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!

27 June 2010

You say potato, and I say...

So many methods to investment success, so little time. Simply, simplistically, an investor could view the investment landscape either as
a) top-down
b) bottom-up

The former (top-down), in essence, involves a prescriptive view that begins with geo-politics, filters down through national and local politics, economics (global and local), finance, companies, markets, sectors, groups, and stocks. The latter (bottom-up) is mostly similar, but in reverse order. The primary difference between the two, for me, is that the former makes pronouncements and attempts to fit the market's square peg into the investor's round perspective (or pronouncement), whereas bottom-up investors allow the markets to 'speak' to them, they 'listen' to the message the markets convey.

When I identify a company and its stock as possible leaders, I confirm that status via seeking similar strength in its group and sector. For example, after I identify xyz as a possible leader, I then attempt to identify whether other company's shares in the same group out-perform by a similar measure; if yes, I seek some measure of out-performance in its sector. (Please understand, the broader the group -- individual stock --> group --> sector --> market -- the less the out-performance, an argument in favor of concentrated positions: more risk = more reward.) This group and sector analysis confirms my thesis in favor of the winning investment opportunity, not vice-versa.

I never view the world and say, "Everything sucks, the world is going to hell, but it is a good time for ordnance makers. Buy their shares!" You willhear me say, and often, "He is smarter than anybody, but not smarter than everybody." This quote sums my view of investing. The consistently successful investor acknowledges the enduring power of the markets, which can and will grind him, his ego, and his portfolio to dust long before it acknowledges he was correct after all. Perhaps.

Which is why, correctly or no,  I choose to view the markets from the bottom-up; my view is clear, unclouded, rarely confused. And I can allow the profound power of the market to help guide me to enduring and consistent investment success

This post concludes on Investment Poetry.
-- David M Gordon / The Deipnosophist


17 June 2010

Trial subscription for InvestmentPoetry

InvestmentPoetry is my second blog, which provides practical, real time investment and portfolio recommendations. (As contrasted to The Deipnosophist, which teaches the mechanics and processes of the markets.)

Subscriptions to IP typically are available in one year periods and cost $250 (per year) only, but I receive requests for a trial period at a reduced rate, so I offer the following subscription:

● $100 for the balance of 2010, or 6 1/2 months. (Offer good through the 4 July holiday weekend.)

Please contact me for complete subscription details.

To your investment success!
-- David M Gordon / The Deipnosophist


10 June 2010

How to Save the News

It becomes a thing not worth knowing when everyone knows it already. And such is the case with the news media, especially newspapers, which "[E]veryone knows Google is killing..."

But as this article makes perfectly clear, Google, in fact, does everything it can to keep it alive, if not revivify it altogether...
The challenge Google knows it has not fully coped with is a vast one, which involves the public function of the news in the broadest sense. The company views the survival of “premium content” as important to its own welfare.
An excellent article worthy of your attention.
-- David M Gordon / The Deipnosophist

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06 June 2010

A working thesis

The equity market's dynamics are always up to the investor to interpret, but its recent negative dynamics continue. Simply, simplistically, and solely: prices rise on diminishing volume, prices decline on increasing volume. The outcome from this particular dynamic, historically, has not been good or positive. To state it mildly.

So what's the problem...? This dynamic has been in force since the low and reversal of March 2009, it worsened off the low of early-November, and became truly ugly since the low of 5 February 2010... and yet the market shrugs off this dynamic, and proves itself resilient, if not also refuse to reassert its broad and wide decline. Of course, Friday's session, as broadly negative as we have seen of late, caused the market to breach finally ES 1080, which quite possibly changes its dynamics, although not yet its direction (as I stated in an earlier reply). At least, not necessarily and not yet; with its current placement after Friday's daily and weekly close, this next week should prove... fascinating; its arrival laden with ominous signs of imminent doom.

My investment methodology relies heavily on market action for insights as to which opportunities appear best situated at any given moment, so the past few months have proved personally damning. Readers and subscribers have abandoned this site because they seemingly prefer short term reward over the intermediate term's mounting risk. (Certainly it is not because I have been proved wrong!) But to invest now, and for the past several months, is, in essence, to play the momentum game (aka, the greater fool theory) -- and momentum with especially horrible dynamics. The decline that began in April might cause these investors to reassess risk, and should they and remove their buy orders, then flash crashes such as we saw on 6 May might become a recurring experience. To prepare you for this event(uality), I described in a previous post this phenomenon of a vacuum of balancing orders that foster the set of circumstances necessary to avoid these sudden air pockets.

The market's changes of trajectory help cause a shift in perception, of perspective; a new parallax view. So Apple/AAPL's chart action of the past 2 months transmogrifies to top from base, and suddenly you see that Google/GOOG began its decline on 4 January, fully 3 1/2 months prior to the market's peak. The question for many stocks now becomes whether the 200 day sma will stem deeper declines.

