Bill Gross quote

I read this quote from super-investor Bill Gross on Forbes' website today:
"The whales of our current economic society swim mainly in financial market oceans. Innovators such as [Steve] Jobs and [Bill] Gates are as rare within the privileged one percent as giant squid are to sharks, because the one percent feed primarily off of money, not invention."

Here's the full story: What Investors Can Learn From Apple, McDonald's And Wall Street's Blunders.

This quote encapsulates much of what I've come to believe about how the financial industry has become a parasite on the economy.

selling a bit into market strength

It's been an exciting few months in the stock market recently as long positions have done well. Following the run-up and run of buying I've decided to take a little bit off of the table given some uneven economic data along with international concerns like Isreal/Iran, and the always present Greece and significant economic slowing across Europe that I've heard discussed in several conference calls.

In addition I was just running out of interesting buy opportunities so I changed approach and raised some cash. (Most of my funds are in retirement accts so tax impacts don't come into play very often for me).

These are my first sells of 2012.

NEU - Newmarket was my largest position and it has continued to act weak following the conference call, so I liquidated. I actually expect to re-establish the position as mgmt characterized the slowdown they saw in Q4 as inventory drawdown, especially in Europe, and said it was not due to lost customers. They sell petroleum additives and there's only so long folks can go without re-ordering. But the stock currently is just short of buyers so I'll step aside for a while.

TEO - I took about half of my Telecom Argentina off the table. Again, I'll be glad to re-establish the position at lower prices, but it's just too weak in this market. The conference call for the company sounded excellent to me, so I gotta think the market is concerned more with international issues (seems like it reacts particularly negatively to bad news in Europe), and concern over Argentine regulatory issues the company may have to deal with. Sounds like alot of analysts are concerned the dividend may be in question due to Argentine govt influence. (TEO is traditionally a big dividend payer). This is still a long term hold for me, it's just smaller now than it was. Will re-buy more on pull-backs. All the metrics tell me this is still cheap.

CHL - China Mobile. Sold my full stake after watching it bounce around in a trading range for several years. It pays a very nice dividend also. I expect to repurchase should it fall back to the 47 range. The metrics look very good on this one. They may be getting the AAPL i-phone soon so might see upcoming bump, but it's near the top of it's range and I promised myself the next time it got here...

WFR - a small position betting on rebound of semi-equips/solar. while those areas in general have done well for me - WFR was the dog of the bunch and it may be too wounded and not the best vehicle to invest in this theme.

In selling I normally try to pair losers and there's a couple of recent buys in the material area I'm keeping an eye on (CLF and BBL in particular), but here are my larger position by size now.

LHCG - LHC Group - home health
SNDK - Sandisk - digital storage - flash drives
AFAM - Almost FAmily - home health
EBAY - eBay
TEF - Telefonica SA -
CLF - Cliffs Natural Resources - mining - iron ore in particular
DAR - Darling Intl - grease recycling
ASML - ASML HOlding - semi equips
HITK - Hi-TEch Pharmacal
VECO - Veeco Instruments - semi equips
TEO - Telecom ARgentina
BBL - BHP Billiton - diversified mining
.... and I'll stop there. the rest tend to be smallish positions, many more speculative small caps so I'll stop here.

Happy investing all

Distribution of Stock Price Movements

So maybe this will be a boring post, maybe not. I found it interesting as I'd tried to google information on this subject before and had been unable much that was useful.

My basic question was "what is the distribution of stock price movements?" (what % of the time do they go up, down, and by how much when they do?)

I didn't really feel like a "normal" distribution made sense as down moves "seem" larger and more violent than upward movements in stock prices. (A normal distribution is the normal "bell shaped" distribution we've all come to "assume" in many cases so we can use basic statistical tools such as standard deviations and allows us to constrain probabilities - example if a normal distribution applied we could assume 95% of price movements would fall within +or- 2 standard deviations of the mean of the distribution. This is particularly useful understanding risk).

Well, I was reading Jack Schwager's "The New Market Wizards" this morning - the chapter on trader William Eckhardt and the topic comes up, and when asked about statistics and stock price movements - and he is talking about only using "blunt statistical instruments" and says "I believe that price distributions are pathological." Ha. I kindof cracked up when I read it, but he goes on to talk about fractals and the problem seems to be that sample variance increases as data increases when you look at stock price movement. The more you look at, the more weird, unusual, unexpected moves you find... The implication of this being "it means that lurking somewhere out there are more extreme scenarios than you might imagine". This book came out in 1992, so the term "black swan" wasn't used then, but what he was talking about is the "black swan" concept that's so popular now after the financial collapse of 2008. Market outcomes that you think might be so highly improbable as to not exist might in reality be far more likely than we expect.

