Stockcoach's Corner

This will be my last post for about a month. My mom is in the hospital and I will be traveling back home to be with her and my dad. I will be back at the computer mid-April, so please check back then. Until then, best of luck to all of you. And remember: most people would rather fail through conventional means than succeed through unconventional ones. Stay happy and strong, and always pursue your dreams.

Despite a good effort early on in the week, my portfolio eventually succumbed to the general weakness in the markets and ended down about $3,000. Still, year to date, I remain comfortably above the major indices, and I am optimistic that my choice of stocks will generate further upside in the months ahead.

I forgot to mention in my earlier post that I sold my shares of MRI.A and SKP. Both have delivered less than stellar earnings recently, and I no longer think that they have enough further upside to warrant keeping them in my portfolio. As I have a healthy profit on both positions (especially MRI.A, which is up almost 100 percent from where I bought it more than a year ago), I decided to take my profits sooner rather than later.

My portfolio continues to hover around the 400K level. Given current market conditions, I am more than happy to tread water without incurring any major losses. Two new stocks for my portfolio today: MACE and SMTX. I don't pretend to be an expert on either company, but they certainly do fit the criteria that I use for picking stocks: low market cap relative to tangible book value; low price to sales ratio; improving operating results; and a story that investors can hang their hats on. In SMTX's case, it's the secular shift towards outsourced manufacturing production. In MACE's case, it's the heightened concern about security in the post-911 world.

I decided to close my short position in Martha Stewart. The stock is down about 40 percent in the past week. I still think it's an $8 stock, but my new rule on short-selling is that I will not short any stock that is less than 200 percent above what I estimate is its fundamental value. This (just) rules Martha out. TZOO, however, continues to be a short, although I may cover if it goes into the low 40's.

On a related matter, several readers have asked how I decide to sell a stock. The truth is that I don't have any fixed rule for this decision, like I don't have any fixed rule about when to buy a stock. The only "rules" that I use are the aforementioned rule about short-selling and the rule that I will not devote more than 5 percent of my portfolio to any one stock. That's it. I don't use technical analysis nor fancy software (heck, I don't even have a broadband connection!).

More generally, I don't believe that one can devise rules to trade profitably on a consistent basis. All the successful investors that I know of use intuition, not rules. That doesn't mean that these investors don't use a "system" for trading stocks. Rather, it means that the system is so complex and fraught with so many non-linearities that it would be impossible to devise a closed form solution to yield some optimal rule about when to buy or sell. In other words, this system is so complex that it can only be described intuitively. You have a gut feeling and you go with it. It's as simple as that.

Of course, that gut feeling is developed through trial and error and only after years of experience. That's why many people buy books about how to invest like Warren Buffet but at the end of the day, the only person who can invest like Warren Buffet is Warren Buffet.

I wasn't able to hold the 400K level by Friday's close, but I did manage a small gain for the week, bringing my portfolio's value up to $399,423. I am still sitting on over $60,000 in cash and will try to deploy some of that this week. I've noticed that in the past year, I've been looking at my portfolio during the day more often than I think is necessary or for that matter, healthy. We've all heard the stories about the trader that made a few million and then retired to a nice home in Montana and never looked at the markets again. Alas, this is bunk. Once you've been bitten by the bug of choosing your own stocks with your own money instead of handing it over to some mutual fund manager, it's hard to go back. This is Hotel California: You can check in anytime you like, but you can never leave! The best thing is to manage the stress that goes with the terrain. I've decided to do just that. From now on, I will try to refrain from looking at my portfolio at all during trading hours. I figure this will not only make me more productive, but more mellow as well! Since I don't engage in day trading, there really is no reason to check how my stocks are doing every half an hour. Still, trading stocks is addictive. Perhaps no less addictive than gambling, which let's face it, trading resembles. So my resolution will be undoubtedly difficult to enforce.

