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!

28 May 2008

Not a pretty picture

American International/AIG just traded for $34.63, effectively matching its ~10 year low ($34.60) that occurred during the Long Term Capital Management problems. (September 1998.)

[click on chart to enlarge]

Although the shares could bounce off the ~$33-35 price level, such a bounce could prove ephemeral as selling pressure this resolute indicates Wall Street fears AIG could be another Bear Stearns/BSC. All in all, not good, not good at all.

Of course, we all would be remiss if we fail to acknowledge that Wall Street gets things wrong quite often -- which helps create opportunities for investors of all stripes.

Full Disclosure: Not long American International/AIG
-- David M Gordon / The Deipnosophist

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Quickie update re Qualcomm/QCOM

Eric Savitz (Barrons' West Coast Editor) seems startled by Qualcomm/QCOM's recent share price strength...

"... shares are up sharply today, perhaps getting a boost from..."
"Perhaps"...? Hmm, ya' think? Stock prices move, and (only) then do journalists seek explanations and justifications. Meanwhile, readers and investors of this blog were prepared for this price move... and with more upside price action yet to occur. Please note the crucial difference between investors and journalists: Investors invest in advance of price moves, whereas journalists explain price moves retrospectively. (Well, attempt to explain.)

Eric Savitz's 'analysis' does include one crucial item, although he fails to note it as such:

"[Lehman chip analyst Tim] Luke’s note today is just the latest of several bullish reports on the company that have been published in the last few days."
Apply the notion of critical mass, and you have an inflection point, a moment when things change. Such as a stock that has traded sideways for a long while and thus lulls into inaction possible investors.

But not you.

Full Disclosure: Long Qualcomm/QCOM
-- David M Gordon / The Deipnosophist

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23 May 2008

Saved by the bell!

Long time readers recognize that I view trends differently than most chart readers, including how and when trends die and reverse. For example, there was my recommendation to sell 1/2 of our position in Intuitive Surgical/ISRG at ~$335, while Wall Street (Jim Cramer included) were ga-ga for the shares. Although not explained at the time, one perception I employ is the difference between the momentum, price, and breadth high prices. (And vice-versa for the low prices.) Market watchers will recognize these chart points as double, triple, and head & shoulder tops (and bottoms); I prefer to sell during the momentum high but purchase during the breadth low.

Well, the price and news from yesterday verged on the need to liquidate the remainder of the ISRG position, but as this post's topic header has it, the position was saved by the bell. First, the 'news' that the company's CEO stated during a conference yesterday morning that slower growth and lower margins for the company loomed dead ahead, which caused traders and investors to sell hard, was later refuted to be rumor. Then the share price closed spot-on at multiple levels of support (200 day sma included) that set up the possibility for a downside price gap on today's open. After the markets closed, however, came news that Intuitive Surgical/ISRG will become a member of the S&P 500 index, which news typically causes index funds to purchase immediately the shares of the new addition. Intuitive Surgical/ISRG shares reacted accordingly to the sudden onslaught of buy orders by surging to ~$287, and continue near that level this morning in pre-opening trades.

But how likely will ISRG be to hold these levels, and not turn lower once again? Remember that the shares have merely reversed, at worst temporarily, and not broken above any levels of resistance. For that preliminary answer, we investigate how strong are the hands that buy and own the stock at this level...

[click on each chart to enlarge]

The chart above shows volume at price (left scale) and on balance volume (bottom scale), two technical studies that measure the accumulation or distribution of the total volume. Neither study involves price, etc, which makes each study an excellent secondary analysis. (Explanations of these studies and how to use them can be found in this blog's archives, or elsewhere on the web.) For the record, I see accumulation, despite the past 8 months of sideways price activity.

For a closer-in look of the activity this morning, I use...

... which also betrays steady and powerful accumulation. Contrary to yesterday's rumor, comes this real news...

