Eileen's picks

Catastrophes and disappointments

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It's been a bad couple of weeks for my collaborator Bianca.

Her 14 year old cousin took the impact when a tow truck hit the car she was riding in: Flight for Life. Another cousin, only 13, was put into juvenile detention. Summer, a close friend, was a bystander victim of a gang shootout; her 16 year old boyfriend is facing 60 years to life for blowing her leg apart when he missed his intended target; she's in intensive care. Bianca herself was in court in a custody dispute.

So Bianca is running behind in explaining another of her picks that purchased when a limit order we set triggered a while ago:

"Preps live for clothes and will pay anything to get the look they want. Ralph Lauren must have been a prep himself. He knows how to make people look rich." Take a look.

My daughter Courtenay , a role model of Bianca's, is a fan of Ralph Lauren jeans. Preps, Courtenay, and the appeal of the lifestyle Lauren creates were enough for the company to make it onto Bianca's research list.

Like Aeropostale, Ralph Lauren (RL) passed all the investment tests Bianca uses, and we waited for the earnings report to come out to set a limit price we thought was "bargain basement."

Disappointment.

Since our two fashion purchases were made, both stocks have dropped. In fact, they're both in our bottom third.

"It's this skirt I bought. American Eagle Outfitters. When I liked their skirt better, I knew I picked the wrong company." And sure enough, AEO stock has soared as ARO and RL have dropped.

And they fit our values better too.

And then there's the one that got away.... The stock I bought in the wrong portfolio has doubled. We torture ourselves from time to time by recalculating our Leader Board rank adding in those gains.

But two other Bianca picks have done very well and are in our top third.

And school starts on Tuesday, Bianca got all the classes she wanted and even has the same lunch period as all of her friends.

There's light at the end of the tunnel.

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First month review

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Life is fascinating. Stock picking is fun or infuriating, depending on the day. Agonizing over how much to invest in any given stock is not fun, not for me.

To minimize the agonizing I use a "diversification across asset types" system - in "real life" and in this competition. I set a "percentage of portfolio target" for each asset type and NEVER allow any type except cash to exceed its target by more than 8%.

For the Open, I set targets at 40% in US equities, 30% in foreign, 6% in real estate, 9% in commodities and 15% in "safe stuff". These are percentages I think are realistic for a family trust or Roth IRA or any other long term investment fund, especially one that is tax deferred.

Here's how my SLO portfolio stands at the moment in relation to the plan: Bianca and I have 71% of our funds in equities and we intend to have 77%. We plan to have 60% in growth, 25% in value and 15% in blend or core holdings. Currently we're at 43%, 42% and 15%.

In the most important part of the plan, asset diversification, we plan 40% in US equities and have 26%, plan 30% in foreign and have 32%, plan and have 6% in real estate, plan 9% in commodities and have 8%, and plan 15% in "safe stuff" and have 29%.

This week I set target allocations for commodities: I plan to have 25% each in water and commodities futures and 50% in energy. Right now I'm at 30%, 12% and 59%.

The allocation by capitalization: 48% large, 42% mid and 10% small is out of line because we're looking for something more in the neighborhood of 60%, 30% and 10%. I'm stymied here because to fix the allocation (and to make my portfolio compliant with the ETF percentage requirement) I need to sell some IWP. Unfortunately, the Marketocracy system simply won't sell some ETFs, and mine was one of them. Fortunately for the compliance part of the equation, I've been given immunity from non-compliance until Marketocracy notifies me the problem is fixed. If you have too much in exchange-traded funds and can't get the overage to sell, you may want to notify the Marketocracy people of the symbols giving you trouble.

And then there is sector allocation, a bit trickier to calculate with confidence. See explanation in this post.

I continue to be lower than my percentages recommend in technology (software, hardware and media) and consumer goods. My computer scientist daughter has helped me identify some tech candidates, and Bianca and I are looking for consumer product companies we like.

