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!

05 July 2006

A grab bag of oldies but goodies

There is no other way to say this than I have been remiss in my responsibilities; i.e., replying to your comments. In my defense is the fact that recent market action has pre-occupied my attention. But that is no excuse, as one objective of this blog is to alert you as market events transpire... albeit in advance. And which I believe I achieve. Nonetheless, without further ado, your comments and my replies...

I should be pleased with today's price action, but I AM NOT! When the tape bottomed late yesterday morning, I was fairly certain that the it would hold and the markets would firm up over the next week or two, providing a modest short term trading opportunity. I started nibbling, and put more orders in to get myself to 50% invested (from a 100% cash position). Even though I expected the markets to start firming up today, I didn't expect it to go totally Batsh*t crazy! Of course, none of my orders got filled and I missed out on one of the two or three biggest UP days in the last couple of years. As David likes to say, "the less the certainty, the less the risk" (sorry for the bad paraphrasing). Now that we have this big green daily candle (like it's on Viagra or something), I have doubts that the remaining upside potential (in what I think is a short term rebound rally) will be worth the risk. Even when I am right (which isn't that often), I manage to screw it up! Now you know why I am not pleased. Am I allowed to cuss on this blog? I've got about 50 stocks on my various watch lists. I don't think there is a promising tradable or new leader among them. Where to look for the new leaders?
• Biotech small caps with really interesting stories (like RNA interferrence)- looking really crappy.
• Tech (Gilder stuff) - looking crappy too.
• Natural resources (uranium, mining, forest products, oil) - everyone and their cousin Rex from reform school is already in and priced it up into a bubble that took a big hit. Will it recover and lead again? Too soon to say, but you seem to think not.
• Value stocks - is it time for rotation back into this area, if so what is it, cause I certainly don't know?

You say you don't use screens, so what do you look for to ID potential new leaders? How do you begin your search, what criteria to look for, how to narrow the search? Can you provide any guidance to help me get past just spinning my wheels?

Greg, the market is an excellent microcosm for life itself, so cuss away, if it helps. I wonder whether your perceptions of the general market mess up your investing strategy and tactics. When the moment to act comes, then act! For example, in this post, I 'called' the bottom on the very day it was set. And this post, written the following day, reified the notion of an important low, if not an initial bottom. Who knows whether the low established on 13 June proves to be the final low? I do know that that particular day was a call to action. And I have repeatedly posted as such. For whatever reason, you waited several weeks more. Why? Did you disbelieve me? No matter, if you did. (There exists no particular reason you should believe me, or anyone else; noone knows your investing specifics better than yourself.) Did you perhaps require certainty before acting? (More crucial, if yes.) Unlike you, I have many promising "tradables" on my list. (See below.) How come none of your "tradables" look promising? As for your concluding paragraph (ID'ing new leaders), please read this post; your answer lies therein.

We'd love to learn about any other relatively low risk, table-pounding-worthy, money making, opportunities. object lessons. teachable moments.
Continue reading this blog each day, Ali. I share each 'answer' as time and opportunity permit. However, the following list are several companies and stocks that garner my attention and ownership interest; as always, timing of purchases remains a crucial variable...
• Celgene/CELG
• Endo Pharmaceuticals/ENDP
• Form Factor/FORM
• Garmin/GRMN
• Genentech/DNA
• Google/GOOG
• Intuitive Surgical/ISRG
• LifeCell/LIFC
• MEMC Wafer/WFR
• Rackable Systems/RACK
• Research in Motion/RIMM
• Starbucks/SBUX
• Under Armor/UARM
• Whole Foods Markets/WFMI
• Zumiez/ZUMZ

(Many of the aforementioned companies / stocks will be familiar to regular readers of this blog.)

Would you be able to discuss what you see in the charts of RACK, GOOG, and the Nasdaq as you had planned to share with us last week? Do you also still feel like this decline is different than any othersince the bottom ~3 years ago as you stated a couple weeks ago?
Had you somehow missed the earlier posts, Steve? I posted on 15 & 16 June extraordinarily clear comments (or so I believe) of my perceptions re the market. I noted then the change(s) as it (they) occurred, though that change was initially very subtle. Re Google/GOOG... well, let's leave it at some readers' complaints that I focused too much and too often on that company/stock. So I have backed off the frequent mentions. Nonetheless, my message remains clear, which I frequently slip in to various posts: own it. As for Rackable Systems/RACK, it was my intention to walk readers through this position from inception to conclusion. RACK is nowhere near conclusion of its uptrend.