Cowen says that presentations at the American Urological Assn this week point to expanding use of Intuitive Surgical/ISRG's da Vinci system for more types of surgery, potentially raising addressable U.S. urology procedures by 23% and the total addressable U.S. mkt by 6%. Cowen analysts also saw strong interest from urologists in broadening daVinci use beyond prostatectomy, increasing their confidence level in their 63% and 49% procedure growth ests for 2008-09. Firm sees potential upside in their 2008 sales est, and reits their Outperform on ISRG.

New investments of Intuitive Surgical/ISRG, even at ~$280, could prove timely; perhaps equally as timely as my recommendation to buy during the last primary base at ~$85.

Full Disclosure: Long Intuitive Surgical/ISRG
-- David M Gordon / The Deipnosophist

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18 May 2008

Grammar, syntax, referent pronouns -- Oh my!

Okay, this post has nothing to do with investing and the markets. But another interest of mine is language, especially English.

Yes, English, because, unlike most languages, English is a mongrel language, cobbled together (some linguists would say, bastardized) from many other languages and because those other languages' rules apply only intermittently to English. Which all helps to make English arguably the most difficult language of all to learn; certainly as a second language.

You see, when something, say a language or even, I daresay, investing (hah, I squeezed in that topic after all!) follows rules on a scattered basis, the person who attempts to learn English, investing, or whatever, is left high and dry; blowing in the breeze. Seeking a constant in the rules to help learn the topic, he or she soon realizes the sole absolute is the perceiver. Hmm, no wonder I enjoy English and investing as much as I do; they go hand in hand!

Also no wonder, then, that I love articles such as the one immediately below. More comments from me, after the article...

Back To The Other Deadly Science
by James J. Kilpatrick
Some months ago The New York Times expressed an unusually astute editorial opinion. Said the Times: "Nobody wants some sicko drilling a peephole in their locker room."

In their locker room?

Four months later, the Times was relieved by a report discounting the threat of nuclear weapons in Iran. Even so, "The new report is not an argument for anyone to let down their guard when it comes to Iran's nuclear ambitions." Let down their guard?

Yes, we're back today to that other dismal science, i.e., grammar. The question nags at every serious writer. How do we handle referent pronouns? The clumsy things won't behave. They won't go away. They flop around in our prose like wet dogs on a kitchen floor.

Last month the acting head of the Federal Aviation Administration made a reassuring statement: "We will take action against anybody who violates their obligation ..." In Time magazine, a writer discussed the Barbary States, "where everyone is making their own deals." In The Seattle Times, an education reporter spoke of a decision-making process that isn't complete "until everybody has said their piece."

This past September I heard from David Short, a retired teacher who formerly taught English at the ninth-grade level. He is of the old school: "I always taught my students that in antecedal constructions, the 'one's' and 'body's' were always singular, e.g., 'Everybody left HIS jacket on the bus.'" He asks, "Was I right?"

On this recurring question, the Times' stylebook is unequivocal: It lines up the usual suspects -- anybody, anyone, everybody, everyone, no one and someone -- and decrees: "Each of these pronouns is singular and requires 'he' or 'she' (never 'they') on further reference. Thus, 'Has anybody lost HIS ticket?'"

In its sometimes disappointing way, The Associated Press Stylebook ducks the issue. So, too, with the eminent Henry Fowler in his Modern English Usage. Fowler's inheritor, R.W. Burchfield, gently waffles. He says the indefinite pronouns "are now frequently, though somewhat controversially, followed by such plural pronouns as 'they' or 'their.'" Burchfield goes on to say: "Popular usage and historical precedent favor the use of a plural pronoun in such contexts, but many writers prefer to use 'he' or 'he or she.'"

What about it? I would love to hear from editors, authors, speechwriters and serious readers (God bless you!) and will report your consensus.

We turn now to another teeth-grinder, i.e., the abuse of "like." Horrid Examples, please.

From historian Richard Rubin, writing in The New York Times magazine: "Even as the American small town continues what often seems like an irresistible decline, some in northwest North Dakota are mounting ..."