Scott has his own story in the comments section of yesterday's post about how trailing stops can hurt the unwary trader (especially in illiquid stocks). Let me add my own story: I placed a trailing stop loss on CTIB today. The stop got hit at @2.18 but my shares sold for $2.03! With a sell order for 2,500 shares, that works out to a pretty big sum of money that I left on the table. Last time I do that. I think it's back to the good 'ol tested and true limit order for me. Anyway, my portfolio continues to spiral down after hitting an all time high of over 407K back on Tuesday. I'm down below 400K now. Hopefully tomorrow will be a good trading day and I'll be able to finish above that magic threshold.

Well, my call on MAX was (almost) right on the money. The stock was up nearly 30 percent on Tuesday and I was pretty optimistic it would continue its run today. But what do I see when I power up my computer this morning? None of other than a big stinkbomb in the form of a PR release from the company saying that management was considering delisting the stock. Most likely management got spooked by the big price jump and wanted to let the cat out of the bag as soon as possible to ensure that the company didn't have to spend too much to pay off the small shareholders. I suppose in the long run delisting will be in best interest of MAX shareholders since the company will now be able to avoid the high expenses associated with Sorbanes-Oxley. Still, I bought the stock as a way of getting a piece of the recent action in energy companies, not as a long-term hold. I sold half my shares this morning in pre-market on Instinet for $4. I'll hold on to the remaining share in the hope that the share price will recover somewhat. I figure I have little to lose: as a holder of only 2500 shares, I will probably get the $3.75 to $4.25 that the company is offering, which is more than the price at which the shares closed today.

In other news, I dumped my shares of ISRL yesterday. The shares were up over 100 percent over the past week on the mistaken belief that the company stands to profit greatly from higher energy prices. In reality, the company's main business is running a cruise ship, hardly the sort of thing that would benefit from the sky-rocketing price of crude.

Lots of action in my portfolio today: I sold ACY and ASIA, and used the proceeds to buy 1000 shares of PSRC and 5000 shares of MAX. MAX represents my belated effort to get a piece of the huge moves seen in some energy stocks. I did a screen of the sector, and MAX, with revenues in excess of $300 million and a market cap of only $11 million, was the only stock to meet my rather strict value criteria for inclusion in my portfolio. Another stock in the same area, FUEL, was up nicely today. I am hoping that the lemmings notice MAX over the next few days so that I can profit from any upside move. All in all it was a good trading day, as my portfolio elbowed past the 400K mark.

It was a good week for my portfolio, as I reversed last week's big loss, and my portfolio hit a new all time high. I noticed today that the stock of ABLE energy has been soaring to the stratosphere. I vaguely remember looking at that stock when it was about $1 as a possible candidate for my portfolio. Clearly I should have bought it, as it it's now over $10.

Oh well. In retrospect, I should have been cognizant of the growing craze for energy stocks. Those investors who were either perspicacious or lucky enough to foresee the surge in oil prices are now basking in riches. The oil market has always been difficult to analyze. Part of the problem is that global petroleum supply is dominated by a few major oil exporting countries. In order to maintain stable oil revenues, these countries typically react by increasing oil output when the price of oil declines. This implies that the global supply curve for oil is downward sloping. If you combine this with an inelastic demand curve for oil, it is almost inenvitable that the demand and supply curves will cross more than once, implying multiple equilibria in oil prices, and hence the volailitity that we observe. On top of that, going long on oil future contracts is about the only effective hedge against further terrorist strikes, which is giving oil prices a further upward lift. All in all, it should have been clear that energy stocks would have been good investments last year. Unfortunately, I failed to see that.

It's been a while since I added a new stock to my portfolio. Today, however, I took the plunge, buying 4,300 shares of ASYS. The company's stock jumped 40 percent when it released a solid earnings report a couple of weeks ago. However, the stock has now given back much of those gains. With a market cap less than half of sales and less than tangible book value, I see little downside risk. Based on fundamentals, the stock should be priced no less than $5. I expect it to rise to that value over the next few months, and if the company delivers another good quarter, it should go even higher.