The King

Congratulations to Vanmeerten

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Vanmeerten,
Congratulations on being selected as the next Amateur in MSN strategy Lab contest. I will be keenly watching the Vad versus Van battle. Meanwhile i hope that marketocracy people change their mind and start SLO3 contest in August. They have nothing to lose and a lot of people have a lot to gain. They will also gain from our experiences. True, that there were some technical glitches in organizing SLO2 but atleast the system worked in producing rankings and blogs. That's what matters the most.

My thoughts on SLO2

Rating: 3.00 (2 votes) Vote:

Congratulations to those who have finished in the top 20 and who have contributed some good posts. Five of you are likely to be declared as finalists and one of you will go to SLO to challenge Ken Kam and others. I was unfortunate to miss that cut. I finished at 44th place . I firmly believe that finalists should come only from the top 20 list. Otherwise there is no meaning in a deadline and the performance. Here are my reflections on SLO2 :

How i missed the boat
I did very well for most part of this competition. For about 40% of the time i have remained in the top 10 list and i was in the top 20 (including top10 time) for about 70% of the time. But when July 11th i came, i found myself a few positions short of top 20 list mainly because the Solar stocks were beaten pretty bad in the second half of June and i didn't have enough time to recover from those losses. In this kind of competitions who wins the game depends on when the game ends. You have different people dominating different phases of the game. Different people have different styles and different markets favor different styles. Last week i read on WSJ that this year was the best in a decade that favored Momentum players. No wonder Vanmeerten blowed every one else here. This market suited his momentum play. Whether he will stand head and shoulders above others in all markets is to be seen in future tournaments. Some of the best performers in SLO1 didn't do well in this round and some of the worst performance like duffbeer became the best performers now :) . Coming back to my performance, my portfolio became over weight in Solar stocks as Solar stocks started going down because i am a contrarian player who buys beaten down stocks. Unfortunately the beating never stopped and the Solars went down insanely cheap and my performance has suffered. It's a price i have paid for going over weight in a sector. If you look at the top performers portfolios, most of them are overweight in either commodities or Ultrashorts. So are we all making mistake of not diversifying into other sectors ? Probably not. These two sectors are the only ones that seem to be working and i don't blame any one for getting fully into these two sectors. If my portfolio was down in the last 2 or 3 weeks, that's only a temporary blip. Had this tournament finished on June 15th then i would have been one of the finalists. Same goes had the tournament finished on July 30 ( perhaps). You just can't control the market all the time. I feel like an Investor lost in a traders market (right now).

My thoughts on fellow competitors
I think that Vanmeerten should be the winner. He showed great performance and he explained his momentum methodology in good detail . His initial postings were kind of short and sillly but he has come up with matured postings lately. My only doubt is if the editors are willing to let a momentum player teach people about investing. Most likely it should not be an issue. Regarding others, duffbeer has impressed me the most in this round. He is the best stock picker in this round. He was remarkebly consistent in his ranking. Please rememeber that he does not use any tools or technics to pick stocks as Vanmeerten does. He just picks the stocks without using any tools and plays with them. He doesn't pick ETFs either. He does not post much and he shouldn't even be a finalist. I think that the 5 finalists should be Vanmeerten, rushabout, bankchamp,jaudio and wildmap or MagicNiner.
I was disppointed that most of the people in SLO2 has showed bad sportsmanship when it came to giving ratings. It was a shame that most of the good postings from many people went without any ratings. I initially used to give ratings to all the good postings and i was surprised and felt very bad when people are not reciprocating. I am not saying that they shoud give 3 stars to my postings. But when i come out with a lengthy article, i feel that i deserve some attention to it. One should give some rating to these lengthy postings because they come after a couple of hours of effort and people who read it get some good benefit out of it. Once i got disillusioned with people on this issue, i also have stopped giving any ratings. I was laughing out loud when i read Vanmeerten's requests for votes. Here is one person who has very rarely voted to any one(rarely saw him complementing others) and at the same time asking people to vote for him. No wonder those requests went on deaf ears. Hi Vanmeerten, no offense here.
I never gave any negative ratings to any one in SLO2. I had tough time stopping myself from giving negative ratings to all those silly postings from Allen Liang (the price guy :) ). How can one participate in a tournament and do nothing and just keep justifying the inaction even at the cost of going out of compliance and thus breaking the rules.