From a Times editorial commenting on a huge Pepsi sign to be built in the Meadowlands. The company said no sign so vast has been seen before. Said the Times: "That seems like a safe bet."

What is the rule on "seems like"? Isn't a simple "seems" enough? My thought is to reserve "like" for honest similes: My love is like a red, red rose. A fighter airplane flies like a homesick angel. To the complacent Polonius, a cloud was like a camel, like a weasel, and very like a whale. When we're just "seeming" and not comparing, let us shun the encumbering word. Down with LIKE! In these constructions, truly less is more.
Referent pronouns, huh? This topic gives rise to a bugaboo of mine; one I refer to generically (and colloquially) as an over-reliance on pronouns in manners of speech and writing. A pronoun, almost always, refers back to the last named noun (person, place, or thing); whereas the referenced noun might be clear to the speaker or writer, such is not necessarily true to the listener or reader. Rather than allow too-frequent reliance on 'pronouns' to stand in for your nouns, spell them out instead, and as often as necessary. This 'rule' applies generally to the words, "this" and "that", which typically modify a noun. So name them all. ("Aha! All what?" you ask. See, even I commit this faux pas!)

Obeying rules of grammar and syntax when speaking (ooh, boy, that error is a whopper!) is difficult enough, although we all could and should make the attempt. But when writing...? C'mon. Communicating clearly is more than some egghead making pronouncements; I can name wars that began due to a misunderstanding; a misunderstanding that clearer communication perhaps could have avoided.

btw, for fun, the red lettering throughout my comments refers to the rules both Kilpatrick and I limn above. I did not indicate them all. Perhaps you could point to more examples, perhaps even other usage rules...? Which brings up another bugaboo, or two; the incorrect usage of "maybe" when "perhaps" would be the correct word. And, for that matter, the difference between "may" and "might"...

But, okay, I will step off my soap box, and now stand ready for your replies and comments.
-- David M Gordon / The Deipnosophist

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16 May 2008

Google's reply

Hal Varian, Google's Chief Economist, 'replies' to my off-handed comment re "Google's reliance on algorithms rather than humans [that] irritates many of their clients and even their advertisers..."

All of the major search engines use auctions to price ads. The reason is simple: there are millions of keywords that need to be priced and it would be impossible to set all those prices by hand.

Using an auction removes the burden of having to do this: the prices are determined by the auction participants. These auctions run every time a user enters a query, so they always reflect the current values that advertisers place on keywords.

The outcome of the ad auction is efficient in the sense that the available ad slots are awarded to those who value them mostly highly. The outcome is also equitable in that the price an advertiser has to pay is determined by the other advertisers -- those with whom it has to compete for slots.

But how do they actually work? There are several steps in the process.
1) Each advertiser enters a list of keywords, ads, and bids.
2) When a user enters a query, Google compiles a list of all the ads whose keywords match that query.
3) The list of ads is then ordered based on the bids and the
Ad Quality Scores, which measure the relevance of the ad to the user.
4) The highest ranked ad is displayed in the most prominent position, the second highest ranked ad gets the second most prominent position, and so on.
5) If the user clicks on an ad, the advertiser is charged a price that depends on the bid and Quality Score of the advertiser below it. The price charged is the minimum necessary to retain the advertiser's position in the list.

A simple example is when all ads have the same Quality Score. In this case, the ads will be ranked by bids and the price an advertiser pays per click will just be the bid of advertiser below it in the ranking. Hence the amount that advertisers pay is no more than what they bid and typically less.

In the general case, where ad qualities differ, the price an advertiser pays for a click will depend on its Quality Score relative to the quality of the ad below it in the auction. Roughly speaking, an ad that has twice the quality of another ad will tend to get about twice as many clicks, and will only have to pay half as much per click as the competing ad.