I'm 5.28% over plan in foreign equities, but I'm still happy with the choices Bianca and I made there, so we're going to subtract the overage from the US equities allocation for now. If they reach 8% over, I'll have to make a sell decision.

With the portfolio review complete, my diversification system now tells me exactly what to do: find large cap growth stocks in technology and consumer goods for a total amount of $122,872 and buy $14,191 of commodities futures (DBC).

I expect several more plunges in the market over coming weeks, so -- as Bianca and I decide on stocks -- we will set our limit order prices low and wait patiently for them to trigger. Meanwhile our money sits patiently in safe cash.

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Which stock to pick?

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It's trickier researching for stocks for a family trust like the one I'm actually responsible for than it is for one's own portfolio.

First of all, a certain amount has to stay in cash because you just never know when someone in the family is going to need to tap the trust. While the cash is a drag on returns, in a yoyo market like we've been experiencing, the last thing I want to have to do is sell on a very down day. That is really a drag!

Example: In September so far there has been my mother's post-illness vacation
to pay for, a loan to us for a small addition to our house, and a business
start-up loan for our son. Two of the three were unexpected but wonderful reasons
to tap the trust. Exactly what it's there for.

Then there is the importance of the stock under consideration being of interest or potential interest to one or more of the trust beneficiaries. That's not something it's possible to run a screen for.

And finally, there are family values. Our family's values. One of the benefits of communicating with family members about individual investment possibilities is that we get to understand each other better.

Examples: Our daughter wants the trust to own stock in companies that help -
or at least do no harm to - the environment. Our son hates impersonal
mega-companies with no concern for employees or the communities in which
they do business. He'd like to see the trust acquire stock in companies run
by owner entrepreneurs who donate a percentage of their profit to improve life
for those less fortunate.

And there are 16 people ranging in age from 12 to 88 who share with me and each other what they value and what they find offensive.

For this competition, Bianca is representing "the family", so it's largely her values and mine that get discussed. Right now there are two stocks I feel have possibilities:

o Ambassadors Group, Inc. (EPAX) is an educational travel company that organizes and promotes international and domestic educational travel and sports programs for youth, athletes and professionals. That's easy: Bianca would love to travel and daydreams about which countries she'll visit someday.

o Wynn Resorts, Limited (WYNN) is much more problematical. It's a developer, owner and operator of destination casino resorts: one on the Strip in Las Vegas, Nevada, and one in China (Macau).

Is it appropriate to profit from exploiting other people's vices? Should I even ask Bianca whether she wants to research this stock?

I'm curious how others participating in Strategy Lab Open approach ethics in their investing. There are clearly a few (ssales is an example) who appear to be taking a deliberately anti-morals approach, if only tongue-in-cheek. What about you?

At last the "comments" feature seems to be working. I'd love to hear your views!

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The whys of some sells

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The rules of the contest dictated a couple of the sales I've made, and reading the very comprehensive post of REITS Investor glang led me to another.

My first experience with the SELL WIZARD came when my exchange-traded funds grew more quickly than I expected. Because Marketocracy mutual funds go out of compliance if they have more than 25% of assets in exchange-traded funds, I watch that along with my asset type and sector diversification numbers.

When my ETF number exceeded 25%, I looked for which to sell. The total amount to sell was dictated by getting back to 20% of the total, which meant selling $53,500. First to go was all of UDN because its potential to generate gains is too low to justify it occupying valuable "space".
Being $20,000 over plan in small cap stocks made selling down that amount of PYH the next move. The balance was to have come from what has become my heavily over-weighted mid cap area.

Numerous attempts to sell $30,000 worth of IWP have been foiled by problems Marketocracy is having. Thankfully, they are exempting those of us whose ETFs won't sell from being penalized for non-compliance, because this is the third week when IWP simply won't sell. An odd feeling to know I'm shackled to it even though the system I use would only generate relatively small sells and buys after the original purchase anyway because IWP is a core holding.