What was my trading methodology
I am basically a bargain hunter. So it's a kind of a contrarian play. It's the exact opposite of Vanmeerten's methodology. He chases the winners and i pick the losers. I however pick the beaten down stocks only if it is not in a troubled industry and only if it is beaten down unfairly. It's interesting that two people (myself and Vanmeerten) with exact opposite methodologies have both been very successful at the same time. We both stayed a couple of rankings apart for about 40% of the time in SLO2. This just proves that there are many ways of making money in stock markets. In addition to picking bargain stocks, i also pick stocks based on market conditions. The examples are Ultrashorts. In SLO2 i picked beaten down stocks like LDK, FMCN, NVDA, SKF,SOL, VIP, AMSF,QTWW (a look at this list should tell people that i am a versatile stock picker, not just a Solar player )and then i sold them for profit. Unfortunately some of the other picks have gone down much further after i picked them for bargain and these losses offset my gains in the above mentioned stocks. One can never predict when will a stock price dive down or drive up. I am quite happy with my method and i am always going to stick to this method.

My thoughts on SLO2 organisers
SLO1 was organised very well. The rankings were updated daily and the web features have worked without any problems. But SLO2 had many glitches. There are more things that did not work than the things that worked. The voting buttons won't work most of the time, the rankings are updated once in a while, the ranking system did not work for a month or more in the beginning, they stopped blogger spotlight a long back and there were a few other smaller things not worth writing about. At times it looked like a tournament without the organisers.They said that there won't be a SLO3 in near future. So this might be it.

What i have learned in SLO2
OK, let's come to the final part. SLO1 has taught me a lot of lessons but SLO2 has taght me only 2 lessons. Lesson1 : JUST DO IT (always without exception). My trading is based on quick reactions to the big changes of prices to the stocks in my watch list and most of the time if i feel that something is a buy i just go ahead and i buy it. I had developed great confidence in my gut feelings and i had very good success with the trades i made that way. The bad moves i have made in SLO2 are the times i have hesitated to buy the stocks that my guts told me to buy. In future, i am going to religiously obey my gut feelings. The Lesson2 is ofcourse the need to diversify into more sectors (if i can). This gives me an opportunity to rotate the sectors.

THANKS
Thanks to those who came out with good postings and also those who have voted for my postings. I am going to keep posting in investorplaceblogs in future.

Is it time to load up on Solars ?

Rating: 3.00 (4 votes) Vote:

Now that the Solars are down, is it time to jeer at SLO2 solar players or to load them up ? The answer depends on your investment time horizon and risk tolerance. If you are risk averse or have a short term investment objectives, then i suggest you stay away from them. On the other hand if you are willing to ride a volatile path for good returns or if your investment timeframes are into many months/ years into the future, then this is a good time to load up on them. Here is my reason for recommending Solar stocks :

Alternate energy is hot and I don't see it changing in near future.
It has been hot from last year second half when oil started going up above $60. The only event that can stop this alternative energy craze is, oil falling to below $60. Even that will not kill the alternate energy industry. It will only slow it down. But if oil goes below $50 then i would assume that the alternate energy companies will be doomed. It is tough for any one to predict the future. But based on the information that I have I predict that the oil prices are not going to crash any time in the next few years. A lot of people on wall street have started predicting that the oil prices will head higher in future. I do not agree with them. I think that the oil prices are rising for many reasons and speculation is definitely a very big factor here. In my opinion, speculation accounts for as much as 50% of the current oil contract price. But we need to keep in mind that speculation is not some thing that came to the scene this year. It has always been there but that factor couldn't influence the prices much because the supply was more than the demand. That's why the OPEC countries keep pressing for cutting oil production to keep the prices high. But now the demand has definitely out stripped the supply and that is one undeniable sour truth. In an ideal environment the supply should rise due to increase in demand but the oil exporting countries seem to be enjoying their heavenly ride and they just don't want any one to disturb this dream run. That's why Saudis have rubbished President Bush when he went there begging for increased supply. This is the fact. Neither the oil companies nor the Oil exporting countries are trying hard to increase the supply in the light of increased demand. Both these parties are enjoying their days under the sun.