Where does this Ad Quality Score come from? It was originally determined by historical click through rates but has been refined over the years using sophisticated statistical models. Using ad quality as a factor in ranking ads provides strong incentives to advertisers to make sure that they provide relevant ads to end users.

There are many additional tweaks on top of this basic design. For example, Google actually runs two auctions: one for ads at the top of the page, and one for ads on the side of the page. Only ads with particularly high quality are eligible to compete in the top-ad auction. Ads that have particularly low quality may be disabled, and not shown at all. Advertisers also can set and adjust their daily and monthly budget so as to cap their maximum spend.

But the essential structure is that outlined above: advertisers bid for position and pay just enough to beat their runner-up. Prices for keywords are, ultimately, determined by the advertisers.

Yes, all true... for as far as it goes. The problems, if you want to call them that, begin with the reserve pricing for AdWords. Any reader who participates in art auctions has familiarity with reserve pricing; in essence, the artist (or auction house, etc) establishes a minimum for bids that, if not met, he or she reserves the option to remove the item from auction. Google's policy of reserve pricing places human interference in the auction process at the get-go, which alloys the purity of the auction process

But human intervention at Google does not end there. Consider, for example, that Google sales reps instruct possible advertisers that his or her selected AdWord is inappropriate for their needs; such as when a sales rep tells one advertiser that his word selections, "poker" and "online poker" are inappropriate AdWords for his book, a primer on online poker. Hmm.

Unfortunately, Google's culture worsens the matter. Its employees have become comfortable working within the shroud that veils the Googleplex; in fact, so comfortable that they have lost the ability to relate to their customers, clients, vendors, prospects, and shareholders. Company employees pay homage to their nerdiness via recusing themselves from almost all human contact. (Try contacting someone at the firm, anyone, to see first-hand what I mean.)

I admit the firm's collected and collective intelligence helps to create their continued successes, but it also represents a risk that could derail the firm. One the company muckey-mucks should recognize. Of course, this type of risk always is and will be; a double-edged sword; yin and yang, and all that.

Full Disclosure: Long Google/GOOG.
-- David M Gordon / The Deipnosophist

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11 May 2008

Are books overrated?

So, okay, not even 24 hours after sharing Charlie Munger's essay re his esteem for learning, especially generalized, comes Mikita Brottman, who argues that books get in the way of real life...
"There’s no question that, in terms of emotional development, books didn’t help me at all. For one thing, they gave me ridiculous ideas about romance. The Victorians had worried about such things. In the 19th century, novel reading was considered an especially inappropriate pastime for well-bred young girls. Romantic novels, it was believed, gave young women the impression that love was a wonderfully passionate affair, and that marriage would be full of excitement and emotion, not practical things like finances, housekeeping, and child-rearing. In other words, it was feared that young ladies who read romantic novels would be deeply disillusioned by the bitter realities of marriage."
Yes, I agree with Charlie Munger. But I also agree with Mikita Brottman. Do I, then, equivocate on the topic? Sheesh, I have lived a life reading and learning; enough time spent reading, in fact, to qualify as a recluse, if not a hermit. But before I descend into too much navel-gazing, I next read -- er, learned -- this item...
"Intelligence has long been viewed by scientists as a stable trait: Either you’re smart or you’re not, and nothing you do can change that. But a new study has showed that the brain is like a muscle, and will get more powerful with the right kind of daily exercise. Scientists measured the IQs of 70 volunteers, then put them through a brain “boot camp‚” consisting of memory tasks that increased in difficulty as the subjects became more proficient. After 19 days of exercising their memories and solving puzzles, the volunteers’ IQs were retested, and the results were striking. Every single participant made significant gains in “fluid intelligence‚” the ability to solve problems, use abstract reasoning, and be quick on their feet. The longer people trained, the higher their scores rose. “Intelligence has always been considered principally an immutable inherited trait,” study co-author Susanne Jaeggi tells The New York Times. This study “definitely challenges the old opinions."
So which is it to be...?
"Books aren’t all bad. If you’re a balanced, discriminating reader, the books you read can make you more interested in moral and political questions, more active, articulate, and engaged. Ideally, reading can help negotiate the tension between self and other, help establish a balance between you, the reader, as an individual, and absorption in the group. With me, it was the opposite. I read unconsciously, almost involuntarily. My inner life was rich, but it all stayed inside. I didn’t talk about the books I read because I didn’t know how. I could write, albeit in a fussy and pretentious style (which I can’t seem to entirely shake off, as you may have noticed). But to actually talk about what I read, I’d have needed a different voice, one that could cross over from private to public, from inner to outer worlds. In fact, I hardly had a voice at all. I went days without speaking as a teenager..."
Hmm, read the article below, form your own thoughts, and then decide for yourself... but be certain to share your comments with me!
-- David M Gordon / The Deipnosophist
Why books are overrated

