Friday, January 06, 2006


What a week!

The first week of 2005 was the worst week for the markets, and chances are that the first week of 2006 will be the best week for the markets. And what a week it was, with the S&P 500 gaining 3 percent, the Russell 2000 picking up 3.9 percent, and the red hot NASDAQ blasting off to a 4.5 percent gain.

My portfolio did reasonably well this week, gaining 3.2 percent. While this is not as good as the Naz or the Russell, I am still satisfied with the result. Since mid-2004, I've been trying to create a portfolio that has a high expected return but is fairly uncorrelated with the Russell 2000. I've more or less succeeded: In 2005, the alpha for my portfolio was 0.8 percent per week and the beta was only 0.31. Loosely speaking, this means that my portfolio was only 1/3 as volatile as the underlying smallcap index. Actually, what's rather strange is that my portfolio's beta was lower when measured against the Russell 2000 than against the S&P 500. Indeed, when I ran a four factor Fama-French regression, the coefficients on the size and value factors were statistically indistinguishable from zero, which underscores the fact that the microcap stocks that I own are inherently different from the small cap stocks that make up the Russell 2000 (it's also possible that to some extent, my pattern of trading negates the correlation between my portfolio and the Russell 2000).

Anyway, enough techno-babble. I made a couple of trades today. I sold 2,000 of my 5,000 shares of TRT and used the proceeds to further increase my position in MNDO. MNDO is now my biggest holding, followed by NSYS, VTEK, and PCTI.

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