The developing countries are going through a faster GDP growth and big increase in the middle class population resulting in more autos on the road, more industries and more energy sapping homes with all those washing machines and dish washers. As Dollar becomes weaker, Oil becomes cheaper for these countries as their currencies appreciate. So these countries are not seeing the drop in consumption. So long as these developing countries do not fall into recession and the dollar remain weak, the Oil prices will keep steady or rising. Adding to the problem, the Oil output is actually decreasing in the recent quarters. Oil companies are finding it difficult to find new reserves. The Oil exploration costs are rising due to rising inflation through out the world.
Big increase in Oil supply is the key to bring down the Oil prices . This is what happened in the late 90s. The Oil prices have crashed by more than half due to gradual increase in supply. This time I haven't seen any significant news about new Oil exploration except the one in Brazil. In fact Oil production has dropped significantly in Venezuala and it has also decreased in Russia. It will take 2 to 3 years of sustained efforts to increase the production that will make the supply match the demand and stabilize the prices. Till then these speculators see the supply shortage and keep pushing the prices higher.
All this is helping the speculators and anxious buyers (like airlines) to bid higher prices for future contracts. At some point these speculators will try to take their money and run away leading to some correction in oil prices. But the correction is unlikely to be more than 50% and unlikely to last longer. So oil may not fall to below $60 any time soon and that is enough to keep the Solar companies thriving. Currently most of the Solar companies are growing at 100% rate. They are doubling their earnings year over year. I do not see this happening with any other sector, not even with search engine sector consisting of GOOG and BAIDU. So right now there is no better investment than the alternative energy stocks, especially Solar companies having p/e of less than 40. There are plenty of them like LDK, STP, SOLF, SOL, CSIQ, JASO, YGE, TSL. All these are good companies. Go and buy them.

- Raju
(user "onlyraju" ranked 6 as of 5/21/08 )

The Key to Success in the bear market

Rating: 2.50 (2 votes) Vote:

Here we are, half way through the SLO2. SLO2 has been a different kind of experience for most of us compared to the SLO1. Having been a top10 finisher in SLO1, I have started this round with the objective of taking my trading skills to the pinnacle. When I set that objective I really didn't have any definition for pinnacle trading : ) . I think I want to measure it by the amount of success I have achieved in rankings and also individual satisfaction with the stocks I picked and the way I have constructed and rotated my portfolio. Towards this definition I feel that I am on the right path to achieve my objective for SLO2. Except for a bad 2 week period, I have always stayed in the top 50 in ranks (currently #26) and I am extremely satisfied with my stock selection and portfolio construction and rotation methodology (once again with the exception of one bad week).

Am I disappointed that I am not in the top 10 ranks ? NO. I was in fact in top 10 rankings for about 2 or 3 weeks (last 2 weeks of March and first week of April). At that time I had to make a decision. I had thought over what my objective should be. Should it be to play safe and stay in top 10 or ignore short time ranking fluctuations and aim for long term reward ? I have decided to go for the latter. That's why I didn't sell my winners. I did not reduce the size of my winners which is mostly LDK and FMCN. I believe that LDK is still undervalued and it has lot of room to grow. So I am going to keep a big chunk of it. I am prepared to go down even a few 100 ranks if LDK goes down. Like a true sports man, I will play this game with the end result in mind. I will reduce my positions if I feel that my winners have achieved fair value. This is what I did with AAPL in SLO1. When SLO1 started, I have allocated about 23% of my portfolio for AAPL and I have stayed with it through its (AAPL) thick and thin till it reached $180. I am doing the same thing with LDK now.

