Vad's Best Ideas

"Politicians are like diapers. They both need changing regularly and for the same reason"

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"The Democrats are the party that says government will make you smarter, taller, richer, and remove the crabgrass on your lawn. The Republicans are the party that says government doesn't work and then they get elected and prove it. "
P.J. O'Rourke

I think as the times goes by I just become more and more sarcastic when it comes to politics. I used to believe that there was a significant difference in the impact on the economy between a "pro-business" party and an "anti-business" one, but as the results show it is not necessarily the case. Even the most astute business leaders seem to lose their way rapidly when put in a public role. There are certainly exceptions but they are few and far in between... Now even Hank Paulson has lost his way? Mortgage freeze as a solution to the sub prime fiasco problem? Heh? I think we need another diaper here...

This proposed bailout makes very little economic or logical sense and is almost certain not to achieve its desired purpose. What's more I think it will create more mess when lenders who are already subject to substantial guess work over how much their assets are worth, now trying to estimate how much impact is the reduced cash flow is going to have on their holdings?

I won't be surprised if some of the same brokers that sold these worthless loans will now be able to get a job as government credit counselors due to their "industry" expertise and experience. I mean, if the government is willing to spend tens of billions of dollars on this bailout plan that is virtually guaranteed to be as efficient as the government is in general, we might be better off distributing public money to banks and lenders as an additional capital infusion... This way the public could at least get most of the money back eventually.

I am not alone in my disbelief in the complete worthlessness and wastefulness of the proposed solution. At least sixty one economists from all major schools agree:

"Sixty-One Economists Sign Letter Opposing Subprime Mortgage Bail Out"

http://www.freedomworks.org/newsroom/press_template.php?press_id=2394

Quote- "Legislation to create new underwriting standards will reduce competition and restrict consumer access to credit. Additionally, efforts to bail out or shore up lending institutions create a moral hazard that would slow the adjustments required in the marketplace.... These (bail out) proposals would fundamentally alter the workings of the mortgage market, leaving consumers with fewer choices when seeking to buy a home and potentially increasing taxpayer exposure for bad loans."

To everyone who still believes that we can get out of this mess by cutting rates I would answer with a simple analogy- "the best way to get of this hole one needs to stop digging". Let the economy bite it's bullet quickly and work out the excesses- business cycles are ok and "creative destruction" is a fundamental principle of Capitalism. In 2001 Fed responded to the economic slowdown with a series of significant rate cuts all the way to 1% which one might argue in turn produced the current sub prime fiasco? I wholeheartedly agree with Keith Barton's view that the housing mess is not over yet but we differ dramatically on the proposed solution. Cutting rates dramatically is almost certain to produce another asset bubble in something. The next time it might happen faster and cause even more damage...

Risk premium spreads between US stocks and many emerging economies have declined to a dangerously low level. I don't buy into the "decoupling" stories that suggest that US Economy does not matter any more and that the World can keep growing even when US is in trouble. We need to remember - just three years ago we've heard very convincing stories on why sub prime assets and junk bonds were not that risky and thus deserved their low spread over treasuries.

That is why my portfolio is positioned more conservatively than most others. I know that not having "hot" stocks in the portfolio like solars, miners and Chinese stocks might have cost me the leadership position, but my ultimate goal is not only to achieve the highest absolute return in the short term, but also to do so while taking on only a "reasonable" amount of risk. I can certainly go for "double or nothing bet" with 4-5 concentrated positions during the last week but that would be against my principles and strategy. I will remain compliant till the end of the competition because I am trying to manage this fund as I would if it was my investors' money

Trade safe and cheers, Vad
Please feel free to read my next post with a short review of my portfolio as it stands today :)

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Prudent Investing as I see it...

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"When somebody buys a stock it's because they think it's going to go up and the person who sold it to them thinks it's going to go down. Somebody's wrong."

