The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

27 March 2006

Mail bag

"I was wondering if there is somewhere on your blog that you store your current stock picks with price targets and stops. I know you have mentioned these within your articles - just wondered if there is a summary out there somewhere I missed."
No, as the eBlogger software (this site's template) does not support a format that allows for a fixed placement template that lacks only my regular updates. Nor does it support file uploads (for your download). Moreover, this site's handful of readers seem resolutely disinterested in me emailing items of possible interest, based solely upon items proffered previously. So why create a distinct file? Instead I attempt to regularly update past recommendations via new posts. Of course, this is not helpful for those readers who would like a summary, or track record. If any readers have suggestions or alternatives, including software changes please post as a reply here or email.

There is no magic answer, btw, re stops and objectives, especially if you view investments as I do, as a continuum. I place my trust in Newton's First Law of Motion. "An object at rest tends to stay at rest and an object in motion tends to stay in motion with the same speed and in the same direction unless acted upon by an unbalanced force." An investor need only recognize and align his or her time frame with the appropriate periodicity for the investment. How high (low) is high (low)? How much time is too much time? How long do trends endure?

All of which seques, I suppose, to this reader's questions...
"I don't see a recurring pattern, I don't. I hereby abandon my attempt to come up with a time objective in relation to this triangle pattern. If it is a symmetrical triangle pattern, please tell me what (else) do you see? I'm not requesting that you divine the future and tell me what it will do. I'm not looking for some sort of price guarantee. I'm more interested in as of this moment, what you see, why, what you look (out) for, etc. Too, what it is you saw when you gave me the heads-up about it. All with the understanding that this could all be thrown out Monday am after the market opens. I'm a big boy, David. I just want to learn."
It might seem odd, but I find this reader's questions extraodinarily difficult to answer. For example, how can I tell you what I see, if you cannot tell me what you do not see?

This particular reader is smart, and he has put in the time and effort to become especially savvy re investing. (And, he is a friend.) He communicates well -- certainly, better than my slovenly efforts! -- and yet even with his many talents he proves unable to explain what he sees, or does not see. I know my answers to date have frustrated him, likely seeming coy or evasive. But how precisely to answer such probing questions as his?

He queries about a private investment recommendation I shared less than 1 week ago. (There is no point for this essay to name the specific investment.) In the intervening days, his investment has appreciated by ~5-8%. That number is unimportant because, to my eyes, the shares look set to go higher in the days and weeks ahead. More important is that the shares rise in price from a chart pattern that is not especially clear, at least to many investors. And yet, again, to my eyes, it coheres into a unified whole. Higher in price, much higher, and soon.

On what do I base that assessment? What did I see before it began its breakout (last Friday), that encouraged me to buy amid the seemingly swirling incoherence of random price bars? What is it I see now that encourages me that the shares are going higher in price, higher than his target of +~$2.50 more?

I suppose because I trust, and even have faith, in the continuum and Newton's First Law of Motion. Most people believe there is one right answer -- stop out at this specific price, objective that specific price -- as if the shares and the market simply and ably turn on such dimes. But they don't, and it doesn't. How many times has your stop order filled, only to leave you empty-handed as the shares screamed higher? How many times have you sold, only to watch the shares scream resolutely higher? How many times have you not purchased, awaiting the ideal moment to buy?

The true answer lies within each of us. At what point are we satisfied with the gain, no matter how much higher the shares rise after our sale? At what price, in advance, might we no longer endure the anguish of being wrong, and thus stop out, no matter what the shares do thereafter? And why is it we force the shares to perform 'right' before purchasing, thus likely causing us to miss the (big) move? I contend it is better to embrace uncertainty; to recognize that, despite your best efforts, you will be wrong always. So your efforts are best expended in being wrong in the right time frame. Yours.

This is why your questions re this or that investment, at least of me, should include your time frame, your expectations. To ask simply, "What do you think of XYZ?" results only in GIGO. Better would be, "What do you think of XYZ in this specific and delimited time frame -- higher or lower, and by how much? Is it an appropriate investment for my portfolio?" Which, of course, begs many additional, and typically unasked, questions. The more information shared, the better the answer... well, reply. In a universe lacking absolutes -- Hey, even the speed of light is questioned! -- there is no one right answer. Only relative answers; in investing, relative to your needs, objectives, risk tolerances, hopes and dreams. We each are different; thus these numbers change for us all.

"But wait!", you cry, "What of all the other investors who propound in favor of stops and objectives?" Do not misunderstand, I too favor stops and objectives as they are a crucial aspect of any investing methodology. The difference is that I believe those price levels are generated internally rather than externally. Life continues; so do the investment markets. The continuum. How much more consistent might your portfolio's results be if you were to align your interests with the continuing oscillations of the market itself? Remember, it is those oscillations that create your profits. Which is why I believe it folly to attempt to slice and dice the risk from your portfolio; professional investors manage risk, not try to banish it altogether from their portfolios. (Fodder for a future post, I suppose.) Risk and volatility, near-synonomous words though they might be for the purpose of investing, are only one side of a coin whose obverse side is reward and price moves, both up and down.

Do any of the preceding comments make even an iota of sense? As always, I welcome and appreciate your questions and comments.
-- David M Gordon / The Deipnosophist

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