Van Meerten's picks

"What's up Dad?"

That's the email I got from my son James who just graduated from University of Central Florida. He had just looked at my fund's performance and wasn't expecting to seeing negative numbers. I wasn't either so I wanted to take an objective look at my transactions. I found 3 fundamental problems:

1 - I didn't dollar cost average into the market. For years I've always read that the best way to enter an uncertain market was to ease your way in by buying in slowly. You can't predict the valleys and peaks so why even try. If you buy a set amount of dollars in purchases spread over a period of time you buy fewer shares on the peaks and more shares on the dips. I wanted to get off the porch from the start to play with the big dogs and should have entered the market more slowly. I notice that's what Ken Kam is doing and he is probably right.

2 - Never try something new until you've played it a while on paper. Most of my investing experience has been in cash accounts whether it was my 401K or Self Directed IRAs. I've made money over the years by always buying long when times are good and buying defensively when the market is bad or choppy. I looked at a new strategy that I hadn't tested but sounded good to me. The strategy was that when the market was choppy there were always a few stocks going up and a few going down and it was possible to play both sides of the market. In all the past contests I've been in only long positions were allowed but this contest allowed short positions so I thought I'd take a try. Why try something just because you can?

The Market moved against me and I didn't realize it quickly enough. I am not saying that the bear market is over but since July 14 my proxy for the Market - the Value Line Index has made steady gains. It is now trading above it's 20/50/100 day moving averages and 61% of the entire Market is trading above it's 20 day moving averages so the trend is slightly to the upside.I had too many positions on the wrong side of the Market.

3 - I didn't use shorts properly. Shorts are really a defensive position and I tried to use them as a money making proposition. I will be the first to admit I don't have an original thought in my head. My head is like those connect the dot puzzles we all liked to play as kids. I've got a lot of unrelated thoughts in my head, kind of like the random dots when you begin the puzzle and occasionally a few of those dots get connected and a picture emerges. Let me connect some of those dots and see if you see the same picture I do.

Dot #1 - In the Strategy Lab Open I was on a tear and at one point my portfolio was up over 60%. My portfolio was heavy into commodities and energy not because I wanted it to be but that's what was coming up on my screeners. My portfolio started to lose momentum and out of nowhere came this guy called Aardvark that was using Ultra Short ETF's and starting to soar. At the same time I saw those Ultra Shorts appearing not only in Ron Prichard's Summary reports but also in some of the portfolios of the Pros. These weren't available until recently and now several fund families have inverse and double inverse or Ultra Shorts. I'm sure if they can figure out a way to do it there will soon be 3x and 4x shorts and then be ready for a wild ride.

Dot #2 - I had an opportunity to spend some time recently with the former Amateur Vad and he made a comment that created another dot in my mind. He said that no one could make money in the long run because in the long run there was always inflation and an expanding and growing Market. Over time the Market always goes up so you can't make money always shorting the Market.

Dot # 3 - I saw some of the pros like Andrew Horowitz - The Disciplined Investor using Ultra Shorts. Now here is a guy with a lot of experience who I know can use short selling effectively that is using these short side ETF's instead of just shorting individual stocks. If the really good pros are using these there must be something to them and they warrant looking in to.

Dot #4 In this weeks Strategy Lab Summary Ron Prichard made some comments that stated to connect some of these dots. Ron wrote:
"Of course, and particularly with Horowitz's play, we're talking about adventurous investing -- not the sort of long-term, buy-and-hold strategy most investors use by default. Shorts by nature are short-term plays; over time, stocks tend to go up.

The best a short can do for you is a 100% gain, dropping to zero. But a stock can rise forever, so your potential loss on a short is unlimited.

Whether you incorporate shorts in your strategy is up to you, but remember they take active -- very active -- management."

Basically he points out that shorts have a limited potential for gain and an unlimited potential for loss. These connected dots have gotten me to rethink my strategy. I have to agree that you can't play both sides of the Market all the time and make money. When the Market is rising, go long and stay for the whole dance. When the market is tanking make a few short commitments on the short side but cut your losses quickly. If you find a sector that is tracking contra to the market look at Short ETF's as an alternative to cherry picking the industry.

You'll be seeing me close out of most of my short positions as they lose their momentum. The Market appears to be in at least a short term upward trend so why bet against it? I'd enjoy reading your comments to see if you think I'm on the right track.

My last recommendation is this. Read all of the Pros' journals and especially Ron Prichard's Summaries. You may not be able to use all that you read but maybe some dots will be created in your mind and some day, when you least expect it, the dots will connect and a picture you never realized was there will emerge.

DISCLAIMER: The stocks selected should not be taken as buy/sell recommendations. They are the stocks that were selected by my stock screening process and then each was analyzed before adding or subtracting from the portfolio. Do not concentrate on the stocks but learn the selection process.

Jim Van Meerten
Strategy Lab Open Winner July 2008

Comments: View Comments |  Saturday August 16, 2008