As I mentioned at the beginning of the competition, I have been using a portion of my holding in Brookfield Asset Management (BAM) to represent the asset category of real estate. Reading George's post here and more on the Marketocracy forum helped me feel more comfortable with real estate and REITS, and I've been following some of the REITS George recommends since early September.

SL Green Realty Corporation rose to the top for me.

Morningstar rates it Growth A+, Profitability A, Financial Health A+. MSN's Stock Scouter says
Pro -- Earnings growth in the past year has accelerated moderately compared to earnings growth in the past three years. Positive The price-to-sales multiple is significantly higher than the average for all stocks in the StockScouter universe. Very positive for a medium- to large-sized company like SLG Con -- The price-to-earnings multiple is higher than the average for all stocks in the StockScouter universe. Negative Shares are being heavily sold by financial institutions. Neutral for a large company like SLG

Today I decided I had thought about it enough. When I saw that BAM as making a nice move up, I sold $60,000 worth of it (the current allocation for real estate in my portfolio) for what would be a tax loss to 4.33% in an actual trust account.

Because SLG is already below what it's traded for during any time in the last year, I looked at the two year picture to see what it might pull back to if it's hit by whatever happens with the Fed next week or with October tax loss selling. I find Yahoo Finances advanced charts especially useful for this purpose. I decided on a target purchase price of $98 a share.

My intention is to make the same move in my real portfolio, substituting SLG for ICF, the REITS exchange-traded fund I use for my real estate allocation, when buying to replenish the real estate allocation that is -- as you would expect -- currently well under plan.

Thanks George!

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Bianca pick chopped, replaced

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It should have been the perfect pick because it met all of our criteria, and we got it at what our research showed was a really good price. We even waited for the earnings report - which helped bring the price down - so it should have been a guaranteed money maker.

But it wasn't. That is the risk with fashion. What's in can be out in a flash as Heidi Klum says so brutally to Project Runway contestants.

Aeropostale (ARO) is gone. Its fate was sealed when Bianca did her back-to-school shopping. We've just been waiting for a good day to sell it, and today was it.

Out with ARO, in (maybe) with AEO, American Eagle Outfitters. It's way under its 52 week high, Morningstar gives it great grades: Growth A- Profitability A+ and Financial Health A+, and the chairman just bought 848,500 shares of his own stock. Piper Jaffrey and Thomas White/Global Capital (that Starmine rates as 95% and 94% accurate on their calls on the stock) say "Buy", and Piper Jaffrey upgraded it recently. The StockScouter report says "Shares are under heavy accumulation by financial institutions. Positive for large companies like AEO" but they also found the stock price very volatile. "Very negative" So American Eagle Outfitters is not a perfect 10 - but Aeropostale didn't turn out to the perfect 10 it seemed to be when we bought it.

Warned on stock price fluctuations - and expecting a drop with October (if not sooner) selling by people who bought when AEO was trading in the 30's - we've set a purchase price of $23.75, just a tad higher than its most recent low, but lower than the $23.83 to $24.25 that the chairman paid.

We'll let you know when we get it.

P.S. Bianca's other fashion pick is less of a disappointment than it was when we told you about it. It's inched out of the bottom third of our purchases, it's in the black, and Christmas is coming.

P.P.S. Take my word for it - never buy stock in a fashion company without taking a fashionista to the mall first. I still can't see much difference between the Aeropostale mini jean skirt and the American Eagle Outfitters one, but it is crystal clear to Bianca. We should have switched stocks the day she made her skirt purchase.

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Fed's interest rate cut and me

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I had read persuasive arguments for no cuts (Ken Kam's for example), a medium cut and a large cut. Because my strategy calls for balancing, I was prepared to take action whether the market went way up in joy or plummeted in disappointment at the Fed's decision.

As it turns out, my portfolios (real and SLO) have benefited enormously from the large interest rate cut. My biggest SLO holdings (RIO, AMX, BAM and IWP) have all risen dramatically, and because I purchased RIO and AMX when prices were low, they've received an even bigger bounce than if I'd purchased them at the beginning of the competition or more recently.

