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!

21 November 2010

Of disposable leads, and new leaders

To invest, even to trade, requires a risk of loss (of capital). And of ego, "I was wrong. How horrible!" So we each identify some analytical tool (fundamental, technical, valuation, top down, bottom up, etc) to derive some measure of comfort -- er, on which to base our investment decisions. Most analyses of the market, of opportunities, is of the worst type: they seem to offer insight, but really do not.

One part of my investing methodology is to select  potential investment opportunities from among high growth, small cap companies. Not so easy to find small cap companies these days, even after the horrific bear market of 2007-2009: a low share price does not necessarily equal a small market cap. And news about companies disseminates more quickly to everyone at mostly the same time, which means largely that only from the gleanings can an investor discover a true small cap opportunity. A related part of my methodology, explicated previously, is not to invest in penny stocks; in fact, I stay away from stocks that sell under $15-20 threshold. And a second part of my investing methodology is to identify the stocks that perform the best within its group, its sector, and the market: the leaders.

My template is the high level consolidation (HLC), defined and described previously. Prices rise and fall, rise and fall, but remain bounded by the HLC. That pattern ultimately will give way in one direction or the other. The oddity is the expectation almost always is for the break to be down; what with the bearish news that typically prevails throughout the secular version of this pattern, the decline from the top of the range to its lower boundary, most people expect more of the same price action. The quirk, and our opportunity as investors, is that the break almost always is opposite the widely-held expectation.

Such as now. I have argued ad nauseum for 11 years now that the market is in a high level consolidation that would perdure for 15-20 years. Yes, things look perniciously ugly out there – as occurs during any secular HLC. I agree the news is horribly bearish. I agree fundamentals do not favor a sustained market rise. I admit I expect another damaging decline to occur sometime next year (2011). But, with the exception of the last item, this all is well-known. Markets factor into price future unknowns and uncertainties, not the knowns and certainties, which were priced-in long ago. Please explain Apple/AAPL's absolute and relative chasm of a valuation discount, if you disagree. Or explain the strength of the retailing sector, across all its constituent groups, for the past 18 months (since the March 2009 low) in the face of what we all knew was the most dire period for retailers in... well, forever. Even now, still; after all this out-performance.

We all, being human, are subject to all the fallibilities and foibles that reality engenders. The crucial recognition, to me, is to recognize that these sideways-trending periods come... and go. Sure, they could endure for weeks, months, years, even a decade or two, but it is our task to identify these periods and invest around their limitations. And the opportunities they create. So frustrated is okay, but never flustered. Assemble your list of possible investment candidates, and via the process of due diligence and market performance, which includes declines, continuously whittle the list to find those few opportunities that have potential to be long term investments.

So how odd is it that my new investment recommendation below violates one part of my investing methodology, share price? Not so odd when you consider it: the company is under the radar for most investors. Not for long, though. Only one reason I recommend this largely unknown company that offers excellent potential to be a successful, long term portfolio investment...

This post continues on InvestmentPoetry. See you there!
-- David M Gordon / The Deipnosophist

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