If someone actually has read most of my previous posts one thing should have become obvious- I am not afraid to sell my positions quickly if something changes my view about a particular stock or sector but in other cases when I believe market is overreacting I simply stick with a losing position and even double down several times if necessary. No one out there is always right or wrong so there is little reason to be stubborn either way...In my latest post I stated that I have no intention whatsoever of stepping into the dangerously reckless "double or nothing" game just so I can win this contest and I will stick with this promise...Instead of chasing bubbles I'll now go back to the usual staff- stating my opinions on various things.

Over the course of the last several months I have received numerous e-mails from fellow posters asking me to explain in more detail why and how do I pick stocks. So, while trying to refrain from boring people to death in the next several posts, I will to try to explain my investing philosophy to anyone who is interested. Remember this is just my personal way of doing things- and while it has worked for me very well so far- there are numerous ways to be successful in investing and the key is to never stop learning...

First and foremost- word of advice- try hard to limit the information overload that we are all subject to every day. I spent most of my early "investing career" listening to talking heads on Bloomberg, MSNBC every day as well as reading tens of different newspapers, magazines and web sites. One thing I learned was as a result, that by the time I was done reading/listening, my initial opinion of the stocks that I held in my portfolio that same morning has changed dramatically. So I traded them mercilessly... And, as we all know, overtrading makes it some much harder to make money in the long haul. Next time you hear Cramer screaming "booya" - simply flip the channel to the Cartoon Network and buy the stock of the first company that you see advertising their products there. Over the long haul the end result is likely to be very similar...

The only newspaper that I personally try to read day EVERY day is the Wall Street Journal. I think that the main reason for that is the fact that WSJ provides me an objective and mostly unbiased overview of the main events in the markets without overloading my brain with the "analysis" part that I can do quite well on my own. I don't intentionally watch any TV shows related to stock market - period.

Now back to the stock picking part. Here are some of the key principles- I only buy stocks with a "business model" that I can understand. It is somewhat different from what Warren Buffet teaches and believes in. I don't necessarily believe that I have to understand in great detail the underlying product, service or technology that a company is providing- knowing the concept is sufficient for me. However, understanding the fundamental way of how the company makes money from these products is a "MUST". While customers are the ultimate judges of how good the products/services are, we- as owners (yes investing means owning a piece of company) should be concerned predominately with how they can money out of this product/service. Does the company have a recurring revenue stream vs. one time sales? Does it have long term contracts with customers? Is it responsible for any warranties/liabilities after the sale has occurred etc.?

Because of the business model differences, fundamental investing based purely on ratios like P/E, P/S etc to me is absolutely silly. What's more, I think ratios like Price/Sales are almost worthless and could be misleading for an average investor. Screening for stocks with the lowest P/S ratio will probably result in a bunch of stocks that either are retailers or simply have an extremely low profit margin. Same thing with (all the "value" guys out there- please close your ears) pure Price/Book ratio. Yes, I know that the fundamental difference between value and growth is defined based on this ratio, but unless we make some significant adjustments to it (like taking all the intangibles out or adjusting for market values instead of historical ones for the assets on the balance sheet) this ratio is not of much stand-alone value either.

To a certain degree the same thing could be said about the "absolutely overused and overrated" P/E ratio. This ratio is almost worthless without the other fundamental part - expected future growth rate of earnings. And that's were the fun part begins. Out of all the simple ratios out there I pay the most attention to the one called PEG.

It tries to estimate a relative worth of today's earnings based on their expected growth in the future. It is now readily available and some investors use simple "rule of thumb"- buy any stock with a PEG of under 1. I don't think it's quite that simple, but if you are going to use any ratios out there, PEG is definitely more valuable than most. It's most significant drawback is that the "growth" part is based on the average of analyst expectations and thus if the stock is not widely covered it might become difficult to estimate.

I usually use my own back of the envelope calculation to do a sanity check to make sure that these analysts are not blowing smoke before I pull the trigger. (To those who aren't yet bored - To do so I use a derivative of Gordon growth formula I learned back during my CFA studies- g("Expected growth") = ROE * dividend retention ratio ("1-dividend payout ratio"). To determine the sustainable ROE over the next five years you could use the DuPont-like analysis (profit margin, asset turnover and leverage) and so on so forth)...

