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!

31 May 2009

The markets and the eternal

Many readers of this blog complain that I repeatedly stray off-topic, and resolutely so; that the point of this blog is more appropriately the markets.

But those thoughts miss a crucial aspect of what I (attempt to) teach: the well-rounded perspective removes the market's jagged edges from your perceptions. The article below alludes to my thesis,
"Mr. Graham's immersion in literature, mathematics and philosophy, he once remarked, helped him view the markets 'from the standpoint of eternity, rather than day-to-day.'"

No one knows of David M Gordon, or The Deipnosophist, but if Ben Graham says it is so, perhaps you should pay heed. Especially because Ben's most famous acolyte, Warren Buffett, purchased this recent intermediate term rally with pitch perfect timing -- immediately before it began.

-- David M Gordon / The Deipnosophist

Wall Street Journal Online
Wednesday, May 27, 2009

If You Think Worst Is Over, Take Benjamin Graham's Advice
by Jason Zweig

It is sometimes said that to be an intelligent investor, you must be unemotional. That isn't true; instead, you should be inversely emotional.

Even after recent turbulence, the Dow Jones Industrial Average is up roughly 30% since its low in March. It is natural for you to feel happy or relieved about that. But Benjamin Graham believed, instead, that you should train yourself to feel worried about such events.

At this moment, consulting Mr. Graham's wisdom is especially fitting. Sixty years ago, on May 25, 1949, the founder of financial analysis published his book, "The Intelligent Investor," in whose honor this column is named. And today the market seems to be in just the kind of mood that would have worried Mr. Graham: a jittery optimism, an insecure and almost desperate need to believe that the worst is over.

You can't turn off your feelings, of course. But you can, and should, turn them inside out.

Stocks have suddenly become more expensive to accumulate. Since March, according to data from Robert Shiller of Yale, the price/earnings ratio of the S&P 500 index has jumped from 13.1 to 15.5. That's the sharpest, fastest rise in almost a quarter-century. (As Graham suggested, Prof. Shiller uses a 10-year average P/E ratio, adjusted for inflation.)

Over the course of 10 weeks, stocks have moved from the edge of the bargain bin to the full-price rack. So, unless you are retired and living off your investments, you shouldn't be celebrating, you should be worrying.

Mr. Graham worked diligently to resist being swept up in the mood swings of "Mr. Market" -- his metaphor for the collective mind of investors, euphoric when stocks go up and miserable when they go down.

In an autobiographical sketch, Mr. Graham wrote that he "embraced stoicism as a gospel sent to him from heaven." Among the main components of his "internal equipment," he also said, were a "certain aloofness" and "unruffled serenity."

Mr. Graham's last wife described him as "humane, but not human." I asked his son, Benjamin Graham Jr., what that meant. "His mind was elsewhere, and he did have a little difficulty in relating to others," "Buz" Graham said of his father. "He was always internally multitasking. Maybe people who go into investing are especially well-suited for it if they have that distance or detachment."

Mr. Graham's immersion in literature, mathematics and philosophy, he once remarked, helped him view the markets "from the standpoint of eternity, rather than day-to-day."

Perhaps as a result, he almost invariably read the enthusiasm of others as a yellow caution light, and he took their misery as a sign of hope.

His knack for inverting emotions helped him see when markets had run to extremes. In late 1945, as the market was rising 36%, he warned investors to cut back on stocks; the next year, the market fell 8%. As stocks took off in 1958-59, Mr. Graham was again pessimistic; years of jagged returns followed. In late 1971, he counseled caution, just before the worst bear market in decades hit.

In the depths of that crash, near the end of 1974, Mr. Graham gave a speech in which he correctly forecast a period of "many years" in which "stock prices may languish."

Then he startled his listeners by pointing out this was good news, not bad: "The true investor would be pleased, rather than discouraged, at the prospect of investing his new savings on very satisfactory terms." Mr. Graham added a more startling note: Investors would be "enviably fortunate" to benefit from the "advantages" of a long bear market.

Today, it has become trendy to declare that "buy and hold is dead." Some critics regard dollar-cost averaging, or automatically investing a fixed amount every month, as foolish.

Asked if dollar-cost averaging could ensure long-term success, Mr. Graham wrote in 1962: "Such a policy will pay off ultimately, regardless of when it is begun, provided that it is adhered to conscientiously and courageously under all intervening conditions."