Because the surprise was on the up side, I will rebalance at the end of the month as originally planned. Had the surprise been on the down side, some or all of my limit orders would have triggered, and I would have purchased stocks at what would - hopefully - have been bargain prices. With those purchases incorporated, I would then have rebalanced and made additional purchases.

But the biggest impact of the Fed's decision has been for me personally. Because the Fed's rate cut was big enough and because the real investments in the real family trust (including shares of RIO purchased when the price was at its nadir) have soared, instead of borrowing money from the trust as planned, we're borrowing from the bank.

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Be true to yourself

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Yesterday I had the pleasure of introducing a number of new members to our congregation. One said the most important thing in her life is being true to herself. Another said what motivated him to join is that everyone he had met so far acted on their principles.

Today as RIO went through the roof again, I realized I was not being true to myself, not acting on my principles. My investing system says, or rather dictates, that when an asset category other than cash goes more than 10% over plan, it must be sold down.

Yet for the last week I've allowed foreign stock values to climb to more than 20% over the plan for that category, kidding myself into thinking it was "okay" because I technically didn't have to rebalance until the end of the month.

But the reason I have a system - a system that has worked very well for me and my family's trust over the last four years - is to make sure that gains are captured (before they have a chance to disappear) and placed in cash or in an asset category that's low.

So today I sold $60,000 of RIO and put the money in cash.

I have a plan in place in case the market drops through profit taking or because of a rumor or a bad report. At the end of the month, I'll review everything again as I did last month and modify the plan if necessary.

Now my conscience is clear: I'm being true to myself, acting on my investing principles.

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I'm nervous

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"This is too good to be true" is what I said this noon when I got back from a business meeting and saw another big gain day for my portfolios, real and pretend.

I remember saying "This is too good to be true" a lot back in the days when Alan Greenspan was talking about irrational exuberance. I had the basics of my system in place back then, but I changed percentages instead of selling. The consequences of that bad decision are in front of me every time I look at my records. Now I always sell when a category exceeds 10% whether I want to or not; even when greed and my conscience wrestle.

Today I had a different problem. 30% of my SLO assets were in cash already. I really couldn't sell very much much without going out of compliance. But the trajectory of my portfolio was (and continues to be) "too good to be true."

I ran the numbers through my analysis program and found no asset category over 5% (except cash of course), no cap size out of whack except mid cap (and IWP still refuses to sell through the Marketocracy system), no sector over-represented.

What to do??? I decided to cancel the limit order I had set for gold and fill out the missing $17,174 of my allocation for commodities. I bought IAU at $2 a share more than I had hoped to pay for it, but if the market crashes down, it's reasonable to assume that gold will go up rather than down, so it should be better than cash.

If something drastic happens before Saturday, my remaining limit orders should trigger. If not, my portfolio should continue to profit because nothing looks "wrong" about any individual stock I own and the proportions of asset classes are okay.

Like toroandbruin, I'm hoping for a soft landing, but just in case, I think I've made the most sensible move the rules of the competition allow.

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The merits of sticking to a plan

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Brian Erickson inspired me to go back and revisit my original portfolio. By "original" in my case, I mean the portfolio I thought I was going to start the competition with.

Had I stuck with my original plan, my current total would be $1,169,686.50, as of the end of September 27th, and I would be in 23rd place. My actual SLO portfolio ended that day at $1,111,609.60, 80th place. Of course, if I hadn't made a stupid mistake at the very beginning of the competition and not realized it until much too late to fix it, my portfolio would have been at $1,146,900 or thereabouts. Better, but still less than if I'd stuck to my original plan.

So what happened? Actually, the root cause was the same for both losses. After the competition was announced I scanned the rules, entered and began researching and constructing a portfolio. I tested out Marketocracy enough to think I had the gist, buying and selling a few things and checking out the features. When the blog feature became available, I wrote a profile, posted it, reviewed my portfolio plan once again, tried without success to delete my practice portfolio and waited for the competition to begin.