I think that's enough for today... To be continued in the next few days:) Below is a quick take on a first batch of my holdings, as I am likely to hold most of them all the way to till the end of December unless something extraordinary happens. (Don't forget that due to the short-term nature of this competition my selection process for this fund is somewhat different from the core one...)

Consumer Staples
- Tobacco- RAI, CG and MO all provide stable income stream, dividend and attractive downside protection (little to no cyclicality in earnings) at a reasonable price. The main risk here is the potential regulatory impact if the latest legislation proposal actually goes through.

Tech:
- EBAY- core auction business is a cash machine, while PayPal is the real hidden gem as it will end up owning the e-commerce space that will be growing at 20% a year as far as eye can see.
- ARRS/CCBL - this is my merger arbitrage play- ARRS has put a bid to buy CCBL a while ago and market has been punishing them ever since. Both stocks are technology plays in a telecom sector, ARRS has cleared all of my fundamental checks, and merger rationale makes perfect sense to me .According to the market the price they offered for CCBL might have been a bit steep. And while I agree in general the punch line is that if the deal closes- CCBL is worth more than it is trading at today. ARRS looked undervalued for a while, which should in turn lead to a handsome profit on both. If the deal falls through (unlikely but possible) ARRS should spike up and offset any losses on CCBL. Hence nice profit potential with lower risk.
- MGI- bottom fishing here, might buy more if this one falls below $14. Explained my reasoning before, still like the core business, however, the scale of ETFC write downs scares me a bit. Market is way to conservative here but it could stay irrational longer than I expected and thus force MGI to sell assets at a discount...
- QLD- is a simple double play on QQQQ- roughly equivalent to 10% allocation to tech sector.

To be continued...
Trade safe and cheers,

Vad

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"What is right is often forgotten by what is convenient"

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It was a bitter sweet surprise for me on Friday afternoon after I was finally able to take a look at what the market has been doing that day. WSJ.com had finally confirmed what I have been preaching here at SLO for quite a while- "Labor Department reported that overall consumer prices last month rose by a seasonally adjusted 0.8% from October, the largest monthly gain in two years. Prices rose 4.3% from a year earlier, the highest such jump since mid-2006."

This press release on inflation has offered at least a partial vindication of my long standing belief on the eventual outcome of the Fed's actions. I have received a number of negative e-mails questioning my judgment almost every time I mentioned my disapproval of Ben and Co's job. The truth of the matter is simple - inflation has been and still is a very real threat and hopefully the number of Fed "rate cut addicts" will decline somewhat in the next several quarters due to the fact that while Ben and Co have done some damage already they will have to think harder when January meeting comes due...

Last six weeks have been a very challenging time for me personally, as I have been working diligently towards a very significant potential change in my future career direction. As a result I've had very little time to devote to the SLO contest or any other personal hobbies even though I tried to post as much as I could. My portfolio performance has been solid and while I am not number one at the moment I can't blame it on my bad judgment or poor stock selection quite yet. I have been simply out "SOLF"ied for the moment.

But I am willing to make another contrarian bet- SOLF and most other solar stocks will trade at significantly lower prices during the next 6 months or so. Momentum always hits the wall and unfortunately while I personally believe that solar energy makes a lot more sense than ethanol in the long haul, current valuations of most players are simply irrational and thus can't be sustained for a long period of time.

Finally after six weeks of almost no activity here come some trades in my portfolio:

Sold GTIV,GILD, SLXP and EBAY- still like all four but PTNR sell off is way over done, so I am buying more- up to 9.5% of my portfolio, plus I need a better hedge against potential emerging markets decline- so also buying FXP, and more MGI

More coming from Vad in the next two days,

Trade safe and cheers,
VY

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"In nature, there are neither rewards nor punishments; there are consequences"

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You know this SLO experience has in many ways been a great training ground for me. It has helped me to for the first time organize my thoughts in somewhat clearer manner and forced me to put them in writing. I have posted here at SLO in a relatively consistent manner, and have been successful at using it to increase the portfolio value of my "virtual investors". I have also been fortunate to have a group of people who actually seem to read and enjoy my posts. Now I am going to go out on the limb and will put my take on what I think might happen on the economic front in 2008. Take it for what it is - an opinion only.

