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!

30 October 2006


Well, there would have been no way I could limit successfully my tendency for logorrhea when answering these two comments from "Struggling to regain lost momentum." So instead I caterwaul at unlimited length here. Let's discover together how pithy I might be...
"That is quite a list! I thought I remember you once suggesting that an investor should have about eight stocks maximum. Did I recall the statement wrong or have you expanded your stock universe?
That would be nine stocks, Ray, not a mere eight! There are many reasons for this lengthy list, foreshortened though it might be, each included in the original post:
• "A list of those stocks I monitor, accumulate, or own." The emphasis here would be "monitor" -- although in fact I do own most of these stocks, many also perform double duty as signifiers of tension on the tape.
• "The opportunity created from the fluctuations in price." If the price is down short term, I buy. Forgive me, but I cannot restrain myself (in truth, I no longer even try!) from purchasing long term winners during short term price declines.
• "Because an investor never knows which one or ones will lead higher the portfolio value." This sentiment is about as clear as it gets without supporting connective tissue; herewith, however, the connective tissue... I might own 30 or 40 stocks, obviously well in excess of a mere 9, but I downsize initial positions. Why? Because noone, me included, knows which one or ones will take the reins as portfolio workhorse (rising the highest, quickest, and with the least grief). As the lead horses betray themselves, I sell down to the ~9 leaders, and then concentrate my monies into those few. My objective is not to be perfect, not even to be correct, only make money. And, as such, I do not seek the market to ratify my analysis, but instead only request it create my opportunities to buy and sell via the continuing fluctuations in price. (Note, for example, my reply to Brian B in the comments thread of the earlier post.) So...
• "I purchase when the price is good." The continuation of the item above.

One more item, not mentioned:
• My objective in these portfolio lists always is to cut across market sectors and groups, stocks obviously trending and those obviously basing (or topping), large and small cap, growth and value. No single investor's answer is correct for all investors; in this lengthy list, each person will find an opportunity that especially resonates for him or her.

"Sometimes I need a good smack! Subtlety often eludes me. Thanks for your reply. Lots to think about, because I do feel lost right now. What is so easily clear to you, is not so easily clear to me. I struggle to understand your meaning regarding time frames and market periodicty. (italics mine -- dmg) Reducing my position size is good advice. I think that could help reestablish my shaken confidence. Your previous advice to buy inflection points has helped me. WHEN I follow that advice, it has worked out fairly well. Recognizing true inflection points is not always as simple for me. I saw some good inflection points in August but held back, had I followed your advice and bought those points, I would have been very well rewarded. Much easier to realize in hindsight."
Yes, all true. Unfortunately, your answer lies more in the realm of psychology rather than technicals or even technique; this is largely because the markets have scarred you. Let's hope not permanently.

I recognize you flailing; seeing patterns, set-ups, even opportunities, but you disbelieve them, disbelieve your analysis... believe only that if you buy the opportunity is doomed to head lower. You must get your mind off the decline of 2000-2002, and remember the advance prior. (You made a lot of money during those heady days, no?) Yes, you lost a lot of money during the bear market, but what you truly lost is your innocence. You stand before a personal inflection point, one quite seminal: either re-capture your lost innocence or focus on only one side of the market. And then wait for your new opportunities.

That is what investing is, after all -- waiting. You wait for the particular opportunity to set-up, then you await the completion of that set-up, and finally you purchase and then wait on its completion of the new up (or down) trend. Investing is 10% elation, 10% deflation, and 80% frustration. Get used to it.

Almost 15 years ago, I endured a similar destruction to my my portfolio value -- and my emotional tenacity. I still could see the opportunities, but no longer could I hold on during the mildest and most short term of declines. Sheesh. I put into place stops so tight that I practically forced myself into a pattern of losing. That only worsened the situation, as you could imagine. Stops are supposed to protect against losses, not guarantee them! (Note the difference between losses and losing. I suffered both.)

What do I do now? (As differentiated from how I cured myself.)
• I recognize the market (prices; opportunities) always oscillates. Hence, these fluctualtions create my opportunities.
• I focus my investments (not my perceptions, nor my perspectives!) on one side of the market, the long side.
• I identify long term winners, qualified as both the company and the stock.
• I seek short and/or intermediate term pullbacks in price to accumulate said positions.
• I never confuse my time frame with the markets' periodicities.
Okay, that last item seemingly requires additional explication. I believe most investors view their investment positions and opportunities epochally; he or she attempts to carve a slice of time that has beginning, ending, and trajectory (trend), and profit from same. Alas, the market continues its meandering way, never even stopping to see that you or I even exist. That is why you sell a winner, and watch with horror as it continues climbing in price without you aboard. And vice-versa, of course. Because I do this investing gig professionally, I seek two objectives
Build net worth. This goal is achieved via my investments not my trading;
Generate income (to pay bills, don'cha know!). This goal is achieved via my trading, not my investments.

With those twin goals in mind, I must never allow myself to grow confused between those objectives, the concommitant time frames, and the market's many price swings to and fro. For example, Google/GOOG is a net worth builder, and thus I hold it as a long term investment. However, it is also a perfect trading stock (huge volatility, massive liquidity, proper side of the trend, etc) so I also trade it. I cannot confuse these two purchases, however; thus, I delineate the specific time expectation, in addition to stop and objective levels, for my trading opportunity. Contrarily, the investment position is one more of time than price; granted time, the price objective will fulfill itself. Capice?

If your objective remains to view the market as carvable epochs, then always align your time frame with the market's specific periodicity. If, for example, you prefer to day trade (open and close a position the same day), then align that time frame with the intra-day price bars. Always keep in mind that all periodicities greater than your time frame must head in the same general direction; you purchase long, then each larger periodicity must be in upside gear. It is only those periodicities less than your time frame that should run counter to your time frame and longer term objective.

Thus is your opportunity born. It is always thus.

btw, the Roman attribute of discrimen is the ability to judge a situation and to take right action without being sidetracked by peripheral considerations. If the word sounds familiar, it should -- it gave rise to our present day discriminate. (Note how this word's meaning has been hijacked by present-day society!)

-- David M Gordon / The Deipnosophist


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