Jeff Kalnitz

Manage risk, taxes, cash flow. Buy low, sell higher as necessary. Repeat. Why is consistently buying good public companies' stock low and selling much higher such a tricky maneuver? A quick look at this morning's stock headlines may be instructive.

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Strategy Lab Open October Blog 10 1 2007

Why is consistently buying good public companies' stock low and selling much higher such a tricky maneuver? A quick look at this morning's stock headlines may be instructive.

Regarding today's headlines; "Jobs data could tank stocks", "Stocks jump on jobs data".
How about those Jobs numbers? Boy, what a relief. I'm sure glad I didn't sell-off and excessively profit-take ... but what about tomorrow? Stay tuned...

Boy, the number of times I have been tempted to back up the truck into the next hot penny stock. Or sell every stock and sit the market out until "safer" times. But then I remember- oh yeah, I have to reliably live off the periodically liquidated returns from my investments. Darn- if only I was playing with other peoples' money, Master of the Universe investing. Instead, I remember my investment mantra- "Manage risk, taxes, and cash flow. Buy low, sell higher as necessary. Repeat."

I fell asleep last night forgetting to turn off the T.V., and upon entering my office this morning was serenaded by the SquawkBox TV show's cacophany of economic analysts predicting and analyzing the possible results and impact of the Fed Jobs Report announcement forthcoming this a.m. Wow, I thought; sharper minds than mine have weighed in on this, and even they can't agree on what will happen or what it all means.

I recall reading about Warren Buffett liquidating his Berkshire Hathaway Fund many decades ago, determining that the risk/ reward factor just made him want to sit the market out for a spell, returning investment capital to the many small investors he so vastly enriched.

Peter Lynch got out on a high note with an astonishing track record.

In the late 1990's, a few self- heralded investors managed to get out of the market just prior to the millennial plunge flushed up to 95% of certain stocks' values down the crapper. The trick is being nimble, quick, and most of all right while dodging bullets "Matrix- the movie" style.

And still, measured over many years and decades, in taking aim at handily outperforming the market indexes, the picture on the TV screen seems fuzzier and fuzzier. It becomes harder and harder to filter out the noise, to stay focused on the prize. Maybe I would have been better off sticking to the low cost index funds after all, a little voice occasionally whispers just prior to the next big "hunch" trade.

When it comes to machine-gun style market timing, I am not so eminently qualified, and anyways I am more of a buy and hold style investor, not very nimble on my feet with day or even week- trading. Still, a little caution say in 1999 turned out to be a very good thing. So are we partying like it's 1999 again? There are both similarities and some substantial differences here in 2007, but that debate alone could itself fill a whole lot of blog-space.

Method AND Madness
After all, it is indeed quite a challenging endeavor to even begin to adequately describe just how one goes about successfully investing in the stock market during any time period, whether it is good, bad, ugly or just plain off the charts insane, let alone implementing predictive analysis successfully while integrating the many factors imagined at play. And to do so in a way that consistently beats the market. Using other people's (that's yours and mine) money, no less. Even as a guy who watched a lot of Star Trek episodes (version 1) growing up in more idealistic times... I stopped looking for the cavalry a long time ago. "Hey, beam me up, Scotty! Take me to the promised land of enlightened extraterrestrial investment managers, I'm ready, Scotty. Scotty, can you hear me?"

Meanwhile, economists unite, and explain to me one more time the validity these depictions offer to help make the investing world a predictable, safer, better, more profitable place, based on well-defined, trackable and tracked results, and the fruits of their carefully evaluated insights and hindsights in the bright lights thereof. How does one even evaluate the evaluation?

"The natural", or the Super-natural?
And yet, yes, I "promise" I often feel it in my bones, and that sometimes actually includes cranial bones, and the vibrating mass cradled within. The securities hunter, investigating the hunch while digesting his lunch while gathering the bunch and sipping spiked punch. Just another day in the 21st century home investor offices (or now, as fate would have it, the iPhone in my pocket).