For that to be true, however, the dollar-cost averaging investor must "be a different sort of person from the rest of us ... not subject to the alternations of exhilaration and deep gloom that have accompanied the gyrations of the stock market for generations past."

"This," Mr. Graham concluded, "I greatly doubt."

He didn't mean that no one can resist being swept up in the gyrating emotions of the crowd. He meant that few people can. To be an intelligent investor, you must cultivate what Mr. Graham called "firmness of character" -- the ability to keep your own emotional counsel.

Above all, that means resisting the contagion of Mr. Market's enthusiasm when stocks are suddenly no longer cheap.

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Quantifiable Edges, part 2

In which Rob Hanna deepens, broadens, and improves the quality and value of his already-stellar market insights.

See for yourself.
-- David M Gordon / The Deipnosophist


26 May 2009

War Made Easy

War Made Easy reaches into the Orwellian memory hole to expose a 50-year pattern of government deception and media spin that has dragged the United States into one war after another from Vietnam to Iraq. Narrated by actor and activist Sean Penn, the film exhumes remarkable archival footage of official distortion and exaggeration from LBJ to George W. Bush, revealing in stunning detail how the American news media have uncritically disseminated the pro-war messages of successive presidential administrations.

This 70 minute video is well worth your time, for it helps teach us all to think critically -- whether the topic is war propoganda or market propoganda.
-- David M Gordon / The Deipnosophist

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22 May 2009

3 cartoons to kick off the holiday weekend

-- David M Gordon / The Deipnosophist

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15 May 2009

Festina Lente

-- David M Gordon / The Deipnosophist


13 May 2009

Secrets of the Dead

What: Secrets of the Dead -- Michelangelo Revealed
Michelangelo spent his life glorifying the Catholic Church. He died in mysterious circumstances, his body disappearing before it could be buried. Exploring an actual scholarly mystery as intriguing as The Da Vinci Code, an art historian points to clues in one of Michelangelo’s greatest masterworks — a sculpture of Moses — as evidence that he had become involved with the Spirituali, a sect attempting to reform the church.

When: Wednesday, May 13, at 8 pm (Tonight!)
Where: PBS; check local listings

For more information, go here.

-- David M Gordon / The Deipnosophist

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08 May 2009

Mr Literature Guy

I have mentioned Stephen Pastis's often-brilliant comic strip, Pearls Before Swine. Today's edition, though, is pitch-perfect, and oh so apropos!

[click on cartoon to enlarge]
Hope you enjoy it as much as I do!
-- David M Gordon / The Deipnosophist

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The future expressed as computational capabilities

"Given the tremendous pace of technology, it is impossible to predict far into the future. However, I think the past decade tells us some things to expect in the next. Computers will be 100 times faster still and storage will be 100 times cheaper. Many of the problems that we call artificial intelligence today will become accepted as standard computational capabilities, including image processing, speech recognition, and natural language processing. New and amazing computational capabilities will be born that we cannot even imagine today...

"The dark clouds currently looming over the world economy are a hardship for us all, but by the time today’s children grow up, this recession will be a footnote in history. Yet the technologies that we create between now and then will define their way of life."

Google co-founder Sergey Brin in the company’s 2008 founders’ letter

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07 May 2009

A second strike of lightning

The Food and Drug Administration (FDA) approved Vanda/VNDA's, Fanapt, which is an anti-psychotic drug for the treatment of schizophrenia.

The shares now are ~800% higher. Wham! Bam! Pow!
-- David M Gordon / The Deipnosophist

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06 May 2009

Inspired Bicycles

Danny MacAskill is poetry in motion; truly a wonder to behold...

Thank you to Harry van Beuningen for finding and sharing the video.
-- David M Gordon / The Deipnosophist

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38 tips for a better you

Okay, okay, I detest most email forwards, so I rarely forward them on; sometimes, though, they are worthy of our attention. Such as the one below. (I must admit, though, that I deleted several of its more inane and vapid suggestions.)
-- David M Gordon / The Deipnosophist