The key fundamental principle behind my projections is my core belief in cause and effect relationship of every economic transaction. However, it is also clear to me that because the real world is actually driven by "human" emotions, rather than logic, not all of my logical relationships will come to fruition. At least not in 2008...

US Economy and Inflation
My opinion on this subject is the same it was 5 months ago- economy is going to end up recession sooner rather than later. More rate cuts will merely delay the inevitable and exacerbate the damage. Inflation threat is not only real but also, as the fact that the PPI jump on Friday was highest in many years, suggests that it could be on the verge of spinning out of control. It is certainly true that with a prolonged economic slowdown prices could and should decline. My fear here is simply that consumer inflation expectations appear to have been significantly altered by continued rise in food, healthcare and energy prices and the lag between expected declines in commodities will take a long time to feed back into the lower wage expectations.

I now think that when if and when Fed comes to their senses and stops or at least slows down the rate cutting frenzy for at least one or two meetings, equities around the world might enter a period of another significant downturn. 2008 earnings expectations for most companies still look absurdly high with most analysts predicting another hockey stick sometime during the third quarter. We've seen all that before... Let's not forget that the real damage to most financial companies' earnings who still account for a large share of earnings did not occur until the second part of the year, so growing over the terrific results of the first part of the year will still be a tough cookie to crumble.

Do you actually think that Goldman could earn as much money in 2008 as it did in 2007? Private equity boom of first part of the year that drove the lending frenzy is over now and it won't come back for while (at least not in 2008). My best guess would be that housing prices have not yet bottomed simply because of the supply demand imbalance- inventories are at all time highs, builders are still finishing off a lot of new projects and labor market is not that healthy. All-in-all I think that we still have a lot more dilution to come in the Financial services sector. Thus I believe the current rebound is temporary and that we might see new lows here. Consumer discretionary sector and anything else that is cyclical (except US based manufacturing) to me still has downside potential. Healthcare has not performed as well as it should, triggered by weakness in Big Pharma. I think that sector rotation could come in play here with healthcare outperforming in 2008. I also like consumer staples, large-mid cap IT, utilities and industrials that have solid manufacturing base in US. I also think that Large-Mid caps will still hold solid advantage over Small caps in 2008.

To be continued in Part 2

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Part 2

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Continued from the previous post

US Dollar
The above opinion also suggests that fears of further dollar declines are greatly exaggerated - Dollar is still a "safe heaven" currency and in combination with potentially more stable interest rates in the US in the short term I don't see much downside for USD here. I am not sure if a sustained rally could be in the works for the greenback, but I certainly believe that the period of severe decline is over for immediate future. USD- long

Oil and other Commodities-short
If you believe in the recession outcome- Oil is a clear "sell" here, so is copper and other basic metals. Gold could hold up slightly better because of the fact that many use it as both an inflation and recession hedge.

China-short
I still think that China is a "bubble" and that it is going to burst sooner rather than later (6-12 months is my best guess). Overinvestment in capacity, obscene prices for real estate assets and equities, as well as the inefficiency of governance structure in general are almost certain to lead to an eventual severe slump. Chinese banks balance sheets are overloaded with bad assets and the simple fact that vast majority of the newly created Sovereign Wealth Fund will go towards shoring up the capital of the three large state banks, should have given all rational investors a pause. We have seen what happens when loans go bad en masse before (Japan fiasco) and while Chinese currency reserves could help protect the banking system from the complete eventual collapse they could also trigger a massive inflation spiral with potential social unrest as an outcome. FXI-short, FXP-long