Am to understand, then, that fundamental analysis is fruitless because the information is widely available and one cannot expect to interpret it better than the market as a whole? My only reason for purchasing a stock is the belief that someone will be willing to buy it from me sometime in the near future for a higher price than I paid. I did reread your post on RACK carefully but I am still missing why someone will pay more for the stock tomorrow than today. Is it because it has demonstrated a bottom price where buyers flock in to buy? Even if this level of support is firm, can't the stock just sit where it is? Or, is momentum itself a predictor? A body in motion tends to stay in motion?

I have saved your questions for last, Ray, as they are a challenge. I suppose I could take the easy way and point to subsequent market action. The truth is I could point to the entire process -- from the original post (with the stock in the 50s) when I looked for a decline to $32-31. And that a decline to that price level would spark my buying interest. It reached that level, precisely, and has since rebounded to $40+, a 30% advance in ~2½ weeks. Does that not count for something?

The truth is, errors in perception abound -- despite the advance. One regular reader of this blog (and friend) posted elsewhere on the web that he believes the decline to $31+ from $56 to be an "impulsive move" and that the rally will fail and that the decline will reassert itself with a drop to under $30, perhaps even to $0. (He is not specific on a price forecast.) Of course, I disagree. (No surprise there, eh? ;-) I believe that time will prove me correct, as it did with Google/GOOG. (Another stock on which this fellow disagreed with my perception.) So differences of opinion continue to exist, despite your notion of momentum. Really, in which direction does the momentum flow when the stock plummets to $31 from $56...?

Fundamentals are litle more than a snapshot -- a moment frozen in time -- in a dynamically evolving environment (the share price movements, tick by tick). Price does not denote value, but does equal risk. By the time you wrap your head around quick (asset) ratios, etc, the stock likely has moved... precisely as RACK has done the past 2½ weeks. It is nice when both company and stock align in the same direction -- heck that is the very situation I seek -- but it is rarer than you seemingly believe. Yes, I perceive stocks and companies as separate entities; I never confuse the two.

Have you read the initiating post in the RACK arc? You might find within the type of analysis you prefer. IOW, I agree that fundamentals are important, but I also recognize that I purchase the stock and not the company, and it (the shares) are subject to dynamics that company fundamentals fail to betray. Some moments -- and some prices -- are more advantageous than others to purchase; why not take advantage of these oscillations in price?

I admit I might misunderstand your question. When I read it, it contains an inherent comment that my perceptions are formed after market action. But that is wholly incorrect in re to how I perceive the markets, and opportunity. If I understand you correctly, then how would you explain that I sought, in advance, the decline to $32-31 as my moment to purchase, and when the stock was still selling months ago in the 50s? Where is the momentum then, but down? Yes, of course, the shares could bounce around this level for weeks and months yet -- in fact, that would not surprise me-- but every traceable movement so far, including its decline to $31+, has been done with all of the subtle clues pointing higher; i.e., the stock will resume its long term up trend.

When the RACK post was uploaded to the
Seeking Alpha site, a smart-aleck reader took me to task for offering more of the common, clueless, and unhelpful 'analysis' he believes widely available everywhere on the Internet; specifically, that my recommended purchase at $32 was an arbitrary price level. Well, yes and no. All (purchase) price levels are arbitrary, in part, because we each have individual investing dynamics; risk tolerances, time frames, objectives, etc. But I believed months ago, and believe now, that $32 represents a crucial level of support, and that in any time frame it manifests as an excellent moment to purchase. So far, the market has ratified that notion... in the short term. Remaining for the market yet to ratify is my thesis of the resumption of the intermediate up trend and the continuation of the long term uptrend. With the passing of the past weeks and months since the all-time high, I continue to see nothing in the chart that disproves my thesis of a higher share price.

Of course, I watch the fundamentals of the company daily. Does a new and improved product appear? If yes, will RACK executives choose to compete or instead purchase its competitor? (A rising stock price is an invaluable currency, you know.) Do margins compress, and if so why? Etc. I am not so simple-minded as to ignore the reasons for owning the shares of the companies I choose to own. I do not chase stocks based on the sole and simplistic notion of momentum. There must be a company behind the stock, and a valid product. Moreover, it must excite me intellectually. Etc.

I suspect I failed to 'answer' you in a satisfactory manner. Please ask again, but re-phrase your question in light of this attempt at an answer.
-- David M Gordon / The Deipnosophist

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