1.Take a 10-30 minute walk every day.
2. While you walk, smile. It is the ultimate anti-depressant.
2. Sit in silence for at least 10 minutes each day.
3. Tape your late night shows and get more sleep.
4. When you wake up in the morning complete the following statement, "My purpose today is to __________ ."
5. Live with the 3 E's -- energy, enthusiasm, and empathy.
6. Play more games and read more books than you did last year.
7. Make time to practice meditation and prayer. Each provides daily fuel for our busy lives.
8. Spend time with people over the age of 70 and under the age of 6.
9. Dream more while you are awake.
10. Eat more foods that grow on trees and plants. Eat less food that is manufactured in plants.
11. Drink green tea and plenty of water. Eat blueberries, wild Alaskan salmon (speak with Ray Fairfax! - dmg), broccoli, almonds, and walnuts.
12. Try to make at least three people smile each day.
13. Clear clutter from your house, your car, your desk.
14. Let new and flowing energy into your life.
15. Don't waste your precious energy on gossip, negative thoughts, or things you cannot control. Instead invest your energy in the positive present moment.
16. Realize that life is a school and you are here to learn. Problems are simply part of the curriculum that appear and fade away but the lessons you learn last a lifetime.
17. Eat breakfast like a king, lunch like a prince -- and dinner like a college kid with a maxed out charge card.
18. Smile and laugh more. It will keep away the negative blues.
19. Life isn't fair, but it is good.
20. Life is too brief to waste time hating anyone.
21. Do not take yourself so seriously. No one else does.
22. You need not win every argument. Agree to disagree.
23. Make peace with your past so it won't spoil the present.
24. Don't compare your life to others. You have no idea what their journey is all about.
25. No one is in charge of your happiness except you.
26. Frame every so-called disaster with these words: "In five years, will this matter?"
27. Forgive everyone for everything.
28. What other people think of you is none of your business.
29. However good or bad a situation is, it will change.
30. Your job won't take care of you when you are sick. Your friends will. Stay in touch.
31. Get rid of anything that isn't useful, beautiful, or joyful.
32. Envy is a waste of time. You already have all you need.
33. The best is yet to come.
34. No matter how you feel, get up, dress up, and show up.
35. Do the right thing!
36. Call your family often.
37. Each night before you go to bed complete the following statements, "I am thankful for __________. Today I accomplished _________."
38. You only have one ride through life, so make the most of it and enjoy the ride.

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04 May 2009

A career opportunity

Two friends have combined their experience, insights, and talents, and have begun a new company for which they received recently their first round of venture financing. This financing not only makes their shared dream a budding reality, it also makes it a business -- which means they now must begin to hire staff. They have an opening for... well, they can tell you:

Our company, AlikeList, Inc., is looking for a hotshot Web Developer with outstanding UI development skills, including Javascript & CSS. The position is based in Sunnyvale, CA.

Type: Full-time
Experience: Mid-Senior level
Functions: Management, Art / Creative, Design, Production, Engineering
Industries: Consumer Services, Marketing and Advertising, Online Media, Internet
Pay Description: Competitive comp/benefits

AlikeList seeks a Senior Web Developer to join an experienced team developing an innovative online solution for improving how consumers and small to mid-size businesses connect, communicate, and transact. If you’re energized by fast-paced, entrepreneurial work environments that solve significant consumer problems, we should talk.

The Senior Web Developer must enjoy leading the charge to apply innovative solutions and technologies to consumer problems. You will be responsible for assisting in defining our web presence, including the AlikeList site, mobile apps on various platforms, and publishing partners such as Facebook / MySpace.

Direct experience with HTML / CSS, Javascript, PHP, Flash, AJAX is required. You will work within an exemplary team of UI designers, junior web developers, product managers, and engineers to build best-in-class services. Demonstrable experience building and deploying web sites that support significant traffic is a must.

• Develop a highly interactive front end, using AJAX and other techniques, that engages consumers while providing high utility.
• 6+ years HTML/XHTML/CSS/JavaScript cross-browser development experience with large-scale web applications or sites
• Strong portfolio featuring XHTML, JS, CSS, and AJAX coding samples
• 2+ years working with Javascript libraries such as YUI (preferred), Prototype and Scriptaculous
• Develop functional prototypes that illustrate feature concepts quickly
• Solid understanding of the possibilities and limitations of building web applications
• Collaborate with UI Designers, Engineering and Product Management
• BS/MS in Computer Science or equivalent
• Excellent interpersonal and communication skills

Company Description
At AlikeList, we get excited about delivering local services that improve people’s lives daily. AlikeList is a VC-funded local marketplace company in Silicon Valley that is changing the way local business gets done. From finding a high quality contractor you can trust to finding a dentist that is really good with kids or a romantic hotel for your anniversary, our service is the essential guide to finding local businesses that meet users’ needs, values, and budget. And for small and mid-size businesses, we connect them to highly qualified consumers in the market for their products and services.