So what's the difference in the way I traded in SLO1 and SLO2 ?
My Core philosophy has not changed much. The RDSLF4 fund (my portfolio) typically invests in stocks that are in good sectors and trading at lower P/E while still showing decent growth. It is as simple as that. The fund does not expose itself to any single sector by more than 40%. These characteristics of this fund have not changed in SLO1 and SLO2. How ever, I am trading less in SLO2 and giving much more time for my stocks to bounce from the pits. The only time I am doing any selling is when I see a big new buying opportunity , like when I saw FMCN going down about 7% because the company came out and said that their revenues are going to be some 7 to 10% less compared to earlier projections. The market has already dumped this stock by more than 30% just because of news that its mobile unit has banned some advertisements to the user's cell phones. When the company came out and told the same thing the investors have dumped the stock by another 10%. To me this is ridiculous. You can't dump a stock by 40% because the company is going to make 7% less profit compared to its earlier projection. As our Guru Warren (Buffett) says " I'd be a bum on the street with a tin cup if the markets were always efficient"
So don't dump your stocks just because it is going down and don't load up a stock just because it's going up. That strategy works very well in Bull markets. But in Bear markets, you need to pick good stocks at bargain prices and stay with them for long time. Those who can do that, will be richly rewarded in the end. Conviction and Patience are keys to success in bear markets.

As a finishing note let me quote the following from the Berkshire Hathaway's 2005 Chairman's Letter :
"Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac's talents didn't extend to investing: He lost a bundle in the South Sea Bubble, explaining later, 'I can calculate the movement of the stars, but not the madness of men.' If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases."

PS : Buy and Hold system is not the only method that works. Buy Low and Sell High method also works well if you can time the market well. By nature i belong to the Buy low Sell High kind of a trader. But this bear market has transformed me (at least for the time being).

Where are we heading for ?

Rating: 2.00 (1 votes) Vote:

Going into 2008, most people expected US to enter a mild recession this year. That has resulted in a stock market fall in January and only the intervention by FED stopped what would have been one of the terrible months for the stock market. Ever since the market has been down 4 days and up 2 days. Most of the stocks have lost 20 to 50% of their value. That explains why most of the portfolios here are down so much. Only the metals and ultra shorts are shining.
I have started my portfolio with a mixture of ultra shorts and some stocks that i felt are safe bets. As a result the portfolio used to be stable and my portfolio used to be in the black till the end of February. My rank used to be move between 30 and 50. Then i have decided to trade aggressively in order to move into the top 10 and i did a few mis steps. I bought too many stocks (long positions) and when the market went down for 2 or 3 days my portfolio turned red for the first time. I was disappointed with that and again sold all the long positions and increased my ultra short holdings. Then the market started going up and my portfolio went down further. I was frustrated and unloaded my ultra shorts. Then the market went down and i missed a golden chance. Oh God, what a mess. I felt ashamed of my trading skills. I have never done so bad. In a matter of 1 week, i did so many bad moves that my portfolio went from +2.0 to -5.0. The market is very volatile and unpredictable. The big players are completely manipulating the market. Their strategy seem to be simple. The big players want to force every one into capitulation. These capitulated souls like me then start betting in the direction of the market only to see the market reversing its course. Hats off big men! I am giving up trading in my personal portfolio. As for here, yes i will keep fighting for the honors. After all i am no different from most of the folks here. Since there is no real risk of losing money, the game will go on here. I have learnt my lessons about trading in bear market and i will play the game. But let me warn you all! Be careful about trading in your personal portfolios.
Though i feel extremely bearish about this market, i lack the conviction because of the volatility and unpredictedability i have seen thus far. Personally i am expecting a crash very soon. But i can't trust the big players. They might keep intervening and change the direction of the market once in a while causing heavy losses to short sellers. The only way i can think of making money in this market is by playing a range bound disciplined trading. That's what i will be doing from now. The most important thing to remember in this situation is to keep abundant cash. That's one position that can't go down. As for leadership board, i don't even look at who is at the top of the list. When the finish line comes, we will have entirely different set of people there. I have seen it in the last round. Only dishwasher has managed to stay in the top till the end. The rest were not there in top 10 for the first 3 to 4 months of the game.
Are we heading for a major crash or mild crash or contiued volatility ? Are there going to be hedge fund blow ups ? I think so. Can our financial system survive this storm ? I doubt.