I took some heat last week for the chart above (updated through Friday's close) for having misidentified the right shoulder, or the neckline, etc; justifiable criticisms, if possibly incorrect. What the commentors do not know is I (attempt to) identify trends and their changes in anticipation of market action; the neckline I identify is nothing more than a working thesis. Although it also (increasingly) appears to be a correct thesis. Time will tell. But what will time tell us...?

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


The Essential Performance Review Handbook - A Review

Sharon Armstrong, in her book, The Essential Performance Review Handbook, bottom-lines the goal of the performance appraisal process:

"... these formal interactions between employees and their direct supervisors point out employee's strenghts and weeknesses, and include assessing the achievemnt of previous goals and setting new ones for the employee to work toward... Ideally the performance review is constructive, separate from discussion of compensation, and contains no surprises. It should reflect a series of discussions or mini-reviews that have been conducted throughout the year." (p 14)
Unfortunately, that ideal perspective is more goal than reality; realistically, most employees would argue their experience with the review process differs. Most employees do not get regular and explicit feedback from their managers and, consequentially, feel blind-sided by their manager's assessments.

The fact is that most large firms hold dear the appraisal process -- for fear of litigation by its employees from suits of unfair treatment, termination, discrimination, or harassment. By preparing and confirming delivery of a performance review in writing, companies hide behind the process as their ability to document status of work and goals, areas of problems, areas of strengths. Whether the employee agrees or not, the company has its documented file... just in case.

Despite my cavil, Sharon Armstrong shares crucial guidance and pointers throughout the book:

● Fine overview of the employee's and manager's feelings towards this process. (p 15)
● Guides both a supervisor and employee as to why a good performance appraisal process can be important. (p 17)
● Exceptionally useful self-assessment tests, as most people who answer truthfully will find they are not where they expect themselves. (pp 18-19)

● Clever, relevant quotes begin each chapter.
● Forms section at book's end offers many appraisal samples.

Room for improvement:
● Armstrong relies on three idealized character types to illustrate issues and potential solutions. The characters are not typical. Most employees in the workplace are average; they have strengths and weaknesses that do not fit into these idealized situations. The author took the easy way to zoom in 
quickly and easily on crucial matters.
● Most of the information Armstrong provides or shares can be found on-line, and free.

● While the author provides insights as to legal issues of employment and touches on importance of performance reviews to protect a business against legal action by an employee, legal problems drive performance review process at most companies. (Chapter 8 - "Keep It Legal!")

The Essential Performance Review Handbook offers a balanced overview of the Human Resources performance 
appraisal and review process; as such, it is a good book for beginners to the performance process, for small business owners looking to develop a process, and for new managers. And an excellent primer for all employees, whether you are the supervisor who performs the reviews, or the employee subject to review. Recommended.
-- David M Gordon / The Deipnosophist

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02 June 2010

The market today

From a letter to clients I wrote only 31 days ago...
"Moreover, the market's current position and posture argue for an intermediate term decline. Assuming forthcoming events prove correct my analysis (a decline to SPX 900-850), the possibility looms for a deeper decline based now on a weakening backdrop. But one step at a time. I would be remiss if I were not to mention my conviction that the leveraged short ETF, SPXU, will redeem your patience, and your portfolio, many times over. Markets never are mono-directional forever, oscillations against the prevailing trend do occur, and the current market has many reasons to decline, short and intermediate term..."
May 2010 proves to be the worst monthly decline since February 2009 and the worst month of May since 1962; SPXU, in turn, roared higher. The question now is, "What and where next...?" To that end, I study the chart of the SPX...

The ominous Head & Shoulders top identified previously -- and whose crucial trend line (the drawn neckline) the market stubbornly refuses to breach. At least to date. The pattern since March 2009 is not a pretty picture -- if you rely solely on its look; other factors come into play, though -- sentiment, market internals, money flows, geo-politics, etc -- that to rely on one item is folly. Nonetheless, many gauges and metrics align with a bearish tilt.

Easy to imagine many scenarios:
● Equity markets plummet now;
● Markets trade sideways for a few weeks or even a few months before breaching the neckline;
● The markets stabilize, and the feared correction is more time and shallow price than deep price.

So I exercise patience while I also search for signs of the true break. Easy to imagine my tactics whichever way the market breaks:
● Down -- buy more SPXU;
● Up -- immediately reverse course (cover SPXU and go long)

As of this moment, I still believe the market's intermediate term (the next ~4-6 months) trajectory is down to SPX 900-850, arguably lower. No matter the outcome, the onus remains upon me to identify now those stocks that manifest as excellent long term investment opportunities. Which is largely how I spend my market days: Identifying the new leaders and the true market direction.

I hope you are equally as happy as I am confident that the decision to increase cash to a dominant percentage of your portfolio was the correct choice. The market appears exceedingly treacherous right now, and for the next several weeks and months. Certainly, the systemic peril has never been greater, 2007/2008 included, the opportunities never fraught with more risk than now.

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

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