Believe it or not, people once considered reading to be a dangerous vice. Now it’s “what makes America great,” according to one slogan. Other book-promoting campaigns also try to persuade us that reading is sexy (“Get Caught Reading”), hip (“Get Real @ Your Library”), virile and productive (“Read and Grow”), and, of course, “fun-damental.”

So in-your-face, so taken for granted is this faith in the healing power of literature, it’s hard to believe such assumptions have emerged only in the last 50 years, postdating the development of all the other kinds of entertainment—cable TV, the Internet, hand-held videogames­—that now compete for our time and make reading look old-fashioned in comparison. And yet, as historians of mass literacy have shown, our indiscriminate faith in the act of reading would, not so long ago, have seemed gloriously insane.

For much of our history, in fact, reading was considered bad for you. Books, it was long believed, had hidden powers; they could cast a spell on you. And it’s not hard to see why. The earliest secular manuscripts, produced long before the advent of general literacy (and often the work of alchemists and magicians), must have seemed suspiciously cryptic to ordinary law-abiding nonreaders.

Have you ever seen that poster in the children’s section of bookstores showing a couple of bears flying through the air, clutching the strings of a colorful balloon, beneath the words “Books Take You to Wonderful Places”? That one always makes me wonder how long those unfortunate bears have got left before they come crashing back down to earth. It’s true, stories can take you to wonderful places. What the posters don’t tell you is that you can’t stay there, and for those children who spend their early years in the otherworld of literature, real life can come as a rotten letdown.

Consider poor old Jean-Paul Sartre. In his memoirs, the famous philosopher describes spending hour after hour as a child absorbed in his Encyclopedia Larousse, fascinated by each volume’s colorful evocation of fauna and flora, only to have all this wonder dissolve the day he first visited the Luxembourg gardens and saw how impoverished real plants and animals were in comparison. After all his reading, he found, “apes in the zoo were less ape, the people in the Luxembourg gardens were less people.” In retrospect, Sartre realized that he passed from “real” knowledge to its subject, finding more “reality” in the idea of a thing than in the thing itself.

“It was in books that I encountered the universe,” he recalls, “digested, classified, labeled, mediated, still formidable.” In contrast, the world outside books appeared messy, disorganized, and unimpressive. Could it ever possibly compete with the beautifully patterned, ordered universe contained in a favorite set of encyclopedias?

For me, the intoxicating moment came when I learned that books could take you to horrible places—horrible, that is, in a thrilling way: places on the other side of the looking glass where unimaginable nightmares came true, where little girls like me were kept in cages, had their heads chopped off, were cooked and eaten for breakfast. These scary stories both frightened me and aroused a strange, dark appetite that was difficult to satisfy.

