Stockcoach's Corner

Maintains profitability despite challenging market environment

Outperforms S&P 500 by 3.5 percent, NASDAQ by 8.9 percent, and Russell 2000 by 7.2 percent during quarter

Revises investment strategy in light of recent developments

Stockcoach today announced profits of $9,780 for the second quarter of 2006 compared to profits of $36,686 for the second quarter of 2005, a decrease of 73 percent. For the six months ending June 30, 2006, profits rose to $108,249, an 82 percent increase relative to the first half of 2005. Stockcoach’s equity was $710,492 at the of the second quarter.

“I am pleased to report continued profitability despite the difficult market environment,” said Mr. Stockcoach, President and sole employee of Stockcoach, Inc. “Much of the outperformance this quarter was driven by solid results in April, when my portfolio increased by 6.7 percent. Results since April have been disappointing. My portfolio has underperformed the S&P 500 in the past two months. June proved to be particularly weak as my portfolio significantly underperformed all the major indices, including the Russell 2000, against which my performance is best measured”.

Mr. Stockcoach continued, “Since I began investing I have adhered to one simple and powerful rule: do more of what works, and less of what doesn’t. Five years ago, shortly after I finished college, I only had a few thousand dollars to invest in the stock market. At that time, I invested in all sorts of stocks: growth stocks, value stocks, small caps, large caps, you name it. Following the rule of doing more of what makes me money and less of what doesn’t, my portfolio became increasingly tilted towards small cap value stocks. The superior returns that I was generating by investing in small cap value stocks were so great that over time, my portfolio became almost completely dominated by such stocks, despite the obvious adverse implications this had for diversification.”

“However, in the past two months, the market environment has soured for small cap stocks. More worrying, my own performance against the Russell 2000 benchmark in May and June was unimpressive. Thus, following my rule, I have now begun to branch out to include more growth stocks and mid cap and large cap stocks in my portfolio. The extent to which I will continue to do so depends on the relative performance of the various asset classes in which I invest.”

I'll be back in early July for the quarterly review (it won't be pretty).

The results on the left speak for themselves. It was a lousy week. My portfolio lost 2.0 percent, underperforming all the major indices. The only upside (and it's not much of an upside) is that I'm no longer getting emails from people who think I make up my results. Let's hope next week is more profitable.

So it looks like I was right in calling Wednesday's bottom (though perhaps only temporarily right). Unfortunately for me, I didn't get invited to party as the market surge left my portfolio in the dust: only up 0.6 percent between today and yesterday, compared to nearly 4 percent for the Russell 2000. Sucks.

Down 1.7 percent today. That about says it all. For what it's worth, I think we hit bottom today. Those people who think this is 2000 and we are in a new bear market are wrong. Back then, the more speculative stocks that were getting hit had horrible fundamentals (little revenue, huge losses). The speculative stocks getting hit now (such as energy and commodity stocks) have strong fundamentals. This time is different. I hope.

My portfolio wasn't able to recoup any of yesterday's losses and consequently, I finished down $16,806 (2.3 percent) for the week. However, because my portfolio managed to avoid much of the market plunge in the first half of the week, I still outperformed the S&P 500 (down 2.8 percent), NASDAQ (down 3.8 percent), and Russell 2000 (down 4.9 percent).

I must admit it is hard to avoid feeling like a chump when you're long a market that is as bad as this one, especially when other traders are making a killing on the short side. Twice in the past four years (fall of 2002 and summer of 2005) I have thought about moving into cash and waiting for the market to perk up. Both times I didn't, and both times my instinct proved correct, as the market rallied and my portfolio achieved huge returns. Perhaps if I were nibble, I could have gotten out in time and then jumped back in, but unfortunately it is impossible to be nibble with a portfolio like mine.

You see, the problem with my portfolio, and I'll be the first to admit this, is that liquidating it is akin to turning around a huge ocean freighter. You can do it, but it takes lots of time. This is an inevitable consequence of being extremely well diversified (as of today, no single position exceeds 4 percent of my portfolio) and being heavily invested in relatively illiquid stocks. Still, I have no intention of giving up on my basic strategy of investing in mircocap value companies given my track record of success with this strategy. However, I have been thinking recently of starting a new portfolio that would focus more on liquid stocks that could be more easily traded. That would allow me to easily jump in and out of the market, both on the short side and on the long side. I've also thought about using protective puts to limit my losses if the market declines. As my thinking evolves on these issues, I'll keep you posted.

One of the worst trading days of my career, both in absolute and relative terms. The portfolio declined 1.7 percent. The really annoying aspect is that my portfolio value barely moved up during the afternoon rally even as the major indices moved back to near break even (I thought according to Cramer such interday recoveries are almost statistically impossible?). I must admit, I really hate days like this.

Anyway, I sold most of my CTIG shares (I wanted to sell them all but my order wasn't fully filled). I've soured on the stock somewhat ever since the company reported a loss last quarter. Not to mention the stock is up 40 percent from where I bought a couple of months ago.

Down 0.3 percent today. I bought few more shares of EWEB. I think the stock is bound to move past $3 one of these days. Talk about a bad trade: TOA is down nearly 20 percent from where I bought just a week ago. What ever inspired me to buy a housing stock? I sold half my shares yesterday and will probably sell the rest on any strength.

Down 0.5 percent today. I sold my remaining shares in AEHR today. I bought the stock in late 2004 in the low 2's. I had sold most of my shares many months ago (obviously too soon), so I only had 1000 left as of today. I was debating whether to part with these remaining shares, especially considering how strong the stock has been lately (hitting a new 52 week high today despite the market meltdown), but ultimately I decided that the fundamentals did not merit keeping it. Although it is true that AEHR's fundamentals have improved significantly over the past six months, at the end of the day, the company is still heavily reliant on a narrow range of products. And while profits will increase next quarter, the future for the company is still unclear. Perhaps if the market wasn't so bad, I'd keep the stock because there is a good chance that the momentum traders will run it up to $10, but given the current market condition, I'd rather swap into a safer stock.

My portfolio finished up $9,262 (1.3 percent) for the week. Thanks to the fact that I was to avoid Monday's meltdown, my portfolio ended up outperforming the S&P 500 (up 0.6 percent), the NASDAQ (up 0.4 percent), and the Russell 2000 (up 1.1 percent).

Most of my stocks decided to go sleep today so my portfolio managed to gain only 0.7 percent. Sometimes GV is just too predictable. Today is officially the first today of hurricane season so the stock, not unsurprisingly, jumped over 10 percent. I should have saw it coming and bought a few more shares yesterday.