Daily Posts Archive
Each year end, I review my investing strengths and weaknesses, examining stock charts of previous buys and sells, comparing them to market action, and so on.
A bear market is not tolerant of aggressive behavior. The effects of your mistakes are magnified—the secret to surviving the bear market is adapting.
William Arthur Ward (1921-1994) said it like this: “The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.” My thesis is simple: that the market is always changing, and that to succeed as an investor, you’ve got to change with it. Well, I think it’s time to adjust the sails, because as the market works to build a base here, the strongest stocks in the market are coal stocks...and never before in my career have coal stocks been attractive investments.
SNaC stands for Story, Numbers and Chart, and it’s the method I use to pick stocks for the Cabot China & Emerging Markets Report. There’s nothing complicated about it, but it can be very powerful. Just because it’s simple, that doesn’t mean it’s easy to do, any more than the simplicity of “exercise more and eat less” makes that particular prescription easy. Here are the basic principles.
If I try to think rationally about this problem, here’s what I get. Debt is bad; equity is good. Consumers and businesses are already working to reduce their debt loads, and as they continue, they will develop stronger balance sheets and greater financial health, which is a good thing. (One aspect of this that is often forgotten is that this debt shrinkage is right on schedule for aging baby-boomers.)
The moral of the story: Successful investors always consider risk when analyzing their portfolio, adhering to rules like cutting losses short (if you’re into growth stocks) or diversification (value stocks). I constantly talk to investors who fail to think of the downside, plowing a huge percentage of their portfolios into a few stocks ... and then failing to cut the loss short if things go amiss.
Microsoft wants to pay $44 billion - perhaps the largest technology purchase ever - to buy Yahoo! Why? To compete with Google! But does it make sense? Well, from a big-picture point of view, anything that can thwart Google’s dominance of Internet search and advertising probably makes sense for Microsoft, and if they’ve got the cash, there are worse places to spend it. But does this make for an attractive investment opportunity? Do you want to own a piece of Microsoft/Yahoo!, recognizing that the Microsoft part is eight times the size of the Yahoo! part?
I know that these trading fiascos are bad things ... and yet part of me is strangely pleased about them. I like having big object lessons that show what happens when people break the rules and refuse to cut their losses short. Rogue traders aren’t greedy criminals - none of the big ones have made any money for themselves on their dealings. But their mistakes remind us that anyone who reacts to losses by making increasingly riskier trades can parlay bad luck into a financial catastrophe of amazing proportions.
The industry is the realm of genetic medicine and the stock is Illumina (ILMN), currently trading in the low-60s. Illumina is one of two major public companies that make tools used for genetic medicine. The other is Affymetrix (AFFX). To say that they’ve been competitive would be polite; there have been lawsuits and countersuits about intellectual property in recent years.
The market appears ripe for a short-term bounce ... but so what? The reason most people want to pick bottoms isn’t really to make money; that’s part of it, of course, but not the sole purpose. The reason they want to pick bottoms is to feel like they outsmarted the market and most other investors. There’s nothing shameful about that, but in the market, wanting to prove that you’re right usually costs you money.