Horror stories were my favorite. I couldn’t get enough of them. I loved the way they took me out of my own story, where nothing ever happened. It wasn’t so much that they put my own life in the context of others’ as that they annihilated it completely—at least that’s how it felt. I read every scary story and horror comic I could find, from H.P. Lovecraft to Lady Vampire, from Titus Andronicus to “Tales From the Crypt”—all the better if they included rats, ghouls, voodoo, vampires, and bodies chopped up and hidden under the floor. I became something of a ghoul myself, buried all day in my bedroom, the door barred with a piece of stair rail that had broken off the wall, making the stairs up to my attic bedroom a bit dodgy to climb. Which was fine, because the only people I wanted to see were already there: my friends Jekyll and Hyde, Mephisto, Dr. Strange, and—my closest pal—Melmoth the Wanderer.

Eventually, my mother gave up trying to coax me downstairs for meals, and, apart from school, the only time I left my bedroom during the day was to renew my library books.

There’s no question that, in terms of emotional development, books didn’t help me at all. For one thing, they gave me ridiculous ideas about romance.

The Victorians had worried about such things. In the 19th century, novel reading was considered an especially inappropriate pastime for well-bred young girls. Romantic novels, it was believed, gave young women the impression that love was a wonderfully passionate affair, and that marriage would be full of excitement and emotion, not practical things like finances, housekeeping, and child-rearing. In other words, it was feared that young ladies who read romantic novels would be deeply disillusioned by the bitter realities of marriage.

The first book that I read that had a really powerful impact on me was Wuthering Heights. It wasn’t the first book that made me cry (like most children, I wept copiously and predictably through Charlotte’s Web, Watership Down, and other books in which animals died), but Wuthering Heights was the first book to make me cry adult tears—tears caused by something, at age 15, I’d never experienced: broken love (if love was the right word for it). Whatever it was between Catherine and Heathcliff, I was utterly transfixed by it—a passionate connection, however sexless and spiritualized, that was stronger and more lasting than death, that couldn’t end or be destroyed because it was a part of nature, “like the eternal rocks beneath,” as Catherine says to the housemaid, Nelly. I started crying when I read this speech; I sobbed when Catherine went mad after her husband banned Heathcliff from the Grange; I blubbered and wailed when she begged Nelly to open the window to get just one breath of the wind blowing from the moor, where Heathcliff lay buried.

I often try to make sense of the impact this book had on me. When I first read it, I thought nothing was quite as rousing as a passion so strong you’d die for it. I was devoted to the idea of a doomed, hopeless love that was too late, no good, couldn’t work, but went on anyway because it just couldn’t be stopped. Looking back, I see how this impractical, otherworldly all-or-nothingness has a special appeal to inexperienced teenage girls. But at the time, when I was all wrapped up in it, what I wanted to know was whether things like this could really happen. I’d lie in bed and wonder: Did they happen in the “real world,” the same world I lived in? I had no reason to think so. It was only in books that people felt that way. In real life, people just got tired of one another, drifted apart, did their best, and got on with things. Personally, I hadn’t even met anybody worth going downstairs for—forget about dying. I was perfectly happy as long as I lived in the world of books, but whenever I tried to enter the real world, the spell was broken.

I was spoiled by other love stories as well, including the plain girls’ bible, Jane Eyre. At 16, with my greasy skin and tragic hair, I was immediately drawn to the inner life of the much-abused Jane, who quietly watches Mr. Rochester and carries on serving tea while cherishing “in her bosom” the secret hope that in the end, she’ll be loved for her quiet intelligence, for who she is—modest and penniless.

In the end, all her years of suffering do pay off and Mr. Rochester finally appreciates the special qualities of the bookish girl nobody ever looked at twice. In fact—rather miraculously—he’s been in love with her all along. That’s the money shot in Jane Eyre—the sadistic glee of the moment when Mr. Rochester takes for his wife not the superficially more appealing Blanche Ingram (as everyone expects), but his daughter’s governess, Jane, with her gray smocks, low forehead, and “plain figure” (does that mean flat-chested?).

Wrongheaded as I was, reading Jane Eyre convinced me that, if it could happen to Jane, it could happen to me.