India-selective buys
I think that India will hold up better than most of other emerging markets because of lesser reliance on the resource sector and higher dependence on the tech sector that should hold up better in the downside scenario. Banking sector here is of a higher quality but is more concentrated with only few solid names to play with. I

Russia- selective buys
My grim view of Russia turned slightly less bearish due to the fact that D. Medvedev has been in effect named as a "heir" to Putin. This is by far the BEST possible outcome for the West/Russia and will go a long way to supporting the equity markets. Real assets are certainly still way overpriced here, but assuming oil prices do not go back to $40 per barrel overnight - Russian consumers will hold up ok and thus eventual emerging market capital outflows from China could end up supporting Russian markets.

Brazil and Latin America- selective buys
These markets have lagged the other emerging market economies until recently and thus on the surface are less prone to severe declines. But it is also obvious that the leftist governments of Venezuela, Bolivia and Co will end up destroying what's left of their economies relatively quickly, so I would stick with more stable countries like Brazil or Chile. Mexico is likely to under perform due to its heavy dependence on the US in general and housing related industries in particular.

Japan-short
I don't know what can help Japan in the next 10 years unless some dramatic shift in popular sentiment occurs- population is on the decline, regulatory environment is not friendly to investors etc... The era of Japan is over and the economy will continue to contract in lock step with population decline.

Canada- short
Our neighbors are likely to be punished because of the deep dependence on US. Inflation has been held somewhat in check by stronger currency but that run is over now. I would look for stable/higher rates there combined with lower commodities prices.

In the next few days I will comment on my portfolio and continue describing my investment principles...

Trade safe and cheers,
Vad

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"Do what you can, with what you have, where you are" T.Roosevelt

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We now only have one week left until this first SLO contest is finished and I thought that now might be a great time to look back at the events of the last five months. My portfolio has been fluctuating around the 30-40% return range for a most of the last two months and absent any major events during the next three trading days I should finish the year in the Top 5... All-in-all I am extremely happy with how well my portfolio performed as well as how enjoyable the whole experience has been for me so far. I look forward to continuing with my blogging and stock picking in 2008 :)

Anyway, I spent most of my morning downloading all the available data on my performance and tried to identify the the causes of my largest hits and misses. The amount of data that Marketocracy can provide is truly phenomenal and it will actually even get better once the fund hits the 6 months compliant mark as some of the advanced reports need 6 months worth of data to become useful...I will detail what I found out in the next post but now I want to cover "the softer part" of this contest...

Let's start with a well known fact- in a short 6 months contest like this it is very difficult to separate the true investment talent from pure luck. "Get rich quick" kind of mentality is almost a must if you are trying to simply win by earning the highest return possible. That means that outsized bets, momentum darlings and/or sector funds should theoretically end up with a highest return every time.

The math is simple-at each point of the contest timeline there will be something that is "super hot" in the market- and being invested in just these few hot stocks or in one sector means that out of 500+ people there will be at least several, whose concentration will fall on exactly what is hot at that moment. Today it is solar and thus not surprisingly many of the top funds are heavily into the alternative energy.

But let's look back- during the first month and a half- sub prime ruled the SLO. Both I and "Demonhawk" Andrew have battled for the first place week after week. Then came the time of China- if you looked at most of Top 20 funds in September/October- they have been very heavily exposed to the Asian markets. Then came the time of BIDU, GRMN and AAPL, dry shippers followed ("Magickniner" made it into the TOP 5). We also had periods when Top 50 has been dominated by materials, agriculture etc... We even had three weeks when many of the Top funds have gone Short :) Now came the time of Solar energy- and while I confident it is temporarry-by coincidence it came right at the end and thus many of the previous best performing posters that have been in the Top 10 for much longer periods than the current leaders, have been now completely forgotten...

And it is not unusual - it is purely human of us to think that the last good movie we watched is best one we ever seen, that this latest hot electronic device we bought is something out of this world and there was nothing with an impact on the society before... But even with all of it's drawbacks this SLO contest has certainly been a terrific ride. I personally have been fortunate enough to ride through most of the "fear and greed" cycles in the Top 5 and I can state with great confidence- I enjoyed competing against all of you a great deal.

