whateverworks

General Hospital

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"Sweet are the uses of adversity." (Shakespeare, "As You Like It")

This is true but you have to know HOW to use it. Adversity shows you what needs mending but not necessarily how to mend it.

I should explain that although I've had a fund at Marketocracy for almost 2 years, it consists of microcaps and nanocaps, the kind of companies I'm most familiar with, though not the ones I'd necessarily invest in with real money. WIth Strategy Lab I'm experimenting with somewhat larger US companies and also with foreign companies, trying to find a diversified, stable group.

For microcaps, history shows that most of their growth comes early in the year and that they decline in the second half. In addition, if the stock market goes down microcaps really plunge because when people get scared they dump the smaller, therefore shakier, companies first. Last year about this time when the stock market slid I hung onto my declining stocks thinking I'd simply outwait current conditions. That was a mistake! Looking at top-ranked Marketocracy microcap funds, I saw that although they, too, had started the slide, they pulled out of it much more rapidly. Those managers must have immediately taken steps to modify their holdings; so, belatedly, I did too. I also found that when a small stock started a big slide it had a very hard time stopping it, much less reversing it, regardless of the quality of the company's fundamentals. Looking at my Yahoo portfolio in which I track my sold stocks, although some have recovered the majority are still in the doldrums or worse. Most of the less disasterous stocks I kept and the new ones I added went up very nicely in Spring 2007.

Therefore, I made up my mind that this year I'd use the annual dip to identify which stocks had the best holding power and more quickly replace the weaker ones. As we know, the dip has turned into a dive. The S&P is down -1.33% for the quarter and up only 0.54% for the month-to-date. My Microcaps are down -7.25% for the quarter and down -4.06% for the month-to-date. My larger Strategy Lab companies are down -4.05% for the quarter and down -2.95% for the month-to-date. I believe I've contained the annual disaster in the microwave fund much better than I could have a year ago.

However I am disappointed in the performance of my Strategy Lab fund with its supposedly sensible mix of good US and foreign companies. So far, the bear market is showing me that my choices weren't as foolproof as I thought. Time will tell. Hopefully the Strategy Lab fund will continue at Marketocracy past the year-end finish of the contest so that I can modify the experiment on a continuing basis.