Dart throwing monkeys? Or professional Mutual Funds money management?
I recall hearing about studies being conducted whereby so-called tried and true strategists were equaled or bettered by such skilled experts as dart-throwing monkeys, or a flip of a coin. Heck, for that matter the Wilshire 5000 has bested the vast majority of professionally managed mutual funds over the long haul, even before factoring in capital gains taxes. In fact, it was this very observation that led me to begin managing my own investment monies several years ago. How astonishing that to find a consistently top-performing fund manager with acceptably low volatility, sufficient diversification yet rewarding focus, and a long-term proven track record is almost as difficult as uncovering naturally falling snow in Miami on a hot summer day.

And yet after all, besides analytical skills, to win this short term contest by numbers alone might require nerves of steel, brass balls, and an iron stomach. And the kind of crash helmet NFL quarterbacks would like to get hold of. I just can't seem to get past my incessant underlying habitually induced thought process, to separate that everyday investor's reality from "the game". But I'm willing to try, considering some of the amazing returns top performing contestants are conjuring up.

I am astonished to get the chance to see the different ways SLO investors are picking hot stocks and beating the market in these ultra-brief time frames. (And it wasn't long ago that it would take a week just for an investment manager to get back to you with the news that he had successfully bought or sold that stock he was telling you about!) Teach me, I'm ready! And heck, the contest is still young, and there's plenty of time for me to become wild and crazy, adventurous and innovative... and ballsy as hell with my play money. I hope there is an opportunity to actually meet my fellow players in person from time to time, possibly at a live money event?

The boring, mundane, middle of the pack portfolio
Meanwhile, a periodic update on my portfolio, my strategy, and my performance helps me to better attempt to begin to describe (Oye!) the complex methodologies that together have resulted in excellent overall returns results for me these last several years, and the first two months of the SLO, all factors taken into account. I hold about 20 stocks over the last month, and my returns span the spectrum FSLR - 47%, GS - 33%, PCU - 25%, AAPL - 22%, ATI - 21%, CTRP - 20%, AMZN - 18%, BX - 18%, AKS - 17%, VMW -19%, ALVR - 18%, ZOLT -15% and so on with 18 of the 20 stocks above 10%, and none significantly in the negative. As of very recently, I have about a 14% return overall, with approximately 13% of my portfolio still in cash in case of a major correction. I have so far achieved and maintained my own objectives so far so good. If the contest spanned 12 or more months, the overall complexion of my portfolio would look somewhat different.

If I hadn't pushed the "staying- long- cash" envelope to the limits already, I might be inclined to go to a large cash position again soon. The number of companies, along with a bit of diversification over various markets and industries hopefully will help buffer my portfolio somewhat from any overall meltdown should October prove especially nasty. And yet a part of me still had to exert sufficient self-control, in my "master of the universe" moments to keep from liquidating my safer plays to load up on far riskier plays so I could say "Winning IS worth the risk!" (Damn, I "knew" I should have loaded up on Baidu 100 points ago!)

"Where did I put that dart board?"
In the meantime, just how is it that I evaluate, pick, and adjust my portfolio by weight, risk and momentum? Well, I start with a high quality dart board, throw in some feather darts with really sharp tips, then take careful aim to make sure I hit the side of the barn... he-he, just kidding, aren't I?

And (movie trailer guy voice again) "In this imaginary world, having thrown all caution to the wind, in this spirit of the age- just what would my ultimate bet on the roulette wheel have been in this Strategy Lab Open if no rules at all existed, and why? Market timing, diversification and risk management aside, damn the torpedoes? That would have to be in aapl at 117, 100% of portfolio, out at $175, convert to 100% cash for a 50% + return and hope that wins the prize. Because, damn, beyond the research, analysis, personal experience with company products and customer service... I just feel it in my bones.

"Scotty, beam me up Scotty, are you there?"

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Apple holds above $170 as the market generally takes a beating (as of Friday's closing bell); what's next , and whether to buy, sell or hold aapl stock? Is this "25 bagger" destined for the "100 bagger" promised land? Here's this investor's take...

