Friday, December 31, 2004


Strong end to what turned out to be a good year

Up $5000 today, bringing this week's gain to $32,924. I also sold my small position in perrenial pump and dump favorite BOSC early this morning for $4.80 per share when the company's stock price, like so many times this year, jumped 50 percent for no good reason.

On the whole, this turned out to be a good year, with my porfolio up 57 percent. As I mentioned in an earlier post, I think next year and indeed the next 5 years will not be good ones for the stock market. As a result, I'm going to be increasing my short positions. Also, in order to prevent the sort of meltdown that my portfolio experienced this summer when I took a huge "can't lose" position (over 30 percent of my portfolio) on one company only to have it explode in my face, I will be strictly adhering to the rule that no single company can be worth more than 10 percent of my portfolio.

Thursday, December 30, 2004


Up $26 today

I'll try not to spend it all in one place.

Wednesday, December 29, 2004


Not too many Christmas bargains this year

Another good day: up $3000. Also, I bought 2500 shares of TRT. However, I’m still sitting on over $50,000 in cash. I just can’t find enough good stocks to invest in, and as I’ve said before, I’d much rather own cash than crap. What a difference two years make. At this time in 2002, there were literally dozens of stocks with great growth potential that were trading well under cash value, often 50 percent below cash. Now bargain stocks are few and far between, especially in the microcap universe that has traditionally been my stalking ground.

At least during the bubble years, there were still assets that remained reasonably valued: real estate, emerging market bonds, commodities, not to mention value stocks and the big “old-economy” stocks. For the value investor, there were still many bargains to be found. All that has changed. Now everything seems overvalued: Real estate prices are sky high, bond yields have fallen, commodity prices have soared, and stocks of every sort have risen, from the small cap growth stock to the big cap S&P 500 stock.

What’s responsible for these developments? Partly it’s the low interest rate policy pursued by the Fed to stimulate an economy suffering from excess capacity and anemic employment growth. But no matter how you cut it, stocks are overvalued now, and so the coming year may bring many disappointments to investors such as myself. Off the top of my head, I can think of at least 4 reasons why stocks are overvalued now by conventional measures of valuation:

• The P/E ratio on the S&P 500 is over 20 now. The historic average is 16, and if you remove the late nineties from the data, it’s even lower. The average P/E on NASDAQ stocks is even higher.

• Inflation is very low now. Contrary to popular belief, P/E ratios should be lower when inflation is low. The reason is that inflation reduces the real value of debt, which increases a firm’s net equity value. Looked at it a different way: when inflation is high, nominal interest rates will also be high, and the firm will have higher interest expenses, thus lowering its reported earnings.

• Corporate profits as a percentage of GDP are the highest since the 1920’s. This has occurred because productivity growth has been stellar while wage growth has been weak. Thus, not only are P/E ratios high, the E in the ratio is very high as well. Eventually, wages will either accelerate as unemployment continues to fall or productivity growth will taper off. In either case, this will be bad news for stocks.

• The market P/B value is still extremely high by historic standards. I can understand that price to book will tend to increase over time, as the economy becomes more technology oriented and firms accumulate more intangible assets, which GAAP often requires that firms expense instead of capitalize (such as R&D expenditures). Still, market capitalizations are very high relative to book values, and some of those book values include nebulous assets like goodwill, the value of which may be close to zero, especially if stemming from acquisitions or mergers during the bubble years.

Tuesday, December 28, 2004


Out of TAYD

I sold my remaining shares in TAYD this morning (I sold half my shares yesterday). The average selling price was about $6.60. Obviously, I pulled the trigger too soon, as the stock reached above $9 this morning. Oh well. As in other aspects of life, one should always be happy with what one has and not with what one could have had. I also sold my shares in ELSE today for $5.30. I didn't particularly like that stock anyway, and today's surge (which I have still to figure out), provided a good exit point. I also added more to my holdings of STRC, and opened new positions in WSCI and PATK. Busy day all around, but quite profitable, as my portfolio increased by $6,000.

