10/29 newsletter

*** Market
The market has been very volatile in the past two weeks. But if you hold your breath, the major indexes closed exactly the same as 10 days ago. Personally I think the October selloff is almost over. Although it may not appear to you a lot of changes on SP500, quite a few stocks moved down 20-30%. My portfolio is down ~5% so far in October. Not as good as I want it to be, but acceptable. And amazingly, I have not traded a single stock in October. Maybe next week. I held up my breath pretty well this round, part of it is also I am fairly busy at work.

There are two scandals that may have long-term impact to American economy landscape. Vice President's top aide was indicted by grant jury. Not sure if President's chief can be spared. This will significantly impair this adminstration's reputation and political power. The validity of Iraq war (and spending) and Bush's reelection is questioned severely. The other scandal is the UN's oil for food sanction on Iraq/Iran. Investigation has shown large scale corruption. There may be some US companies that will be indicted.

Steve

10/15 newsletter

*** Market
The US market underwent another week of aggressive correction. Small-cap is hit particularly hard. However, this may post the second best chance to buy stock in a year. (But I am fully invested, no free funds available!) You may wonder what is causing all this craziness. I like to think that the market just "have to" do this to wipe out speculation, especially in hot sectors like oil and real estate. But if you are economist minded, here is the reason.

First of all, energy stocks are overheated. Several foreign markets as well. Second, President appointed a panel to fix the tax law concerning mortgage deduction to bring more "fairness" (federal tax law favors capital gain on real estate over other types of investment) under the light of a very speculative housing market. This pours cold water too. Third, a FED chief voiced concern on inflation. Market fears that more agressive interest rate hike is in store... Enough bad news? But all this is just typical of October.

*** Comment
I read a very interesting article of Greenspan, I hope you can enjoy it too. I am no longer resentful of my job loss (Ada!) since it is part of the market mechanism designed from on high. What can you do? (However, I still believe management can not blame on the economy. If a general manager is blaming economy, he should be fired in the first place. Why waste investor's money?) This also shed light on how you should see your corporate environment. No wonder Buffett gangs always said "obtain large moat, agressively cut cost"...

http://www.federalreserve.gov/boarddocs/speeches/2005/20051012/default.htm

If you are eager to properly design your retirement, you can read David Swensen's book (only $15, about a trade's cost). I read a few pages yesterday, it is a very fine, solid book, telling you how to avoid Wall Street traps.

--Steve

10/08 news letter

*** Market
It is definitely one of the bearish weeks in a year. Just as everybody got zealous about energy stocks, Wall Street decided to sell, and sell big... XLE (SP500's energy sector) was hammered by 10% in just 3 days with a 100% turnover on Thursday. Amazing volatility. My 10% beat over SP500 is short-lived. Now I only got 9% lead. This is again a warning that even in a bull market, you can lose money due to volatility. It is just a mathematics that Wall Street plays all the time.

*** PDCO
As I am checking my portfolio this morning, I found the latest news that PDCO is promoted to SP500 to replace the defunct Delphi (auto parts manufacturer). I bought a small position of PDCO about a month ago. PDCO is a dental equipment reseller. Its long term performance has been extremely stable. A straightline movement of 20% per year. As a risk-averse approach, this is the best kind of stock I want.

However, there is a caveat to this. 20% gain with 20% volatility is a very difficult game to play. You have to buy at the bottom of the curve. Otherwise, you have to wait more than a year to glean on the growth. Therefore, I hesitated. Two months ago however, PDCO began to turn bearish. It missed its sale target and the stock was hammered down to the unusual 25% stop. That is where I bought the stock.

It was not a easy call. Based on its past performance, it should be a solid company. But if you checked Yahoo news under PDCO, one class-action suit after another, acusing management security fraud. S&P maintained "sell" option. However, late September, S&P changed its opinion. PDCO is placed in "buy" category. And yesterday, it is promoted to the list of SP500. This is a recognition of its fundamental (but not a garantee of stock price). What a world !!!

Enjoy the roller-coaster of October market...

--Steve

10/03 monthly performance

French and Fama Factor Model: [211 days, 2004-12-01]
Blend         Value         Growth
SPY     4.58
MDY    12.66
IWB     6.15  IWD     7.83  IWF     4.32
IWR    13.79  IWS    14.86  IWP    12.02
IWM     5.68  IWN     5.56  IWO     5.05

---

So far this year SP500 is gaining 5%. It is pity. My portfolio is gaining +15%. I pride myself of beating SP500 by 10 points. This is the measure that Warren Buffett is looking for. And 15% tops all the numbers listed above. Therefore I am very happy to reach that. In my bio, I set three goals for my portfolio: It has to either beat SP500 by 10 points, or obtain more than 20% absolute yield, or match the best major index. If I can achieve this consistently, my portfolio should perform quite well.

Part of the gain in October is from the high flying oil refinery stocks. Your beloved President announced that the country needs more refinery capacity. Since this is in line with the interest of many Whitehouse insiders (not a smoking gun like "we need to conserve gas"), the related stocks took off. On the other hand, CME continues to lead the portfolio to all time high. But its PE ratio seems to be stretched to a very dangerous level...

These numbers do not include the big drop of today (10/04). We will see how much selling is in store and I am prepared some non-performing stocks in the portfolio will be stopped out in October.

I am also developing a method to efficiently align with the best performing sectors. (There is another stochastic reason for doing this, but it is hard to explain in a paragraph.) It seems intuitive that when a sector is ultrahot, one month of superior gain can exceed many months of mediocre performance. But this method is very hard to simulate (for lack of historical information). Therefore, I am experimenting it carefully in a small portion of my portfolio. It is far from convincing that you will outperform by simply chasing the hot sectors. A lot of times, the market is so efficient that, after a business cycle (such as dot com boom and bust), most investors do not gain any edge. This showed up in my many simulations, therefore, I am conservatively skeptical about it.

--Steve