By now I've read alot of the stories of these traders in both "Market Wizards" and "The New Market Wizards" and one theme that they keep coming back to is cut your losses fast - and keep your risk small so that no one event can wipe you out. It seems the field is littered with traders who can make money for years but then "blow up" when they run into something unexpected and haven't properly respected risk. Assume risk is much larger than you expect it is, because how you manage risk makes the difference between surviving and getting wiped out.

Revising Greenblatt's Magic Formula approach

I've been spending alot of time working on Joel Greenblatt's Magic Formula approach to stock selection, and thought I'd refine an initial model that I'd put together to help select investments. Over the past week I've spent almost every free waking hour away from work working on this new model (I say waking hour because I'd often fall asleep at my PC at night while building out the calcs). The new model was designed to take into account several more factors than the one he describes in his book. I added several variations of return on capital, a few more measurements on valuation, added an entire section on growth measurements, and added a couple of components on balance sheet strength and price strength.

Well, the new model is pretty much completed and I downloaded new data, sorted things, and .... despite all the changes I pretty much end up with the same list of stocks that the initial simplified model supplied. Maybe in slightly different order, but they're all there. Greenblatt's initial criteria of Ranking stocks based on Return on Capital and EBIT earnings yield seems to be pretty robust, even when supplemented with quite a bit of other types of similar desirable measurements.

Stocks at the top of the interest list are same as before: ARO Aeropostale, WDC Western Digital, TJX TJ Maxx, MRK Merck, BBY Best Buy, GD General Dynamics, and so forth for the bigger names.

I'm still digging around with some of the smaller company names, but overall I'm being presented with a similar set of companies as before.

I guess the next step in working with this is figuring out buy/sell points to make this an ongoing/workable approach.

My new hero: Peter Schiff

Whoa, I just saw a link to video from Peter Schiff on seekingalpha.com, an investing website with alot of great articles.

I'm going to have to read more about Peter Schiff but this guy called the economic mess we are in - and he put the other talking heads to shame. Watch this video of him on various news shows as he's literally laughed at by commentators and other guests when he warns about the coming mortgage crisis, banking collapse, and economic recession.

Peter Schiff is my new hero! Prepare to see who was clueless (utterly) - and consider whether you should listen to these guys ever again. They couldn't even imagine Peter Schiff's argument being accurate - to the degree that they dismissed him with laughs and giggles. It's scary how right Peter Schiff was and few others could see it.

Stocks - still cautious

The stock market's run-up has surprised me over the past month or so. I've been gradually raising cash along the way.

I recently cleared my largest position in CTSH Cognizant Tech - a company I'd been in for around 5 years. I've closed out a few other longer term holdings too, including HANS.

Today I closed out a short term swing trade in WalMart WMT. I was in for about 3 months, picked up a dividend along the way, and sold for about 7.5% net gain in total. So far I'm enjoying the opportunities to move in and out of positions in some of the big companies that just seem cheap to me.

While I'm still taking a very cautious stance on the economy and stock market, I still want to stay partially invested, so after looking over some options I'm thinking MSFT Microsoft will be on the buy list for tomorrow.

Large Caps look inexpensive

I've never in my investing life been a fan of big blue chip stocks - they've always looked expensive to me - until now. Add a nice dividend on top of a low earnings multiple on top of a financially strong company that's growing earnings and in this environment they look pretty good. I think I posted about Kimberly Clark KMB and PEP Pepsico. I recently also purchased WMT Wal-Mart and a couple days back added JNJ Johnson and Johnson.

There are others of those big blue chips on my radar too. I've decided to try to swing-trade some of these as they tend to oscillate - because my main interest at this point is preservation of capital at low risk while picking up income from dividend and/or small price moves.

Today I sold KMB and PEP for about maybe 5-7% gains each. Will keep each of these on the radar for re-entry points. I've never really done these longer term swing trades but there are alot of these big stable companies with dividend that seem to kindof oscillate a bit, and I really don't mind owning them - especially if I can pick up a few dividends in the process, while at the same time being in a decent % cash seems a decent low-risk alternative too while I wait for other buying opportunities.

Like I mentioned I moved into WMT Walmart and JNJ Johnson and Johnson recently, and am interested in Comcast CMCSA amoung some others depending on the price moves from week to week. The market seems to want to be manic and indecisive right now, and all my old growth screens aren't turning up much new of interest right now - so I'm trying something new.

As I work out how to value these big blue chip dividenders I think I'll have some interesting work ahead of me.

Stock update

It's interesting to me that there have been alot of upside earnings surprises out there. Many commentators are reporting the dichotomy between earnings reports and employment, and it is a bit confusing, but there have been several good earning reports from companies I track.

Of those I track and/or own that seem to have business going well for them: CTSH, EBIX, HANS, DECK, KMB.