Monday, December 27, 2004


Bought more MRM, sold NUT

In other news, I bought an additional 1300 shares in MRM on Thursday, and sold my remaining shares of NUT today.


Profiting from disaster

My portfolio was up over $17 thousand today, largely due to huge surge in TAYD shares. I'd be lying if I said that I am not happy with the windfall, but the truth is that this is a bittersweet experience. You see, TAYD manufactures shock absorption equipment, including the sort of shocks that are installed in buildings to mitigate the impact of earthquakes. Obviously, yesterday's disaster was the cataylst for today's run in the stock. Well, I've decided to give a portion of today's winnings to charitable groups involved with the relief effort. My thoughts and prayers are with the victims of this disaster.

Thursday, December 23, 2004


End of week summary

I didn't get a chance to post yesterday. Not like there was a lot to say: my portfolio dipped $500. Today it recovered $89. Ahh.. the law of large numbers. Since most of my stocks tend to be uncorrelated with the market, my portfolio, as a whole, tends to avoid big swings, which is fine by me! For the week, I finished up $1,422. Merry Christmas everyone!!!

Tuesday, December 21, 2004


Up $4400

Despite a minor meltdown in Outlook shares, my portfolio was solidly in the black today, increasing by $4,400. I'm surprised by how well TZOO shares are holding up, considering no reasonable person could argue that they are worth more than $40. Proof, once more, that there is a sucker born every minute.

Monday, December 20, 2004


Stupid press release of the day

Once again, the dubious honor goes to (AAC) for this stupid press release, which simply announces that they filed an 8k with the SEC disclosing this even stupider press release that they released a few days earlier. And what was the content of this "news"? Well, it turns out that the company is crowing about the fact that its shareholder's equity has grown by $5 million since last year. No surprise that they neglected to point out that $4 million of that is attributable to sale of stock. But I suppose expecting most AAC longs to know how to read a cash flow statement is asking for too much. Friends, if it looks like a pump and dump and quacks like a pump and dump, my experience has always been that it IS a pump and dump.


New addition to my portfolio

The week started on a sour note, with my portfolio down $1600. I also added a new stock to my portfolio: STRC. Like most stocks that I own, it's a "deep value" stock, trading at 70 percent of tangible book value and 30 percent of annual revenue, but still profitable. Despite a "weak pricing environment", as the last earnings report describes it, the company is generating good cash flow, which allowed it to generate enough free cash last year to pay off $5 million in debt.

Sunday, December 19, 2004


Huh? (Motley Fool edition)

Today's featured article in Yahoo Finance is from the Motley Fool:

It's odd, but the stock market often tanks when there's good economic news reported. That might not make sense to you, but there's an explanation. It's all related to interest rates. Alan Greenspan and his buddies at the Federal Reserve set interest rates, trying to keep inflation at bay and promote a healthy economic environment. When positive economic news is released, such as lower unemployment figures, rising wages, or growing national productivity, the specter of possible inflation is raised. Economies growing too quickly can spur inflation, with too much currency in the marketplace leading to the weakening of the dollar and rising prices.
What's odd is that anyone actually pays money to read this stuff. First of all, growing national productivity is always deflationary (if firms can produce goods more cheaply, prices will fall, not rise). Second, what's good for America is not necessarily good for the stock market, or vice versa. Higher wages are good for workers. But higher wages also mean higher costs for firms and hence, lower earnings. Whether that's "good news" or "bad news" depends very much on which side your bread is buttered. Third, as this NBER study shows, good employment news tends to be bad for stocks only when the economy is close to full capacity and the labor market is tight. That's when there is a real threat of inflation. The labor market is not tight now: payroll employment is down more than a million from where it was 4 years ago and the average time it takes someone to find a new job is the longest in over 20 years. Perhaps that's why when the October jobs data came in lower than expected, stocks sold off.