My personal thanks goes to many of you whose posts I enjoyed reading- the "Wildman of SLO"- Don Ferk, the "Sub Prime" king- Andrew Carlson, the "Shorting Maniac"- Jon Coyle, the "IT Slave Driver" Keith Barton, the "Mac Guy" Jeff Kalnitz, the "Trustee" Eileen Teska, the "TA Guru" Kevin Wilde, the "Man of Few Words" Kai Pettanen, the "Always Drunk Realtor" Duffbeer, the "Sailor Mate" Magickniner, the "Cut to the Chase and drop your BS" Gullapali and the "Man of convictions"- Tom Armistead and many others...

Many of you are not in the Top 10 today but as I said before- the cycle right now might not favor your style- but it does not mean that you do not deserve to be a finalist as far as I am concerned. I don't know if Ken, Mark and Co agree but who knows- this is not supposed to be a shoot for the "stars" (or should I say "Sun" :) ) contest so you never know howit will end up :)

Anyway good luck to all of you and as always, trade safe and cheers,
Vad

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"Investors have very short memories"

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I can't stop getting confused and amazed with just how silly some stocks/investors can behave in the short term. As I said in my previous posts I fully believe that stocks while semi efficient in general, tend to overshoot in each direction when some stock or sector all of sudden gets "hot" or "cold"... Today's "craze du jour" is definitely the alternative energy field. Undoubtedly, solar is a great alternative to ethanol and many established solar companies are likely be successful in the long term. But do all the companies in the sector deserve the same fantasy valuations? I don't think so...

Look at the CTDC - up 70% today alone... http://finance.yahoo.com/q?s=ctdc The company has been around since the late 90s, never made any real money but recently has announced that it intends to be a "solar focused" company. Because it has bought a factory making thin film base plate and announced an agreement with a subsidiary of a bulletin board company called China Solar. Stock price of which in turn started going up after changing it's name from Deli Solar to China Solar and issuing more shares :)... Heh? It is simply very humorous how far the excesses could go in the short term...Stocks like this are simply going to end up costing retail investors a lot of heart burn and money...

Here is Vad's take- most of the solar stocks flying hot today are likely to trade much lower in the next 12-18 months- some will even go out of business. Let's be realistic- it's going to be (or actually as LDK's results show) already is a pure "commodity" business. What does it mean- it means competing predominately based on price, hence lower margins and ultimately lower multiples. Yes, there are several players that actually do make money and could probably deliver solid double digit growth for years to come. But current overinvestment and hype in this solar business is simply not sustainable... Manufacturing stocks (yes solar stocks are simply manufactures albeit having a very high growth rate) trade at lower multiples for a reason-they require heavy capex to support growth and are subject to constant pressures from commodity prices, suppliers and customers.

Anyway, just usual ramblings here but I really do wish we could short stocks at this contest as well...

Disclosure- this post is not directed at any person or stock (except CTDC) specifically. I simply wanted to state my opinion and put out a red warning sign out there- "Solar overheating"

Trade safe and cheers,
Vad

P.S. Here is a short term recipe for instant success for any high risk entrepreneurs out there- just open a plant in China (it could be actually even faster to buy one using investor's money :)), list on NASDAQ or may be even better in Hong Kong, call yourself something that has the word "solar" and may be even "fun" or "china" in it and go surfing on the Costa Rica :). Just hope you can get it done before the reversal unravels full speed...

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Prudent Investing as I see it Part 2

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"October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February" Mark Twain

As promised before I am going to continue to explain fundamentals of my regular investment strategy that I try to use in my other longer term funds at Marketocracy and personally. link to Part 1 for anyone interested
I am also going to do that in the same way I would, if I was having a conversation with prospective investors trying to decide whether they are going to entrust me with their hard earned capital...