I'm actually looking to add to the EBIX position again. I want to be careful and not get top heavy without the market validating reported results, but I feel like EBIX's results deserve upping the ante a bit.

KMB Kimberly-Clark has had a good run (I recently purchased this consumer staple company as a dividend stock and it's up nearly 10% since then - so I'm considering cashing out and waiting for a pullback as KMB has pretty much traded in the same price range for nearly a decade and I've more than made what I was expecting to get from the dividend in the first place.).

Other recent additions to the portfolio including PEP Pepsico and WMT WalMart. I may try a similar in-out on PEP like KMB as I bought it similarly for dividend and have more cap gain than dividend in short period. All of this is in retirement accts so no tax implications.

Anyhow, overall I've been pleasantly surprised with earnings so far, especially given such a pervasive bearish mood that seems out there.

Yet another reason to avoid big name stock recs

I know we've talked about this before, but just a reality check in case that memory has faded. This time it's Goldman-Sachs.

From this NYT article
"Goldman Sachs can’t seem to stay out of the news, and I keep thinking about the amazing first quarter they had. In case you missed it Goldman made money on its own trades every single day in the first quarter. Meanwhile in the real world, people who followed Goldman’s recommended top trades for 2010 lost money on seven of the nine recommended trades."

2 new dividend stocks

I didn't do much research on these, but I picked up a couple of dividend oriented stocks today: PEP Pepsico and KMB Kimberly-Clark. Again, not much research on either other than they seem to pass some screens and showed up in several articles trying to identify dependable dividend picks at reasonable prices. I simply did a quick look through a few of the companies and selected these.

The main goal here was to attempt to diversify my portfolio a bit away from the growth type stocks that dominate my portfolios, as well as make a little money at the same time via dividend since money markets are so lousy right now. Both companies have strong consumer brands, and Pepsico while a bit pricier still seems to have pretty good growth prospects.

I also had an order in for Comcast but that one didn't get filled.

Stocks

Though wary, I haven't totally given up on our capitalistic system. Even though stocks have been basically flat over the past decade and the past couple of years have been terrible, I'm still looking for places to invest.

I sold the eBay stock I purchased back in January - the first trade I've recorded a gain on in a while. Over the past several weeks I've also opened some new positions that I wanted to post.
DAKT - Daktronics - they make scoreboards and alot of digital signage
DECK - Deckers Outdoors - shoes of various varieties. This has been on my watchlist for a while.
EBIX - Ebix - software for insurance industry customer, insurers and agencies. This one has been on my watchlist for a long time.
GME - Gamestop - video game retailer. There's concern the industry may be changing away from a retailer based model to more web delivery of games, and it's brought this company's stock down considerably. Slower guidance going forward by mgmt also.
VSEC - VSE Corp - government contractor - particularly dept. of defense. I don't really understand all the stuff they do - it's a broad array of services - this pick is more based on the numbers and a strong historical trend.

A few more still near the top of the watchlist: FLR, FLIR, JEC, BUCY

Bought some ebay stock

Haven't had much to post about in a while, but wanted to mention that I have stuck my toe back in the market waters with a small purchase of ebay stock. There's so many beaten down stocks right now, but at 9X earnings for a powerful franchise I figured this is a chance to pick it up on the cheap. In addition to the main site, I'd noticed that ebay's paypal is becoming a common payment method on many websites all over the net - and it's my preferred method of online payments. I don't know much about the prospect for their online phone skype, but I liked ebay in the 20s, so at 13 I just wanted to open a small position.

We'll see how it goes.

Funny Financial Quote

S.E.C. Concedes Oversight Flaws Fueled Collapse

From the NYTimes:

The chairman of the Securities and Exchange Commission, a longtime proponent of deregulation, acknowledged on Friday that failures in a voluntary supervision program for Wall Street’s largest investment banks had contributed to the global financial crisis, and he abruptly shut the program down.

(and later on in the article - and what I find funny)

On one level, the commission’s decision to end the regulatory program was somewhat academic, because the five biggest independent Wall Street firms have all disappeared.

The Fed and Treasury Department forced Bear Stearns into a merger with JPMorgan Chase in March. And in the last month, Lehman Brothers went into bankruptcy, Merrill Lynch was acquired by Bank of America, and Morgan Stanley and Goldman Sachs changed their corporate structures to become bank holding companies, which the Federal Reserve regulates.

Anyhow, found it funny. Not all regulation is bad regulation - especially when insurance is behind the system - be it financial/banking system, or the healthcare system. Active players in a fully competitive free-market environment will find ways to game the system, and good regulations try to limit that. (Yes, I work in the risk management industry and see regularly ways people try to get around the intentions we put in place to minimize risk).