Saturday, December 18, 2004


Social security reform and economic growth

Don Luskin criticizes Michael Kinsley’s argument that privatization of social security will depress economic growth. Let me try to boil down the issue in the following way: All things equal, economic growth will increase if privatization of social security leads to a greater capital stock, financed by increased investment. By definition, funds to finance investment (I) must equal what American saves (S) plus what America can borrow from aboard. In other words, I = S + CA, where CA is America’s current account deficit (a broad measure of the trade deficit). I should stress this is not a “theory” but rather, a matter of arithmetic.

National savings is the sum of three things: savings of individuals, savings of firms in the form of retained earnings, and savings of government in the form of a budget surplus. Social security privatization will lead to larger government budget deficits since payroll taxes will be diverted into private retirement accounts. Corporate savings will probably not change much one way or another. So the big question is whether increased savings of individuals will offset the increased dissavings of the government. It is certain that individuals will save more, since any reasonable scheme will force workers to contribute a portion of their income into accounts from which withdrawals will restricted until retirement. However, if individuals regard contributions to individual accounts different from how they regard payroll taxes, there may also be an impact on consumption. In particular, since individuals will tend to regard contributions as “their money” (whereas payroll taxes are regarded as the “government’s money”), they may perceive an increase in their net wealth, and increase consumption accordingly. Thus, in aggregate, private savings will rise, but this will likely not offset the decrease in government savings. Hence, national savings will decline, so all things equal, there will be less funds to finance investment.

There are, however, two caveats to this story that are worth mentioning. First, while national savings may decline, the composition of savings may change in a way that is favorable to Americans. Implicit in the back of the minds of most proponents of social security reform is the idea that privatization of social security will lead to more money flowing into the stock market. But wait a second, if people start putting more money into stocks, who is going to buy all those treasury bills that will have to be issued to offset the lost revenue from payroll taxes?

While one may name the usual suspects, namely Asian Central Banks, it is hard to see this as a long-term answer. External holdings of treasury securities are growing rapidly, and there is no guarantee that the appetite of foreign investors for U.S. government debt will accelerate (let alone increase) over the coming years. Furthermore, even if this occurs, a portfolio shift towards equities may not be in America’s best interest if the stock market does not perform well over the coming decades. Currently, standard measures of valuation suggest that American stock markets are still richly valued, with P/E and P/B ratios above their historic averages. Thus, while privatization may lead to a portfolio shift that benefits Americans, it may also lead to a shift that harms Americans. Moreover, this argument suggests that it is doubtful that America will be able to increase investment spending by running larger current account deficits to offset the decrease in national savings. Thus, if social security privatization leads to lower national savings, growth will suffer.

Second, it is possible, though far from inevitable, that a privatization may have short-run stimulative benefits. In particular, if consumption demand increases as suggested above, this will spur economic activity, and lead to higher utilization of the existing capital stock. Moreover, it could provide a short-term boost to both savings and investment, since strong demand will boost output and hence incomes. Notice however, that this is a “demand-side” argument, which is only valid for an economy operating below full employment, and is very different from the “supply-side” arguments that proponents of social security reform typically espouse.

Friday, December 17, 2004


Travelzoo’s 8 million subscribers

So let’s do a little math: 8 million subscribers divided into a market cap of $1.5 billion is $187 per subscriber (okay, I know, I’ve already lost most TZOO longs by this point). Ahh... memories of 1999. How many companies back then touted their subscriber counts? And how many of them are still around now? Okay, there’s Amazon, EBay, Yahoo...and and .. well, you get the idea. Of course, even the word “subscriber” is misleading. How many of Travelzoo’s emails actually get read? I would wager only a small minority, with the rest deleted at first sight, and/or send directly to the old spam folder. Come to think of it, I actually subscribed to Travelzoo’s service a few years ago. It now goes straight into the bulk mail folder never to be seen again. Let’s ask an honest question: how many subscribers would Travelzoo had if each “subscriber” were asked to pay $1 per year for the service. My hunch is a lot less than a million, which makes Travelzoo one overvalued company. It’s a bit like saying that my local pizza parlor has thousands of customers because that’s how many flyers they stick under the door.


Stock options to be expensed

From USA today

Count one for the bean counters.

