Author: Michael Goode

Motley Fool CAPS

I am generally not a fan of stock trading games or contests. However, I do like the Motley Fool’s CAPS. I have gotten a few successful short pick ideas from the game, and I have learned of some great stocks from a long perspective as well. In fact, I found Tecumseh (TECUA) on CAPS and was about to buy it before it shot up 50% in one day as it was upgraded and it sold some assets.

CAPS is a good way to try out a new way of picking stocks or a way to find out what others think about stocks you like (dislike). CAPS players are rated on the quality of their picks, and not surprisingly, I am highly rated. In fact, I am currently rated #53 out of 33,000 people on CAPS. Not bad, eh? See me on CAPS.

Short a falling stock and put it in your pocket . . .

Okay, I was a little bored. This is the theme song of my short selling today. To the tune of “Catch a Falling Star.”

Short a falling stock and put it in your pocket
Hopefully it will fade away.
Short a falling stock and put it in your pocket
You can buy to cover some day.

For the market may crash and wipe out all the bulls,
Some bloody day!
Just in case you want to profit,
You’ll have made money on the short side!

Short a falling stock and put it in your pocket
Hopefully it will fade away.
Short a falling stock and put it in your pocket
You can buy to cover some day.

For when the Dow and Nasdaq are fallin’,
An’ that’ll come some way!
Life will feel a whole lot better,
If you were shorting stocks that day!

Short a falling stock and put it in your pocket
Hopefully it will fade away.
Short a falling stock and put it in your pocket
You can buy to cover some day.

original lyrics:Catch a falling star an’ put it in your pocket,
Never let it fade away!
Catch a falling star an’ put it in your pocket,
Save it for a rainy day!For love may come an’ tap you on the shoulder,
Some star-less night!
Just in case you feel you wanna’ hold her,
You’ll have a pocketful of starlight!

Catch a falling star an’ ( Catch a falling . . . ) put it in your pocket,
Never let it fade away! ( Never let it fade away! )
Catch a falling star an’ ( Catch a falling . . . ) put it in your pocket,
Save it for a rainy day! ( Save it for a rainy day! )

For love may come and tap you on the shoulder,
Some star-less night!
An’ just in case you feel you wanta’ hold her,
You’ll have a pocketful of starlight!

( . . . pocketful of starlight! ) [ hum in time ]

Catch a falling star an’ ( Catch a falling . . . ) put it in your pocket,
Never let it fade away! ( Never let it fade away! )
Catch a falling star an’ ( Catch a falling . . . ) put it in your pocket,
Save it for a rainy day! ( Save it for a rainy . . . Save it for a rainy, rainy rainy day! )

For when your troubles startn’ multiplyin’,
An’ they just might!
It’s easy to forget them without tryin’,
With just a pocketful of starlight!

Catch a falling star an’ ( Catch a falling . . . ) put it in your pocket,
Never let it fade away! ( Never let it fade away! )
Catch a falling star an’ put it in your pocket,
Save it for a rainy day!

( Save it for rainy day! ) Save it for a rainy day!

Sung by Perry Como (see him on Youtube here)
Music and Lyrics by Lee Pockriss and Paul Vance

Why Inexperienced Investors Do Not Learn

Why Inexperienced Investors Do Not Learn: They Don’t Know Their Past Portfolio Performance

Glaser and Weber just released a paper with the above title on SSRN. I urge you to download and read it. They examine the performance of 215 online investors over the past 4 years and find that the investors have no clue whatsoever as to how much money they made or lost. At the extreme, one investor who thought he had lost 50% per year had actually gained 2% per year. Another who thought she had gained 120% per year had lost 3% per year.

There was literally no correlation between the returns investors thought they had made and the returns they actually made. There was a tendency for those with better performance to be more accurate in assessing their past performance (they were better calibrated). This is a logical outcome–those investors who know how they did were more likely to allocate money to strategies that worked. So if they knew that they tended to lose money speculating in tech stocks, they would know to switch to something safer (index funds or blue chip stocks). That is why you should know your performance.