Well, it didn’t happen. Nobody ever asked for my hand in marriage. Nobody even called me on the phone. I was caught in a vicious self-perpetuating cycle: The more real life disappointed me, the more I buried myself in books; and the longer I spent reading, the more remote grew the possibility of actual escape. Private fantasies were all I had, and the hours I spent locked up in the attic started to take their toll. It might be all the rage now to be pale and thin, but at the time it was the fashion to be rosy and tanned, not ill-looking and waxy like me.

Books aren’t all bad. If you’re a balanced, discriminating reader, the books you read can make you more interested in moral and political questions, more active, articulate, and engaged. Ideally, reading can help negotiate the tension between self and other, help establish a balance between you, the reader, as an individual, and absorption in the group. With me, it was the opposite. I read unconsciously, almost involuntarily. My inner life was rich, but it all stayed inside. I didn’t talk about the books I read because I didn’t know how. I could write, albeit in a fussy and pretentious style (which I can’t seem to entirely shake off, as you may have noticed). But to actually talk about what I read, I’d have needed a different voice, one that could cross over from private to public, from inner to outer worlds. In fact, I hardly had a voice at all. I went days without speaking as a teenager. Like a Victorian hysteric, I was paralyzed by fantasy, crippled by self-loathing, self-doubting inhibition—a problem that’s never completely disappeared, and probably never will.

The old superstitions about books aren’t groundless, in other words. They can cast a spell on you. They can change your life completely, and, once you’ve changed, you can’t go back. I, for one, would have been much better off if I’d listened to my dad and spent more time in the company of other human beings. All those years in the attic would have been far better spent learning vital skills: how to socialize, how to engage with others, how to be physical, how to live in the world.

Yes, books can take you to wonderful places, but they can also leave you stranded there, isolated from other human beings, even from your own experience of yourself.

From the book, The Solitary Vice: Against Reading by Mikita Brottman. ©2008 by Mikita Brottman. Used with permission of the publisher.

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10 May 2008

Nothing is off topic; it all connects

I clambered out of my safe cubby-hole ~10 years ago to share publicly my knowledge re the markets and investing; of course flack and guff came my way due to my tendency to share items that seem to range far off the mark of investing.

Except the many articles, etc do not veer off-topic; I believe everything connects, which explains, on one level, my esteem for the humanities, and why I share all this... seemingly unrelated stuff. From poetry to articles about mountain lions, they all are fair game, and germane to an investor who seeks consistent success.

Imagine my surprise, then, to read this essay by Charlie Munger, Warren Buffett's #2 at Berkshire Hathaway...

"... the subject of my talk is the art of stock picking as a subdivision of the art of worldly wisdom. That enables me to start talking about worldly wisdom a much broader topic that interests me because I think all too little of it is delivered by modern educational systems, at least in an effective way. The carrot part of this talk is about the general subject of worldly wisdom which is a pretty good way to start. After all, the theory of modern education is that you need a general education before you specialize. And I think to some extent, before you're going to be a great stock picker, you need some general education..."
"Well, so much for the basic microeconomics models, a little bit of psychology, a little bit of mathematics, helping create what I call the general substructure of worldly wisdom. Now, if you want to go o­n from carrots to dessert, I'll turn to stock picking ‑ trying to draw o­n this general worldly wisdom as we go. I don't want to get into emerging markets, bond arbitrage and so forth. I'm talking about nothing but plain vanilla stock picking. That, believe me, is complicated enough. And I'm talking about common stock picking. The first question is..."
Models and pattern recognition help us to recognize (investment) opportunity; modeling (mimicing) icons of success help us each to be successful.

I consider this essay also to be worthy of your time, which makes me two for two today. (Might as well attempt the hat-trick.)

-- David M Gordon / The Deipnosophist

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Top of the hill

Many observers, in my opinion, had entirely the wrong understanding re Microsoft/MSFT's bid to purchase Yahoo/YHOO; not so much the change for either Microsoft or Yahoo, or even MicroHoo (the combined entity), but the effect on Google/GOOG.

