do something. When I look at a company that just has a perfect balance sheet, but the sector looks bad or something in the economy doesn't makes sense, I walk away. I'll put that company on a watch list and wait for a better time. More often then not, some bit of news that I didn't think about drives that company down even lower and I get a better buy in. Yes, sometimes I miss the boat on an opportunity and valuation should trump market timing, but not paying attention to the market has kicked my ass when buying companies at a good price, more than I've missed opportunity waiting to buy an undervalued company because of market conditions.

 

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#11) On July 21, 2010 at 1:04 AM, TMFUltraLong (99.95) wrote:

This is just a case of one or two bad apples spoiling the party for the rest of the Chinese companies. One company lies about their balance sheet and now they're all suspect. Keep in mind American companies have been known to be accounting creative as well. I see nothing wrong with JGBO that a buy order wouldn't cure.

UltraLong

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#12) On July 21, 2010 at 1:16 AM, WallstreetKnight (43.27) wrote:

Hmm the question is, how do you determine what sort of AAPL this is?

 

Freudian slip. 

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#13) On July 21, 2010 at 9:45 AM, TMFBabo (100.00) wrote:

I like your 5 minute snapshots and do similar quick looks myself.  Even after just a few minutes, I've found myself going "Damn...that is really stupid!" pretty often.

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#14) On July 21, 2010 at 12:29 PM, ContraryDude (32.26) wrote:

I think that possibly the difference between what is "stupid" for an investment may not be as stupid for a spec stock like a biotech.  People are shooting for the moon sometimes, which might be stupid.  But as they say, No Risk, No Reward.

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#15) On July 21, 2010 at 12:33 PM, EnigmaDude (89.37) wrote:

Stupid Is as Stupid Does, I always say...

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#16) On July 21, 2010 at 1:51 PM, Seansonfire (38.29) wrote:

Ultralong-

 Great post, I agree with you on most of it, but sometimes a quick snapshot is not all you need to evaluate a company.

Great Example is PANL.  All the stuff you said is true I don't disagree with you or others on whats been said about its valuation, but the current valuation may actually be correct if you assume large free cashflows in 2012, 2013 and onward (and discount them back).  That is way it is currently valued as it is, because the underlying product has huge potential to produce large future cashflows, and people forsee a potential huge windfall in the future.  So yeah it may be "Stupid" looking at the company right now, but in three years when the company changes it may not have been so stupid to buy it at these levels.  Same would have been true for Apple, Google, or Celgene when their products were just in develop.  It's a gamble that could pay off. (I got into PANL at a much lower price then it currently is, I would not buy it right here)

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#17) On July 21, 2010 at 2:23 PM, TMFUltraLong (99.95) wrote:

Seansonfire,

Generally when I'm taking my snapshot I'm looking for it to be fairly valued over the next few weeks, months or maybe even a year. If it's trading at levels now that represent something in line with a 2013 cash flow, then its way ahead of itself. It's one thing to be profitable, like Netflix for example and be trading ahead of yourself, it's a whole other boat to be losing money and trading up 200% on the hope of a one-day profit (aka biotech syndrome).

UltraLong

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#18) On July 21, 2010 at 4:52 PM, Seansonfire (38.29) wrote:

Ultralong,

I see.  A bit different timeframe then I am using on some of my long term plays.

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#19) On July 22, 2010 at 8:58 PM, Goofyhoofy (< 20) wrote:

While it's possible to "time" an individual stock, that requires a fair amount of knowledge of how a company operates, what the balance sheet says, whether the CEO has a vague clue, if the wind is from the northerly, and whether the creeks are rising.

I find it a lot easier to time sectors, or - twice in my life - the entire market. I sold everything in 1999/2000 because there were just too many "too good to be true" stories; the market felt "toppy"; it had all the smell of soap bubble and only a little of 'lasting business.'

The second time was just recently, when I said to Mrs. Goofy - this scares me, the whole thing could collapse, and I (again) sold everything just a couple weeks before the great swoon of 2008. Now she thinks I'm a genius, of course, which is untrue, but so what?

 I find it easier to jump out than to recognize undervalued sectors. It was easy to see telecom was going to crash back in the 90's, and it was easy to see that retail was going to get crushed with a recession looming a couple years ago.

 Getting back in is my problem; I don't have the chops to jump in full force the way I can jump out, so I nickel and dime my way back in. I'm still way ahead, so there's no complaint, but it would be great if I could hit the grand-slam by getting in at the bottom as well. Greedy, greedy, greedy, I know.

Anyway, I was glad to see this post. I have been told so many times that it's impossible to time the market.  Well, sure, if you're going to demand a 1.00 batting average. But all you really have to do it time it well enough to do better than average - or a couple times when it counts - and you'll be WAY ahead. Nuttin' wrong with dat.

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#20) On July 25, 2010 at 7:13 AM, ddsdave (< 20) wrote:

What is stupid is getting the wrong information! ARNA has a drug up for approval from the FDA in October. They have already signed a licensing deal. They have the manufacturing facility ready to go. The CEO has said that their drug can be in the market within 12 weeks of approval (that would be Q1 2011, not 2013). And the New England Journal of Medicine recently published their study results along with a positive editorial about the drug. So to me it's not a stupid idea at all

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#21) On July 25, 2010 at 11:48 PM, TMFUltraLong (99.95) wrote:

Dave,

As I say with all biotechs....I'll believe it when I see it. Until that point, most biotechs are blowing smoke...

UltraLong

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#22) On August 26, 2010 at 2:42 PM, MashkiaTsair (< 20) wrote:

UltraLong:

Can we discuss on email or something?

-"Mashkia Tsair"

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