The AlikeList founding team consists of successful Internet executives experienced in both start-ups and Fortune 500 companies including Apple, GeoCities,, Rand McNally, Yahoo, and Accenture.

Additional Information
Local candidates only, no relocation (San Francisco Bay Area).

Please contact me (only your interest, and not your resume, etc), if this description sounds like you. I will reply with the contact information. And please feel welcome to pass along this opportunity.
-- David M Gordon / The Deipnosophist

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03 May 2009

Measure trends objectively vs subjectively: Which is better?

Price equals risk, I state often; I am not alone in that sentiment. Alas, with so many methods to measure price, they amount as too many. Two technical measures of price (action) include:
1) Price measured from a breakout, whether short, intermediate, or long term;
2) Price measured from a low, whether primary, secondary, or tertiary.

The two simple items above count as six (6) distinct measures -- and do not even begin to scratch the surface. To reduce to the irreducible, the two crucial perceptions are subjective and objective. And while the subject of this post is not Green Mountain Coffee Roasters/GMCR, it does qualify as an excellent example.

These two commenters (1 and 2) are on the right track, but use subjective analysis. Where, for example, do they include objective measures that offer proof that a change in price dynamics is about to occur? They state only that change will occur, not how and how to recognize it. Commenter #1 states,

"I’m fairly confident that this stock will have a sharp pullback in the coming weeks and one that could be very profitable if timed quickly."
Unfortunately, he offers no quantifiable or objectively measurable reasons why such a situation will arise, nor how to view such change if and when it occurs. He also neglects to add whether the decline will be for months, weeks, days, or minutes, or from primary up trend to primary down trend, even whether the decline warrants careful attention as a moment to purchase rather than to sell or sell short.

Those same thoughts hold true for Commenter #2, who states,

"the stock is now trading at a huge premium to market"
Though a more objective measure, I nonetheless ask, "So, what of it? Many stocks trade at a premium (and at a discount) to the market; what makes GMCR different and deserving of a sale?" In its monolithic way, the market averages performance, and yet individual stocks can, and are, outliers to that pattern. These outliers create your opportunities to profit.

Subjective analysis can, does, and should play a role in your portfolio investing. For example, as an investor, you could decide in advance the price or value level that offers the most comfort for your sale, irrespective of subsequent price action. No more kicking yourself because a stock continued its rise -- after you sold. And vice-versa. Objective analysis, on the other hand, offers crucial insights, because, over the long run, the markets are a weighing machine; i.e., while you might be smarter than anyone you are not smarter than everyone.

Consider, once again, Green Mountain Coffee Roasters/GMCR...

[Click on charts to enlarge]

You and I, able to perceive only three dimensions, typically view charts like the one above via the x and y axes of price and time. (Other axes deserve our attention, but are not the topic of this post.) So we draw trend lines like those I delineate, which circumscribe price moves, but ignore the element of time. Oh sure, we know now that the price meandered sideways for ~26 months, but what does that knowledge tell us, if anything, about when the stock will break out (up or down)?

Viewed differently, but still relying on the Cartesian coordinates, we can see this...

Carried over from the prior chart is the trend line at $45 that delineates the breakout from the high-level consolidation; I added:
1) The small and internal double bottom (#1);
2) The breakout (price and volume highlighted in yellow);
3) The internal rising bottoms trend line that occurred since the second low of the double bottom, which forms an...
4) Ascending Triangle, which breakout typically is quite bullish -- and occurred at $45.

We know already what happened. Remember that the up trend I identify began in the depths of the recent, especially ferocious, bear market, which caused most traders and analysts (but one) to see only lower prices and deeper declines immediately ahead. And yet Green Mountain/GMCR has forged higher amid increasing incredulity.

So, yes,
Green Mountain/GMCR enjoys a powerful up trend, now ~5 1/2 months old. That up trend, though, gives rise to a sequence of questions:
1) For how long do such trends endure?
2) How do I measure trends predicated on time, not price?
3) How can I use time to measure change?
4) How can I combine the x and y axes (price and time, or the z axis) to identify risk (high price and high value relative to a constant) and opportunity (low price and low value relative to a constant)?

The answers to these questions and others must await a future post. This post merely introduces the concept, sets your curiosity free to roam, and even encourages you to share your perceptions and thoughts so that we all could discuss the notion together.

Full Disclosure: Long Green Mountain Coffee Roasters/GMCR.
-- David M Gordon / The Deipnosophist

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