After years of heated debate between high-tech companies and accountants, the head accounting rule-setting body Thursday declared all companies must subtract the cost of stock options from their earnings starting in mid-2005.

It's a massive blow for companies, mainly in Silicon Valley, which had been doling out lucrative stock options to employees and executives for decades but not counting them as a cost. It also requires investors to rethink how they value companies: The new rule will affect everything from price-earnings ratios to earnings estimates.

Accountants, thinking companies had been enjoying a loophole that understated their costs, applauded the decision. The new rule will have "a big impact, but it's the right move," says Ed Nusbaum, CEO of accounting firm Grant Thornton.
No, count one for the investor class. Let’s be clear: it’s not so much that shareholders of high tech companies don’t want options to be expensed; rather it’s the overpaid executives at these companies, who are the prime beneficiaries of intransparent option programs, who don’t want options to be expensed. The distinction is crucial. My prediction is that option expensing will have no adverse impact on share prices, and indeed over the long-run will have a beneficial impact, as expensing helps to curb excessive CEO pay and makes corporate accounting more transparent. The money grubbing insiders in America’s high tech companies, the very same people who made absurd amounts of money selling their shares to ordinary investors during the NASDAQ bubble, should collectively hang their heads in shame. Expensing of options is a victory for the investor class, and a victory for capitalism.


End of week scorecard

A strong end to what was otherwise a lackluster week: Up nearly $5 thousand today thanks to good performances by AEHR and OUTL. As a result, I finished the week up $4,876 from last Friday.

Thursday, December 16, 2004


Agreeing to disagree

In the long run, value triumphs everything else. But as Keynes said, in the long-run, we’re all dead. The inevitable truth is that markets can remain irrational much longer than most investors can remain solvent. But how do you make money when you know you’re right, but the market doesn’t agree with you? That’s a question I’ve pondered for quite some time now. I have a variety of views on this issue, to which I will return in future posts. But for now, let me ask a simple question: can “rational” investors ever be in a position where they find it sensible to buy shares of a company whose stock is trading above its ‘intrinsic value’, knowing full well that the expected return to holding the stock ‘for the long-run’ is negative?

Let me be more concrete: consider a biotech company that is in the early stages of bringing a drug to market. EVERYONE agrees that if the drug is a success, the share price should be worth $10. Similarly, everyone agrees that if the drug is a failure, the shares will be worthless. Moreover, everyone agrees that there is a 50 percent of success, and a 50 percent chance of complete failure, with nothing in between. What should be the price of the stock? For convenience, let’s assume that that the time periods involved are sufficiently short so that we can ignore the opportunity cost of holding money that earns no interest, and that investors hold the stock as part of a well diversified portfolio (which weans out idiosyncratic risks). [p.s. none of the results listed below will change if we relax these assumptions].

If investors are rational, the price of the will be $5, right? In general, the answer is yes, since there is a 50 percent chance that the stock will end up being worth $10, and a fifty percent chance that the stock will be worth nothing.

However, let me add in an additional wrinkle. Suppose that before the final verdict on the drug is announced, the company will release a “preclinical study” assessing the drug’s efficacy. Now suppose that there are two groups of investors. The first group, (let’s call them Group E ... the ‘Earlies’) believes that the results of this preclinical study will determine beyond a shadow of a doubt whether the drug is a success or failure. However, the second group (let’s call them Group F ... ‘the Finals’) believes that the results of the preclinical study are totally meaningless because they are too premature, and that only the final results should count.

Now I know that these are pretty extreme positions. But let’s stay with my thought experiment and ask the following question: what will the price of shares now be? The answer, as I will now explain, is $7.5. In other words, both group of investors will be willing to buy the shares at $7.5, even though both groups agree that the stock’s expected value in the long-run is $5.