Implementing a successful investment strategy requires more then just good stock picking. I personally divide my money management process into three core parts:

1. Portfolio management
2. Stock selection
3. Trade Execution and Risk Management

I have already started covering my stock selection portion in some of the previous posts but today I want to cover the first fundamental part- portfolio management.

Here is how "the long side" of my "guideline" hedge fund should look like:

50% of the fund would be devoted to a core group of roughly 10 stocks with initial weighting of about 5% each. This group would be selected utilizing a group of core quant factors with main emphasis on cash flow and growth. I would only overrule this fundamental methodology if the "quant group" becomes too heavily weighted in one sector. To me the threshold for concentration is 35%. This group would be rebalanced quarterly.

30-35% of the fund would be devoted to "micro trends and event" picks. Basically a group of 5-6 stocks that I believe would benefit from the specific short term events or trends that I identified using on my "big picture" view of the economy in general. These stocks are likely to be turned over more quickly than the rest of the portfolio.

15-20% of the fund would be devoted to a "conviction contrarian" bet. This contrarian bet in addition to having a compelling story behind it, has to also make it on the least of most active highest % losers of the day on the NYSE or Nasdaq at least once, preferably several times in a short period of time. As I mentioned before - I believe that fear triggers overreaction which in turn presents a rare opportunity to make a quick double digit return on the bounce. This contrarian bet is also subject to a very quick exit once it makes a heavy volume double digit move up. In addition, the initial position in this contrarian bet is likely to be of similar size with the "event" picks or roughly 7% or so. Picking an absolute bottom is quite difficult and thus the position is expected to grow to the target 15-20% through averaging down. I usually set exit limits below my first entry price, even though most of these beaten down stocks gap up routinely.

To sum it up - my fund should be expected on average to consist of roughly 16-17 long positions with only one position larger than 10%. All losers with an exception of the "contrarian bet" will be eliminated mercilessly upon breaching a 7-10% loss (depending on stock's volatility) level even if that means higher turnover.

On the "short side"- maximum initial position is 40% of "the long side". Smaller average positions of roughly 2% each should be expected. No upper sector concentration limit, losers are mercilessly cut with maximum 10% downside. Picks will be predominately quant based on a multi-factor model with high leverage, negative cash flows and high short as a percent of float as significant drivers. I will add to the winning positions at the expense of losing but not to exceed the double of the initial position.

My fund should be expected to invest (both long and short) in domestic, foreign equities and any US traded ETFs. Tax considerations while important for the individual investors will not significantly influence my investment management process. I am running my portfolio with the goal of delivering above average positive returns and thus short term capital gains are to be expected.

To sum up the principles of my portfolio management strategy- 1.4 to 1 expected total leverage, 16-17 long positions, 15-20 short positions, no single stock over 25% of the portfolio, losses cut at 7-10% depending on individual volatility, significant short term capital gains and higher than average turnover are to be expected.

To be continued with more on individual stock selection...

Trade safe and cheers,
Vad

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"If opportunity doesn't knock, build a door"

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"Ideas are the beginning points of all fortunes"
Napoleon Hill

I am sure many of you have seen and heard of all kinds of opinions and investing ideas for 2008. So here is one more- a list of Vad's quant selected stocks to buy long and sell short in Q1 2008. Don't consider this a recommendation to buy or sell any stocks but rather a pool of ideas to explore and decide on using your own gray substance.

The interesting thing to me after I did my study this weekend is the number of Oil & Gas servicing stocks that showed up... There are two possible explanations- current growth expectations are too high or these stocks are dirt cheap. I am not going to question the results quite yet and thus I picked some well known names early this week.

Bull ideas- diversified pool:

ORCL, RIG, SYK, NYX, GENZ, FCX, WFR, DO, PCP, NOV, APOL, GRMN, BCR, ESV, HCBK, WAT, ANF, NVDA, DLB, CTCM, APH, NNDS, CLB, HOLX, TDG, TSRA, PDX, ANSS, UEPS, FMR, NDAQ

Don't forget to complement any the above stocks with a good number of additional "Alpha" ideas as this list is a bit skimpy on flashier and riskier names required to deliver consistent 25%+ annual returns. Even though my Marketocracy portfolio created using derivatives of this approach has so far delivered returns double that of the S&P with less risk as measured by Beta...