By the way, here's another good article in the NYTimes about Goldman Sach's close call - along with some interesting perspective on leverage.

EDIT: Adding another - a good op-ed by Ben Stein "In Financial Food Chains, Little Guys Can’t Win"

First, I am furious at what the traders, speculators, hedge funds and the government have done to everyone who is saving and investing for retirement and future security.

Sold PRXI

As part of my efforts to lose as much money in the market as quickly as possible I posted another stunning success with my recent purchase of PRXI - Premier exhibitions. In less than 2 months I successfully lost just over 24% in this holding. To lock in my losses I made my sell today.

Who said markets were efficient? This academic exercise being tested in my portfolio is living proof of market inefficiency. Everything I buy is able to go down in value.

Happy investing to all. Next time I want to buy a stock I'm going to punch myself in the gut to remind myself of what I'm getting myself into. :-)

Stocks

It's been a long depressing run for stocks - for at least the past 9 months or so. Despite losing money, I find I've been bored with investments over the past couple months, and I wonder if that means better things are ready to come?

I've noticed in the past that if I'm too interested in what's happening that it's not good. I wonder if being bored with events means the contrary?

I'm a little gun shy due to several picks I've made performing poorly in the downturn, but there are signs of life - or at least stabilization - in the kinds of stocks I like to invest in.

Interesting view of India by a traveller

As many are aware, I'm invested in a couple IT stocks with their core operations in India Cognizant Tech and Infosys), however I don't know much about the country other than what I occasionally read in newspaper articles or the random book. Much of what I read indicates observers sees India as considerably more limited in economic potential than China due to government controls and issues with infrastructure.

This blog by Derek Sivers gives a different view that I found particularly interesting - and different from many observations I've heard. India is making do, but in a different way.

Long Term market returns

I got an email from AAII today detailing the long term performance of the market vs. bonds over the past 10 years. If the link is accessible the full info is here:

10 year returns (I assume these are annualized returns over past 10 yrs, but not sure. Also not sure of how benchmarks are defined.)

Large cap stocks 3.43%
Mid Cap stocks 8.48%
Small Cap stocks 5.70%
International stocks 5.60%
Emerging Markets 13.06%

Intermediate Bonds 6.67%
Short Term Bonds 5.70%

It's very interesting to me that bonds have performed comparably to most equity classes over the past 10 years.

Warren Buffett video

This Warren Buffett video includes a wide range of observations. Here's a quote I liked:
"The most important thing about investing is not how big your circle of competence is, it's on understanding where the perimeter is so that you don't get outside of it."

Marketocracy update - year end 07 at Dec 28.

I think there might be another trading day left in the year next Monday, but I wanted to go ahead and review the year's Marketocracy investment results.

For the past 12mo, my main Marketocracy fund SMF is up 10.99%. A decent year overall, but it is worth noting that the fund actually declined 1.11% over the past 6 months. The past 6 months have been wheel-spinning. Not good.

For the past 12mo, my secondary Marketocracy fund SOS is up 9.64%, and virtually flat over the past 6 months.

While investing in similar stocks and having similar selection criteria, the secondary SOS fund is more aggressive in selling positions than the primary SMF fund by design - it's a test in sell strategy. Again like in past years I find that it's better to follow the SMF approach and ease out of positions slowly - to let them run a little longer. The SOS approach of selling more rapidly when my opinion of a stock changes just doesn't seem to be quite as effective.

The 10 largest holdings in the SMF fund are (53.4% of fund):
GRMN Garmin
LIFC Lifecell
GOOG Google
HANS Hansen Natural
CTSH Cognizant Tech
SAY Satyam Computer Services
INFY Infosys
HWAY Healthways
VDSI Vasco Data Security
NTRI Nutrisystem


The 10 largest holdings in the SOS fund are (65.95% of fund - the SOS fund is more concentrated at the top because I sell full positions faster here)
GRMN Garmin
VDSI Vasco Data Security\
LIFC Lifecell
CTSH Cognizant Tech
GOOG Google
HANS Hansen Natural
INFY Infosys
TRAD Tradestation
SAY Satyam Computer Services
CEO China National Oil

PEG

Nasdaq 100's top 25 PEG Plays.

#7 and #8 are two of my larger holdings (I've been adding to). This is part of why I like their valuations right now.

The "PEG" is the ratio of a company's PE ratio to the earnings growth rate of the company. So if a company has a PE of 30 and an earnings growth rate of 20, then the PE would be 30 / 20 = 1.5. All else being equal you like lower PEGs because you're buying earnings growth at a discount.

The first place I heard about the PEG ratio was in Peter Lynch's book "One Up on Wallstreet," and he's credited with its widespread popularity as a valuation rule-of-thumb.