How so you ask? Well, work backwards. Suppose you are a member of Group F. Since you consider the preclinical test to be irrelevant, you will be prepared to pay at least $5 regardless of the outcome of the test. Now, suppose you are a member of Group E. If you buy the stock and the results of the preclinical trials are unfavorable, you know you will be able to sell your shares to members of group F for $5. On the other hand, if the test is favorable, you know the price will jump to $10 since you and other members of Group E will regard the favorable results as conclusive evidence of the drug’s efficacy. Thus, for someone in Group E, the downside to buying the stock before the preclinical results are released is only $5, but the upside is $10. Hence, people in Group E will be prepared to pay $7.5 for each share.

Similarly, people in Group F know that if the preclinical trial is favorable, they will sell all their shares to Group E at $10 per share. If the preclinical trial is unfavorable, they will happily buy all the shares from Group E at $5 per share. Hence, members of Group F will also be willing to buy the shares at $7.5. Let’s summarize the key results:

• All investors agree that the intrinsic value of the stock in the “long-run” (after the final results are released) will be either $10 or nothing, which implies an expected value of $5.
• Nevertheless, all investors are happy to buy the shares at $7.50, which represents a 50 percent premium to the stock’s expected intrinsic value.
• The stock’s expected return in the short-run (between now and when the preclinical trial results are released) is zero. But in the long-run, the expected return is negative 33 percent.
• None of these results listed above depend on “who is right” (though obviously, if this scenario were repeated many times, the actual profits accruing to each group would depend who’s view is correct. But of course in that case, the members of the group with the incorrect view would eventually lose all their money and/or investors would move from one group or the other when the truth became known).
• Moreover, it is not even clear if one group is more sensible than the other (though clearly for the purpose of fleshing out my conclusions, I assumed that both groups are rather irrational in having such stark views about the relevance or irrelevant of the preclinical trial).
• My conclusion would break down if short-selling were allowed (I leave it as an exercise for you to figure out why!). In practise, however, this is not an important consideration since short-selling is not very common, as reflected by the fact that even at the height of the NASDAQ bubble, fewer than ½ percent of NASDAQ shares were sold-short).


Some AEHR in my lungs

Thanks to a nice jump in AEHR today, due to the intiation of analyst coverage by Wells Fargo at a "buy" rating, my portfolio managed to eek out a $1500 gain. The coverage of AEHR came as a surprise, given that the company's market cap is only $20 million. Hopefully, it's a sign of good things to come. Most of my other stocks, however, remain in hibernation; without AEHR, I would have been down on the day.

Wednesday, December 15, 2004


Sold all my PTA shares

I decided to sell all my PTA shares at $1.93 today. I bought them only a few weeks ago at $1.85. I usually don't flip stocks so quickly, but I had a change of heart about my decision to buy, and decided to bail while I was still slightly ahead. Insurance companies are very hard to value, and even though the stock is trading at well below book value and just had a nice profitable quarter, a few things I read on the Yahoo messege board written by people who appear to know the company a lot better than I do indicate that there are good reasons why the stock appears so cheap. My suspicions were compounded last week when the company issued convertible subordinate debt to bolster its capital base at terms that appear to indicate a relatively large risk premium. So I think I'll stay on the sidelines for now. There seem to be safer bets out there, with equally good upside potential.


*#$! Martha

Martha Stewart is in the middle of a short sqeeze, and my shorts are definitely getting squeezed (and not in the fun way). My portfolio was down $2000 today, all on account of MSO, a company founded by a crook, who is now sitting in jail serving a sentence that in my opinion is way too short. Make no mistake, MSO will fall to $10 one day, when the lemmings that have invested in this stock realize the it's valueless, and that Martha's TV show will mainly benefit (no surprise here) Martha, and not her company.

It continues to vex me that most people still don't regard Martha as the slimy crook that she is. Insider trading is victimless crime, right? Tell that to the chump who bought her Imclone shares just before they fell. For every seller, there has to be a buyer. What Martha did was no different from what a shoplifter does. Actually, it's worse. Martha stole a lot more than the typical shoplifter; she stole from people who had less money than her; she stole when she knew what she was doing was wrong (she used to be a stockbroker, after all); and on top of that, she tried to cover it up after the fact. Absolutely shameless.

