I Eat Bear

Making Lemonade

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This has not been a good week for the stock market as a whole. But, before I get all depressed about that, let me mention a few things, which might shed a different light on some of that. Last year, the Dow was hitting a peak of just over 14,100 in July. It got slammed in August, October, and February, with minor gotcha's in between attempted rallies.

Now, I was not a lab participant last year, so I am going to make some statements as if I was, largely because many of the stocks in my lab portfolio are also in my personal portfolio (Yes, the lab has a few more, but hey, they gave me a million, and the lab is a learning tool).

The net affect since July of last year is that the Dow dropped about 12%. Had my portfolio only dropped 12%, I might have been a lot happier. The truth is that my portfolio dropped about 29%, so I had well over double the drop that the Dow showed. I suspect, I am not alone in that boat either, and it happened to many, many other people as well. In truth, I simply ignored the continuing declines, with the idea that the market does always rebound. That was an expensive lesson, but, it will probably happen to me again, so maybe I did not learn enough from it. It is kind of "human" to watch things you believe in, to decline, and to continue to hold it.

Now, much like my lab results reflect, I have had a roughly 20% recovery (gain this year), from what became the February (this year) bottom of the Dow at just under 12,000. So, the net effect is that my portfolio is still down a tad over 9% from last year highs. That 9% could be bad news, if you see it in that light, or it could be good news, in another light. Let's look at both.

Most importantly, I have less, and it is almost a year later. That can hardly be called good news. I think this is the same situation many people today find themselves in, and it does not bode well for the American economy as a whole.

Then I look at the lab stats, and I am in the top 15 people, most of the time for returns. That says a lot of people are worse off than me. I kind of knew that anyway, but it does make you grateful.

Then let's say, the Dow has recovered 5% (I am being gracious here, as it is closer to 4%) from it's low of around 12000, and sits now at 12600. I have recovered roughly 20% of my 29% drop within that same 5% that the Dow has recovered. Keep in mind, my 29% drop was based on a 12% drop in the DOW. So, for every percentage point the Dow recovers, I have gained 4%.

Well, to be honest, there is no assurance that same rate of return will continue. But, since we are not exactly in economic boom times here, it is not a huge stretch of the imagination either, to believe I should beat the Dow. But, at times I like to apply some simple math, which will follow.

I dropped 29% on a 12% drop in the Dow. I am recovering 4% for every percent the Dow gains (but lose 2.7% for each % point drop). When the Dow returns to the 14,100 level it was at before the drop, I should have made 48% (4 * 12 %). In other words, when the Dow is again at 14,100, with consistent return rates as I have been getting, my portfoilio should be a minimum of 19% (48% - 29%) higher than it was before the first point fell from the Dow last August. Now, 19% more for the same level it was at last year, can only be considered a good thing.

Here is the rub on that though. To get that 19% gain, the Dow has to get back to that 14,100 level again. And, it is taking it's good old sweet time about getting there. It will get there, barring some economic disaster. In fact, it will surpass that number, again, barring some economic disaster.

But, assuming any truth to my twisted numbers and logic, 19% becomes the cost of time, within my portfolio. Divide that by the number of years to get there, and you have a real rate of return. And, since I still have less than last year, my real rate of return is still a negative number since July of last year.

So, is the glass half full, or half empty. If market pullbacks, add to gains at the same levels over time, it could be a good thing after all. Then again, none of us are getting any younger either!

So, as I watched the Dow drop 400 points, or roughly 2% this week, I was able to envision my cash register ringing, at some point in time in the future. While 2% down meant a 5% drop today, over the longer term, I was squeezing 8% gains into that 2% on the way back up.

Obviously, it is much better to have pure gains, with no pullbacks. That way, there is no loss to figure into the calculations. But, as long as the market continues to rebound, and it always does, some pullbacks are not the worst thing in the world either. While I still don't particularly like the pullbacks, I have learned, you can still make money on them over TIME. And, that concept alone, is why everyone preaches to be a long term investor.

So, this week, the market gave us LEMONS, and hopefully, I have made some pretty good lemonade. I saw most of the stocks take some beatings. I did scrape some profits on some, and largely bought dry bulk shipping stocks, which got a really BIG downward thump. The more they fell, the more I bought. Time will tell, when that will be a profitable plan, but why am I expecting a 19% return on it this year? Actually, I expect to beat 19% before October's end. Let's see if I am right.

Join me and watch DRYS, TBSI, EXM, GNK, NM, DSX, EGLE and maybe a few more yet. As of the close of business May 22, 2008 stock prices are shown below. Let's see when they add 19%. (Give me break - can we just AVERAGE 19% gain across all of them). If I am right, a 19% gain in less than a year, is nothing to sneeze at.

GNK - Genco Shipping $69.25
EXM - Excel Maritime $50.50
TBSI - TBS International $47.49
DSX - Diana shipping $34.86
DRYS - Dryships $92.13
EGLE - Eagle Shipping $32.04
NM - Navios Maritime $13.08

And, if it matters to anyone, as of today, the total amount of these stocks in my portfolio is 7.5 %. Yes, I also preach DIVERSIFY. But, do it well. And, I did dump some financials. I am just not to good at them, or it is a really dangerous place to be,,, or both!

I do love the sound of a cash register ringing, when people just want to hand me money!

Got lemons? No problem. Make lemonade.