Bear ideas- promptly cut losses at 10% and reinvest in winners:

ZQK, VICR, SWWC, CTDC, FSS, COT, GVHR, MNC, QUIX, THC, LNG, GY, COHU,ROCK, CYBX, SHFL, CVTX, MCO, WNC, FLE, PLX, XL, RSC, KBH, NCC, CHP, TIV, RZ

Trade safe and cheers,
Vad

P.S. Strange sell off in GEOY today. I picked up a bunch of shares late today in my personal account and think that it might be a welcome entry point for long term investors...

Comments: 1

Farewell to SLO Season One

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"Life is really simple, but we insist on making it complicated"
Confucius

I wasn't really going to write any final messages here but given that I spent the last five months sharing my thoughts and experiences, I thought that it would be unfair not to do so during the last day of this contest.

First, I wanted to repeat that I am very happy with how well my portfolio performed, and how enjoyable the whole experience has been for me so far. Secondly, I wanted to quickly eliminate the confusion that might have arisen when some of the frequent visitors (Don Ferk :)) quickly glanced at the Top 5 leaderboard from yesterday, and did not find Dishwasher's name on it- it is purely a one day glitch :). ARRS/CCBL merger corporate action has not been adjusted yet and thus my portfolio is missing roughly $110k in gains which would put me right back in the number 3 spot for yesterday :)

I can't stress enough the fact, that I feel to have been very fortunate to be able to share my investing knowledge and ideas here at SLO during the last 5 months. And given all the positive feedback that I received from many of you, hopefully I've done it well. As a quick glance at the Top 50 blog posts of the contest indicates, I tried to put a lot of time, energy, thought and effort into all of my posts and have been rewarded with your votes.

In addition to blogging successes- my fund is also the only fund in the SLO that has been in the Top 5 almost during the entire contest. It is also interesting to note, that even if I did not make any trades after the first day and simply held my initial positions all the way to the end, my fund would have returned over 16.4%, which would have likely put my portfolio all the way into the Top 10-12 compliant funds of the entire contest. That proves that it is not only my good stock picking or trading skills, but rather my whole fundamental investment strategy is what allows even my pure "buy and hold" selection to deliver superior returns.

To sum it up, I truly believe that I have proved my ability to deliver great returns, write well, use a consistent investment strategy, and that I do deserve to win. But while I believe that my case is very compelling, it will certainly be up to the judges to decide who would be given this unique opportunity to be featured on the MSN's Strategy Lab panel in February.

Once again, I enjoyed competing against all of you a great deal, and to finish off here is the repeat of two paragraphs from one of my previous posts that sums my attitude for the entire SLO contest:

"My personal thanks goes to many of you whose posts I enjoyed reading- the "Wildman of SLO"- Don Ferk, the "Sub Prime" king- Andrew Carlson, the "Shorting Maniac"- Jon Coyle, the "IT Slave Driver" Keith Barton, the "Mac Guy" Jeff Kalnitz, the "Trustee" Eileen Teska, the "TA Guru" Kevin Wilde, the "Man of Few Words" Kai Pettanen, the "Always Drunk Realtor" Duffbeer, the "Sailor Mate" Magickniner, the "Cut to the Chase and drop your BS" Gullapali and the "Man of convictions"- Tom Armistead and many others...
Many of you are not in the Top 10 today but as I said before- the cycle right now might not favor your style- but it does not mean that you do not deserve to be a finalist as far as I am concerned. I don't know if Ken, Mark and Co agree but who knows- this is not supposed to be a shoot for the "stars" (or should I say "Sun" :) ) contest so you never know how it will end up :) "

Please stay safe, have many cheers and a Happy New Year,
Vad

Comments: 9