Tuesday, December 14, 2004


Still stuck in low gear

Despite a nice pop in Mancaster Technologies (MANC), my portfolio remains stuck in low gear, increasing only $2000 today. Had it not been for my MANC shares (which I sold in afterhours at $8.40), I would have been down on the day again.

Monday, December 13, 2004


ULTE booted off my island

What a way to start the week. I wake up this morning, and what do I find? None other than a big stinkbomb from Ultimate Electronics in the way of a press release saying that there is "significant doubt" that it will be able to continue as a good concern. English translation: hi ho, hi ho, it's off to bankrupcy we (may) go. Luckily, I was able to sell 60 percent of my shares in the premarket at $1.80. I unloaded the rest for $1.17 later on in the day. As a result, ULTE is no longer in my portfolio.

What is the lesson to be learnt here? Actually, I am not sure. My philosophy is that investing is a probablistic endevour. The key is to buy stocks with a high expected return. The key word is expected. The stock may go up, it may go down. I still think I would have bought it knowing what I knew when I knew it (I must sound like Donald Rumsfeld). Anyway, my portfolio is down another 3 grand today, in what is becoming a daily statement on this blog.

Friday, December 10, 2004


Are Home Prices the Next "Bubble"?

From the New York Fed:

The strong rise in home prices since the mid-1990s has raised concerns over a possible bubble in the housing market and the effect of a sharp price decline on the U.S. economy. This article assesses two measures frequently cited to support a bubble—the rising price-to-income ratio and the declining rent-to-price ratio—and finds the measures to be flawed and the conclusions drawn from them unpersuasive. In particular, the measures do not fully account for the effects of declining nominal mortgage interest rates and fail to use appropriate home price indexes. The authors also estimate a structural model of the housing market and find that aggregate prices are not inconsistent with long-run demand fundamentals. Accordingly, they conclude that market fundamentals are strong enough to explain the recent path of home prices and that no bubble exists. Nevertheless, weakening fundamentals could have an impact on home values on the east and west coasts, where the new housing supply appears to be relatively inelastic. However, prices in these regions have typically been volatile, and previous declines have not had a sizable negative effect on the overall economy.

I think this study overlooks two critical issues:

1. The supply side response to increased demand for housing: Think about it this way: The price of land is the key driver of urban home values. In rural areas, the price of land has not increased significantly. This is because land prices in rural areas are largely determined by the what happens in the agricultural sector. If land prices rise too much, farmers will sell their land. If land prices fall too much, farmers will stop growing crops. In the long run, food prices and rural land prices tend to move together. So what has happened over the past 10 years? As urban land prices have risen, the premium that people pay to live in city centers has increased. Now it may be plausible to argue that as people get richer, they will pay more to live one mile closer to downtown. But the striking feature of today's housing boom is that home prices have surged at a time when real wages have not increased rapidly.

Real estate enthusiasts argue that doesn't necessary imply a bubble, since the amount of urban land is limited. And indeed, this is true: while urban houses can be turned into condos, in general, it is hard to put more housing units in densely populated areas. But this misses the point. Housing prices are set in a broad market. If developers build more houses in suburban areas, this will increase the supply of available housing, and this will depress housing prices everywhere, including in the city center. Why hasn't the supply response been more pronounced? Partly it is because zoning laws in the United States make it difficult for developers to response quickly to shifts in market demand. But make no mistake: the flood of newly built homes will eventually hit the market, and when it does, home owners may be in for quite a surprise.

2. Second, homeowners may be suffering from what economists call 'inflation illusion'. In the early 1980's, when inflation and interest rates were running at nearly 20 percent, anyone who took out even a modest mortgage would end up paying large monthly payments relative to disposable income in the first few years of the mortgage. Of course, in a world where inflation is running at double digit rates, the last mortgage payment that the homeowner would make would only be a small fraction of disposable income (since nominal incomes increase more quickly when inflation is high).