My SLO portfolio, like our family trust, would have been largely invested in exchange-traded funds. I would have placed carefully researched limit orders to buy VTI, IWP, JKJ, PYH, DWM, VGK, PID, EEM, EEB, DBV, FXE, ICF, GLD, IGE, PHO, and DBC. With some of the 20% reserved for individual stock purchases I would have placed limit order purchases for RIO, BAM and NVO. The allocations of each, based on their limit order price, would have created a portfolio perfectly balanced across all aspects of my diversification system and have left enough cash for purchases of individual stocks to balance categories over the duration of the competition. With the drops in the market I was sure August, September and October were bound to bring, the limit orders were likely to all trigger (as in fact they did, beginning quite early in August with the remainder being hit on August 16th.

So what happened? Why didn't I stick with the plan?

The night before the competition started I reread the rules, all the rules. I read them carefully, and thought about them in a state of semi-shock. Not on the compliance page but in the rules of Marketocracy it said that ETFs could not exceed 25% of a portfolio. I would be at 80%. I am not a stock picker. I research stocks that have relevance first and then narrow the field based on potential for growth and the generation of interesting news. I finally decided I'd enter my limit orders for the stocks and as many of the ETFs as possible while keeping their total under 25%. And that's what I did the morning of the competition.

Because as I made the limit order buys the BUY Wizard kept apprising me of how much money I had left, I thought they constituted "buys." Later in the day I was shocked again. My portfolio was listed as 100% in cash and "not compliant."

That was when I started buying things, even though I would never have done so in real life. Fortunately I didn't buy too much - one of those "be true to yourself" moments - and I went ahead to research and place limit orders that pulled me out of the trough. Now even my biggest loser, BAM, was climbed out of the red.

The moral of my story is: read all contracts thoroughly; test all equipment thoroughly; make a plan and stick to it.

It's an all-purpose moral. Had I taken more care in reading "Open Trades" I could have avoided my other big mistake too.

P.S. The reason I will always prefer a portfolio that is 80%+ mutual funds and exchange-traded funds is that even if you leave it untended for a while, even for a month or two, it will be fine. Contrast the $169,686 gain of my untended-for-two-months EFT plus a few stocks portfolio to Earl Mitchell's apparently-untended-for-one-month portfolio that has lost over $100,000. Earl was in the top 5 or 10 when he first posted.

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Why do you invest?

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I've noticed something about the ratings on my posts. I get the lowest scores when I write about "safe stuff".

It's way too small a number of votes -- which may well be from different people altogether -- to draw any conclusions, but it did get me thinking, as did a comment posted by Walter Thatcher.

I'm sure everyone who invests would say that they invest to make money, but I would venture to guess that there are other factors at play as well. The thrill of risk-taking, the pleasures of the chase as one ferrets out a new offering or a cheap stock that might skyrocket. Playing with numbers and finding real meaning where others only see perplexing complexity.

I'm wondering whether the thought that a fund composed of almost entirely ETFs and cash left on its own through two months of roller coaster market performance could outperform the majority of portfolios in the competition was unsettling. Could something so boring really be successful? Could something done by computers outperform human judgment?

When our son was 15, he stopped conversation at the dinner table by asking "Why do you and Dad talk about money so much?" It made us think. Were we too concerned with filthy lucre? I told him that I invest to put wind in the sails of the family, that people who don't have enough money to pay their bills are the people who are obsessed with money because they have to be. Being able to finance the fulfillment of dreams -- our own, our children's, our relatives', our friends' -- is why I invest.

Why do you invest? I'd love to know.

P.S. Be sure to check out Walter Thatcher's "Stocks for All Seasons"; it's wonderful.

P.P.S. Interestingly enough, my boring "safe stuff" is paying off for me in the competition: my cash substitute DBV is one of my 5 most profitable holdings, and my commodities choice, DBC, has the 5th best return in my portfolio.

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