My Outlook on the Economy and Stock Markets

Rating: 3.00 (2 votes) Vote:

Last year, trading was easy because the market went up for the most part. So you just need to pick up some great momentum players and some good under valued stocks. Short ETF buyers got killed for most of the time. But now the market is confusing every one with it's up and down movement. It is searching for a direction. Different pundits are telling different things. One expert says that there won't be a recession, another says that we are heading for a deep recession and yet another expert says that we are already in recession (he might have lost lot of money in stocks  ).

Right now we are in a situation where it is extremely difficult to predict which way the economy and the stock markets will move. In this situation, it would be best to sit on the sidelines and watch the story unfold. That's what the Goldman Sach's seem to be doing as per one of their chief strategist in a TV interview a few days back. Being a compulsive trader taking part in a trading competition, I can't sit idle waiting for the market to decide where it should go. Sitting on the side lines is good if you don't want to lose the money but it may not help you win a trading competition. Some one is going to make good calls and forge ahead of others. Don't forget that one can make money even when the stock market is going down. So if I want to win this competition I need to make some bets based on the information I have .

I personally feel that the credit crunch will get deeper and deeper. I am not sure how much the Fed's easing actions are going to contribute towards overcoming the credit crunch. The main problem at this moment is that investors have lost confidence in some fixed income Securities and Credit rating agencies. They no longer trusts triple A rated Securities. So there are fewer and fewer buyers for fixed income assets. The banks are facing huge financial losses and they are reluctant to lend money to any firm. All the companies involved in the mortgage business are scrambling to raise cash and not many companies are willing to lend money. The possibility of credit rating downgrades for mortgage insurers is the biggest threat looming around. We are not sure if these bond insurers are going to be able to raise money before the rating firms down grade them. We are also not sure how much time the rating firms are going to give to these firms to raise the capital. Warren Buffett came out with an interesting bail out offer which these firms are likely to reject. These firms are in a trap now. They are still trying to get a better bail out package. The outcome of the bail out of these firms is going to have big impact on the stock market. Every one is holding their breath about which event is going to happen first : The bail out or the ratings down grade. Let's examine the two scenarios in detail.

Scenario 1: Mortgage Insurers get bailed out and there is no ratings downgrade
The stock market will get a HUGE bounce from this event. The stocks of financial firms are likely to witness a big rally. The mortgage insurers will have a dead cat bounce. People holding the fancy SKF will pledge to themselves that they will never buy short ETFs again. The financial firms will trim their losses because their CDO holdings stop bleeding further. These financial firms are unlikely to see good revenues in near future because investors will continue to be skeptical about the CDOs. So I think that even though the financial firms may avoid disaster, they will have very little to cheer about for a long long time. I will stay away from the financials for a few years. These firms are likely to lay off some people to improve their bottom line. That doesn't seem good for the economy. This will signal the beginning of a recession. As for the stock market, it may again enter a period of confusing direction (just like now) after the initial rally. So the volatile markets are here to stay for a long time.

Scenario 2: Mortgage Insurers get downgraded by Rating agencies
If this thing happens, what's going to stop the hell from breaking lose ? This may lead to stock market crash and Fed intervention. The economy will surely enter recession immediately. Of course the government may then come out with a bail out plan which will result in conditions mentioned in Scenario 1 which means slow growth, loss of jobs and gradual recession. I don't even want to imagine a case where the Mortgage insurers get down graded and still no one helps these firms. That will be dreadful to think and it may not happen.

So it looks like in either scenario, the economy will see some job losses and slower growth that result in prolonged recession starting from the second quarter.