Thus, in a world of high inflation, the real burden of mortgage payments gets pushed towards the first few years of the mortgage, which depresses the demand for housing. As inflation falls, mortgages appear to become more affordable. And of course, one of the things that has driven the housing boom is low inflation combined with very low nominal interest rates. Hence, the particular feature of America's mortgage market, that the value of first month's payment is the same as the last, regardless of underlying inflation, could itself be a reason why the housing market has done so well over the past decade.


End of week scorecard

Despite a small rebound today, my portfolio ended the week worth $334,355. That represents a decline of $3,239 since last Friday. On the whole, it was a disappointing week, as I underperformed both the Nasdaq and the S&P 500. Hopefully next week will bring more favorable results.

In other news, I bought 2000 shares of COBR today at $7.50. It's exactly the sort of company that I like to invest in: great value characteristics (profitable; market value less than below book and less than 50 percent of annual sales), and good growth potential (new technology; increasing sales and earnings).

Thursday, December 09, 2004


Bought some more OUTL today

It's hard to find good stocks in today's market. That's why I have about $60,000 sitting on the sidelines now. I'd rather own cash than own crap. However, I did put some of that money to use today, buying 1000 shares of OUTL at $7.20 per share, to add to the 1000 I already own, which I purchased at $5.4 per share. I very rarely "double up"; but in this case I made an exception. Profitable company; revenue growth; worth less than tangible book; pays dividend. Boring sector perhaps, but in today's market, that may not be such a bad thing. As always, please read the disclaimer before you even consider following my lead.


Funny press release of the day

Still more reliable than most Wall Street Analysts


Martha Martha Martha!!!

Well, clearly my ability to pick shorts leaves much to be desired. First I get burned, badly burned, trying to short Google, and now Martha Stewart decides to do a beeline to the stratosphere just as soon as I short her company's shares. I think shorting is one of the most noble pursuits that any investor can undertake. Elliot Spitzer can try to crack down on corporate fraud all he wants; Alan Greenspan can talk about irrational exuberance all he wants. But only short selling provides the ability and the incentive for investors to profit from overvalued stocks. In so doing, short sellers help to ensure that stock prices do not get too out of line with fundamentals, which helps ensure that capital in our economy flows to firms that will use it most productively.

Nevertheless, I don't have a knack for it. If anything, I seem to have an uncanny ability to short stocks that are about to soar. Talk about your contrarian indicator. Well, as you may have figured from this rant, my portfolio sank another 2 grand today ($1,876 to be exact) when again, the market went up. I'm not impressed.

Wednesday, December 08, 2004


Down again!

Well, my portfolio was off by $2,074 today. That's especially discouraging considering the market was up. As I had feared, MRIa sold off today, on what strikes me as minor news. Well, I'm still holding it, as I think it's still a bargain at this price.

My short positions didn't help either. Both Martha Stewart and Travelzoo were up. Both stocks are grossly overvalued by any reasonable valuation metric, so I'm confident they'll eventually crumble. However, as short interest in both stocks is high, there is always the distressing possiblity of a short squeeze. Let's hope that doesn't happen!

Tuesday, December 07, 2004


Glassman unrepentant

I must admit I like James Glassman. Usually, he has lots of interesting things to say about Wall Street and investing. But you would think that he would be the last person to admit that 5 years ago he co-authored a little tract called Dow 36,000, which was published right at the high of the NASDAQ bubble. But no… he comes out swinging, claiming he was right all along and that he really didn’t mean the DOW would climb to 36,000 like, you know, the very next day.

True enough, but isn’t it amusing that his column doesn’t refer to the subtitle of the book, The New Strategy for Profiting from the Coming Rise in the Stock Market or that they write in the book that a “conservative estimate” is that the Dow will hit 36000 in 3 to 5 years – that is, by the end of 2002 or 2004. By my count, they have 4 more week to get it right.