I am the poster boy for the importance of tracking performance. Since I started seriously investing in 2005 I have done all sorts of things–day trading, options, shorting stocks, speculating in gold, quantitative investing, value investing, and raw speculation. I know after tracking my performance in detail on Icarra that most of these things were not worthwhile. While I made a lot of money in gold I did not know what I was doing, so it made sense to get out. I lost money in day trading and got out with minuscule losses after only a week. I have made money shorting stocks. I have broken even on my options trading, mostly because I have gotten fairly good at shorting stocks and I used puts on a few stocks this summer that I could not borrow the shares to short. I have lost a lot of money in various stock speculation. When I have focused on finding and understanding good value stocks I have on the whole made money, doing slightly better than the market. My quantitative investing performance has been pretty darn spectacular.

So now that I know how I have performed, what will I do about it? I have forbidden myself from rank speculation in stocks or options. I have increased my short activity. I have limited the number of individual stock positions I pick for my value investing portfolio, increasing the size of each position, so that I can focus on better understanding each company. I have also drastically increased the portion of my portfolio that I allocate to quantitative strategies, both long and short.

So take a look at your performance. If it is okay, you may want to allocate more money to those strategies that are more profitable and less to those that are less profitable. If your performance is dismal, you may want to just stick all your investments in index funds. Remember, if you index, you can expect to outperform 80% of all investors, while spending a lot less time thinking about your investments.

Depreciation made easy

Okay, call me a glutton for punishment, but what I did this last Saturday night was type up a variety of the most useful depreciation schedules. The schedules are set up for real estate investors, but anyone who in the course of a small business needs to depreciate real or personal property might find these worksheets useful.

Excel Depreciation Schedule
Open Office Depreciation Schedule

Feel like timing the market?

It may not be such a good idea. A perfect market timer could have, over the last 80 years, turned $1 into $670 million. A perfectly inept market timer would have turned $100 million into $1,000. A market timer would have to be right about 70% of the time just to equal the return of a buy and hold index fund. Do you think you are that good? See the study here

Uncorrelated assets now correlated

One of the reasons for recommending diversification of asset classes (stocks, bonds, real estate, commodities, etc) is that since different asset classes are imperfectly correlated this will reduce volatility and risk. A recent report from Merrill Lynch shows that the correlation between different asset classes have increased over the last year. Your best bet for diversification? Short-term bonds with maturities of a 2 to 5 years. My bet is on treasuries, particularly TIPS. For my personal portfolio, I lend money on the P2P lending site prosper.com and I expect to earn an 8.5% annual return with little effort.

Article here (PDF): http://rsch1.ml.com/9093/24013/ds/20350591.PDF

Rule #1 Investors

If you have read and liked Phil Town’s book Rule #1, you may like the investment blog “Investmestment Jungle“. The author of this blog looks at various companies from a Rule #1 perspective.

I have yet to read Town’s book, though from what I have read about it, I have a couple problems with his investment methodology: first, it is too formulaic, and second, the strategy tends to lean towards buying growth companies. The only major valuation criteria appears to be that a stock trade below its historical average P/E. Yet this can lead to buying very expensive companies, which will be a problem if they stop growing so fast and their great returns on invested capital decrease (as it the fate of almost all companies).

Do you like cheap stocks?

One of my favorite investing blogs is Cheap Stocks. I have added a link to it on my blogroll (right hand side of the page) for your convenience. I have found such stocks as CALL (which gave me a 30% profit in a couple months) through this blog. Clyde searches for stocks trading at low multiples of their net current asset value (NCAV: current assets minus all liabilities).

The current post on Cheap Stocks is on profitable companies trading at less than 2x NCAV. Most of the companies are not that interesting to me, except for maybe Adaptec (ADPT). I will probably write more about Adaptec in the future. Following is Clyde’s list of the top 5 largest profitable 2x NCAV companies:

Ingram Micro (IM)
Sycamore Networks (SCMR)
Exar Corp (EXAR)
Adaptec (ADPT)
Farmer Brothers(FARM)

See Cheap Stocks for more details.

Errata on my portfolios

I track my portfolio performance on www.icarra.com and I link to those portfolios here. So I should note that icarra is currently not accounting for short sales correctly. Correct accounting of those sales would modestly reduce the performance of my iZone Quant Portfolios and somewhat reduce the recent return in my Stockpicking portfolio.  On the plus side, my portfolio betas and R-squared are actually lower than shown because of this error.