Would the creation of MicroHoo (call it whatever you wish) provide competition for Google? Would Google lose its way, while it devoted company resources to fending off this new challenge?

I believe Google hoped and preferred Microsoft to focus its attention on this proposed buyout and merger, if successful, for as long as possible. This would clear the way for Google's continued successes. And a widening lead ahead of its primary competitors.

Sure, Microsoft and Yahoo are also-rans in online advertising, but the space grows so rapidly there remains room for several worthy competitors to keep the game... honest. Distressingly, I learn that Google's reliance on algorithms rather than humans irritates many of their clients and even their advertisers -- albeit, of the mom & pop variety -- who decided to spend their advertising budget elsewhere; a reality that seems to trouble Google little, if at all. Yes, as corporate advertisers (especially those companies with a national footprint, and thus huge advertising budgets) move online, attracted by the comparatively low CPMs, Google's revenues remain sky-high. And growing. But that all is a topic for a different post.

Meanwhile, no surprise that I enjoyed
Rob Pegoraro's Washington Post article...
"Microsoft and Yahoo have often failed at that goal, in part because they've distracted themselves so often with big-picture strategic shifts. Microsoft has shuffled brands -- MSN, .net, Windows Live, Live Search -- for mysterious reasons, confusing customers in the process. Yahoo has wasted billions of dollars on acquisitions of smaller companies that it fails to capitalize on (anybody still use GeoCities?), like a kid who can't stop himself from breaking his new toys before he gets out of the store. So before Microsoft and Yahoo start talking about a recast merger or any combination with other Web firms, they ought to tend to more basic tasks. A few humble suggestions..."
I believe you, too, will enjoy Rob's article. Please share your thoughts after you read it.

Full Disclosure: Long Google/GOOG.
-- David M Gordon / The Deipnosophist


09 May 2008

What do you think?

A reader (who prefers anonymity) sent the message below; I consider his (or her) technique interesting and creative.

I've been using a technique I find helpful in determining buy points on stocks that have pulled back after an extended rise. To illustrate, I will use the CMG chart. Take the 12/31/07 HIGH of 155.49 and subtract from it the 1/4/08 CLOSING price of 127.01, the first high volume close below the 50dma. Multiply the difference by 1.62 and subtract the result from the 12/31/07 high. Thus, 155.49-((155.49-127.01)*1.62) = 109.35 projected low. Actual low was 108.00 on 1/9/08.

Sometimes the original low price projection isn't hit for an extended period. When that occurs, I keep it in mind as the basing continues. Usually, however, I find the low occurs around this point, the price then rises above the 50dma, then falls back again. This is another chance to utilize this technique, as the high reached on the recovery above the 50dma can be used. I find the first signal the strongest, the 2nd signal useful, and the combination of the two useful as well.

In the case of CMG, note the pullback above the 50dma, establishing a high of 135.47 on 1/25/08. The first high volume close below the 50dma in my mind is the 2/7/08 close of 107.73. The fact that it closed below the 200dma is the reason for this higher volume and I must say I haven't paid attention to this before. Instead, I have focused on the high volume close that often occurs as the price falls below the 50dma once again. In any event, using the above formula and the high of 135.47 on 1/25/08 and the close of 107.73 on 2/7/08 results in a projected low price of 90.53.The actual low is 90.09 on 3/10/08.

Again, I use this method as a tool. I know I don't have to tell you nothing is perfect. I do find this helpful, however, and hope that this may help you in some way.

Finally, another price point I find very intriguing is when a good (subjective) company's stock price reaches 21% below the 200dma; this ties in with timing as well. I think I have mentioned that I believe some of what I do involves, perhaps, a sliver of your "tyme" concept.

Your comments are welcomed... For example, does this methodology withstand your rigorous (back) tests?

Thank you,

-- David M Gordon / The Deipnosophist

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01 May 2008

The Yield Curve

Bill Luby offers yet another crucial perspective for investors.

-- David M Gordon / The Deipnosophist

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