And where did the figure of 36000 come from, anyway? As Glassman explained in a Slate dialogue with Economist Deputy Editor Clive Crook,

A good way to express values is by price-to-earnings ratios. Currently, the average stock sells at a P/E of about 25, meaning that it costs $25 to buy $1 worth of profits. Or, as a reciprocal, the stock's return in the first year is $1/$25 or 4 percent.
That doesn't seem like much, especially compared with a 30 year Treasury bond, paying 5.9 percent. If stocks and bonds have equal risk, shouldn't the P/E for stocks be 1/.059, or about 17?
No. There's a big difference between a stock and a bond. A stock increases its profits year after year, while a bond simply pays the same return.
Hassett and I assumed that earnings would rise annually at the same rate as nominal GDP (in fact, they have been rising far faster lately), or 4.9 percent, according to the Congressional Budget Office. Then we applied a simple finance formula: value = 1/(r-g), where r is the interest rate on 30 year bonds (5.9 percent right now) and g is that 4.9 percent growth rate. The result: 1/.01, or a P/E of 100.

But wait a second! What’s that simple finance formula again? It’s not what Glassman says it is. A stock’s fundamental value is it equal to the present value of future dividends, not earnings. After all, companies need to invest in order to grow. A typical company will pay out only a dollar or so in dividends for every 3 or 4 dollars in earnings. As Crook points out, once you make the correct adjustment, the value of the DOW ends up being.. drum roll please.. 10,000 or so. Oops.


Down $2,150 today

Well, you win some, you lose some. What I gained yesterday, I more than lost today. Fortunately, given how badly the market did today, it could have been worse. My short positions helped out, especially TZOO, whose shareholders are still partying like it's 1999 (or more accurately, March 2000). However, MRIa announced after the bell that they were restating their results for the last fisacl year. As far as financial restatements go, this one seems pretty insignificant, but we'll see how the market reacts tomorrow to the news.

Monday, December 06, 2004


Why I started this blog

You may be thinking: why would anyone want to share their investment decisions with others? Well, there are many reasons. Partly, I enjoy the process of picking stocks, and want to share my ideas with others. I also figure that if others see what I invest in, they may provide me with good reasons why I should change my mind about some of the companies that are in my portfolio. Who knows what dogs I may be unknowingly holding. If you think I have made a grave mistake with one of my holdings, let me know!

Also, I hope that this blog will provide some discipline for my investment decisions. If you click on the charts to the right, you will notice a big dip in my portfolio between May and July of this year. There is one reason for this and one reason only: I got greedy and broke my golden rule that restricts holdings of any of one stock to no more than 10 percent of my portfolio. I got arrogant, and I paid the price.. a big price, when the stock floundered. I will have more to say about the stock in question in a later post. But for now, I am hoping that posting my views about what I trade and why will force me to think twice about what I do, and justify my decisions to myself and to you.


Off to a decent start

Well, my portfolio increased $1,924 in value today. My fear that starting this blog would be the kiss of death for my financial success has proven, at least for the time being, to be premature. Of course, there's always tomorrow...

Sunday, December 05, 2004


Let the games begin!

Tomorrow will be the first trading day since I started this blog. On Friday, my portfolio was worth $337,594. I am well aware that hubris has gotten the better of investors much more skilled and intelligent than me, so let's hope that this time next year I won't be reflecting on "what went wrong".

Saturday, December 04, 2004


Important Disclaimer

Don't buy the stocks that I hold in my portfolio!

Here's why:

Friday, December 03, 2004


My very first entry

There is a familiar concept in statistics called "reversion to the mean". In simple terms, the idea is that things tend to even out. This concept helps to explain the 'Sports Illustrated Curse', which tends to strike athletes who have the fortune (or perhaps I should say misfortune) to appear on SI's cover. It also helps to explain why movie sequels are rarely as good as the original. In the former case, athletes featured on the cover of SI are often at the peak of their careers, so there's only one way their performance can go: down. In the latter case, only the better (or at least the more profitable) movies tend to be followed by sequels. Hence, there is a good chance that the sequel will not be as good as the original. Reversion to the mean, folks. How is this relevant to this blog? Well, I started this blog after 3 exceptionally good years investing the stock market. Presumably, if I had lost all my money (like some) I wouldn't be writing this now. So how will my investing future fare? Will I also revert to the mean? Stick around, and let's find out together.

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