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As of Friday's market close, Apple holds above $170 (within a few percentage points of it's latest all time high), as the market generally takes a beating; What's next , and whether to buy, sell or hold aapl stock? As Stephen Colbert devilishly asks; "President Bush- great president or Greatest President?" Answering that question about Apple (aapl) may soon fall more into the "historical facts of life" category than "partisan political opinion". In the meantime, here's this investor's take on the ongoing Apple story...

Multiple choice quiz (pick one): aapl a "25, 50,100, or 200 bagger"?
Anytime we have a current "25 bagger", and imminently potential "50 to 100 bagger", the stock invites and deserves extraordinary consideration and scrutiny. Such is the case with Apple (aapl). Since aapl has achieved a 25 times valuation increase in a relatively small amount of years, the question is how likely and quickly is aapl likely to double again? And how many more times can aapl achieve this? And is it too late (risk/ reward-wise) to get in on the gravy train? Less than three more doublings could make Apple the biggest company in history, by market cap! Will this happen by 2010? If so, this would inherently become a singularity, so tread carefully if entering aapl stock at current valuations.

Apple understands investor psychology;

Glimpsing that which is hidden just beneath the surface while understanding the masterful orchestration of the interplay between market expectations, current investing conditions, and investor psychology is a major key to unlock the brilliant play aapl stock (still) embodies. And possibly even more significantly at this late stage, instructive in helping us to identify the next stellar stock performer hidden like the near- perfect diamond amongst endless chunks of unqualified lumps of coal.

Look at the recent, ceaseless aapl- intimated rumors and news at any given time to understand just how brilliantly investors expectations and psychology are being played to produce some sweet, uplifting monetary melodies even at these lofty valuation levels. This last few weeks alone have seen the following drivers of upward momentum play out so brilliantly as to place aapl management in a class all their own. Even as market conditions froth over and investor confidence swoons, aapl increases the flow of meaningful information prior to their earnings report in such a way as to limit a major profit taking sell-off of the stock during a tough week for stocks. This may serve to make aapl a catalyst safe-haven for nervous investor monies over the next volatile several months.

Earnings and number of iPhones sold are not likely to dramatically surprise (although they probably will to some extent), therefore it becomes necessary for Apple to brilliantly illustrate the future trajectory of increased sales potential of the iPhone, Mac computers, and so on. Hence, a barrage of breaking news impeccably timed regarding a variety of timely issues. iPhone locked/ unlocked, special secure (safe) iPhone applications development by February, French law (in itself the predictable secret weapon antidote to the "apparent" poison pill/ ATT exclusivity clause in aapl's contract), the release of Leopard (an astonishingly useful upgrade), number of computers and iPhones sold and projected to be sold (in my opinion, still not fully factored in), DRM/ non DRM iTunes, lower iTunes pricing, the increasing likelihood that the video, TV and movie industries will eventually cave in to the Apple juggernaut, and on and on...

All the hot button issues cultivated as worrisome to the future health of aapl are addressed here, so conveniently orchestrated press release/ pageant style as to indicate that aapl is more than ever before way ahead of the rest of the pack at using these hot-buttons to hedge against prevailing investor perceptions and market variables, and propel the stock ever higher. The headlines might psychically question all this as follows; "Apple news blitz- inspiration or desperation?" This is indeed the sign of a great stock, a great management team, and a great continued money-making opportunity long term. The implications are in themselves so vast and far-reaching to the potential increased upside of aapl product sales over the next 12 to 24 months, it would require an entire article to cover these even minimally.

Suffice it to say for now that the company's 36 month strategy is so far advanced beyond the market's ability to currently fully comprehend and quantify the fiscal implications so as to provide yet another opportunity to beat the street handily by stocking up on aapl stock! (But it would be prudent to control one's urges to maintain a modicum of caution as usual when playing a hot stock, even aapl). Aapl compared to most of the rest of the tech stocks is like Crox compared to most of the other "shoe" stocks. If I find myself getting carried away with the giddy prospects relative to my hard earned investment dollars, I like to visualize walking a tightrope over Niagara Falls (some have actually accomplished this) while holding a tiger by the tail to reach a pot of gold at the end of a rainbow.That usually settles me down a bit.

Management is just so adept at making the right moves ahead of market comprehension, it would be hard to envision anything but a continued trajectory of similar wisdom (and their consequent returns) applied to strategies of company growth moving forward near term.

That is why using valuations, P/E, projected sales, or any other single factor alone could not have accurately predicted the stellar rise of aapl the stock, nor is it likely to moving forward. Investor sentiment acts as steroids, pumping the stock up with inflated unseemly muscle mass- that is until the company fails to impress, then look out below!

SHORT-TERM STRATEGY FOR TRADING AAPL STOCK;
As market cap shoots to the moon, we're definitely going out on a limb here more and more, which is why I am selling chunks of aapl off to capture profit and reduce risk after it's latest 55% run-up from a recent "low" of $117. But dream with me for a moment... Apple's stellar run began several years ago when the stock hung out at around $7-8 a share. Now around the recent high of approximately $175, we essentially have a "25 bagger". Any profits locked in now for those of us who started buying in near the $8 level will have achieved the rarest of return multiples. But consider that if aapl continues to successfully "play" the company, the investor base, and the stock as successfully for the next 3 to 5 years as they have so far done, if the stock doubles again we have a "50 bagger", and a second time makes a "100 bagger".

A "100 bagger" would turn $1 into $100 (or $10,000 into 1 million dollars), and yet look how difficult it is to actually identify, and maintain a core holding of a stock to get to this level of returns! Why is that? Because it almost never happens, and is very hard to count on, let alone predict.

Current Owners of aapl;
To those of you who have been following my blogs since aapl was many multiples cheaper, and have accumulated a significant position in the stock, I say this; $175 marks the beginning of a "sell" zone until (if?) the stock reaches $200. Take enough profits to make you feel good whether the stock stalls, falls, or continues its stellar ascent to the investing heavens. Then, sell additional chunks incrementally every 25 points or so, and smile repeatedly.

Potential buyers of aapl;
For those of you thinking about getting into aapl as believers in the company's ability to increase share price substantially over the next year or two, I say use caution. There are so many high reward, lower risk plays I wouldn't chase this one here. Looking at the historical price charts shows that every so often, aapl corrects in a definitive and impactful way. It may come by way of a substantial market correction (There is always the "hope"). Aapl may not hit the ball out of the park next week. Possibly, even probably profit taking post- announcement could occur. These could serve as potential entry points to ride a wave of "optimistic opportunism". Has the easy money been made here?

Well, I look at it this way; this next wave of tsunami- like growth would place aapl as one of the biggest market cap companies that ever existed, and by definition there just ain't that many of those! So be careful, because the #1 most fundamental strategic movement towards making money is not losing a lot of it. Because let's face it, we're not just talking about play money in an investing contest here- we want to be able to use our successes to enrich our portfolios in the real world markets.

To this end, a unified approach to playing this field best serves us in the "real world" of investing. What interests me to a far greater extent at this late point in aapl's game, is finding the next 10, 50 and 100 baggers. Any ideas?

Here are a few revealing aapl links to check out;

http://seekingalpha.com/article/50378-iphone-s-new-business-apps-just-what-the-market-needed?source=feed

http://www.apple.com/macosx/guidedtour/large.html

http://apple20.blogs.fortune.cnn.com/2007/10/21/apples-q3-preview-firing-on-all-cylinders/

http://seekingalpha.com/article/50315-apple-s-impressive-platform-security-for-iphone-leopard-development?source=feed

http://www.thestreet.com/s/apples-macs-gain-market-share/newsanalysis/techhardware/10385313.html?puc=_dm

http://apple20.blogs.fortune.cnn.com/2007/10/21/apples-q3-preview-firing-on-all-cylinders/

http://seekingalpha.com/article/50320-french-law-to-require-optional-unlocked-iphones?source=feed

Regards,
Jeff Kalnitz
jeff@jeffkalnitz.com

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