Month: November 2013

Book Review: Win by not Losing

Book Review: Win by not Losing

Just follow my methods and you will make money. Yes, it is another one of *those* books.? Most of them are not worth your money.? This one might be worth it, but let me give you my misgivings.

The book warms up slowly, because it spends most of its early time destroying other ideas, without introducing their main ideas.? For example, it spends time destroying:

  • Gains in the market come slowly and steadily.? Correct, that’s wrong.? As my readers should know, market returns are lumpy. [Note to readers at Amazon, there are links at my blog that explain these concepts in greater detail.]
  • Modern Portfolio Theory.? Again, no argument here, it is not a good explanation as to how the market works.
  • Volatility isn’t risk; risk is the potential to lose.? Again right.
  • Diversification among risky assets does not provide much risk reduction.? Again right.
  • Most mutual funds miss out on the ability to limit risk, because they forbid market timing.? Here I differ.? Aside from funds that aim to time the markets, the asset allocation decision is not in the hands of the managers, but the shareholders, who must them selves decide how much stocks to hold.

This leads to their main hypothesis, that people have been duped into buy & hold investing, when they could make a lot more money if they only invested when conditions are favorable.

There are two problems with this: 1) how can you tell when times are favorable or not?? I use the credit cycle, and estimates of what various asset classes are likely to return if they were private businesses, but not everyone can follow that.? They give their simplified version, which is a moving average crossover method.? Buy when stocks are above the moving average.? Sell when they are below.? Simple, huh?

Yes, simple, and that brings up problem 2.? If a lot of people began managing money in a way like this, the market would become more volatile.? At moving average crossovers, people would rush to buy and sell as groups.? Some would shorten their moving average formula to get a jump on others.? Any risk control method, if used by many will cease to work well.

Other Difficulties

  • Though it is not a major aspect of their book, and it comes toward the end, part of the goal of the book is to interest people in purchasing their newsletter and/or money management services.
  • At times, buy and hold investing is the optimal way to go for an era.? Also, not holding assets for a long time limits the ability to limit taxes, and compound really large gains.? My mother and my father-in-law, amateur investors both, limited their taxes on their investing largely through buying and holding quality stocks over decades.? (The authors do advise that their strategy is best done in a tax-deferred account.)
  • At one point the book insists that the Capital Asset Pricing Model [CAPM] implies that the equity risk premium is constant.? Sorry, but that’s not true.? Many financial planners act as if it is true.? What is true is that it is challenging to estimate the varying equity risk premium.? Value investors have their own way of doing it, but it boils down to: “I’m not seeing many attractive opportunities to deploy capital.”
  • On page 116, they make too much out of how households have too much money in cash as a fraction of their assets near market bottoms.? The amount of cash may vary some — in general at market bottoms, institutions hold relatively more stock, but the main reason for the increased percentage invested in cash is simply the fall in prices for risky assets.? Aside from IPOs, mergers for cash, acquisitions for cash, money doesn’t enter & exit the market.? Market prices reflect the willing of marginal buyers and sellers to trade cash for stock, and vice-versa.? In aggregate, nothing changes except the price.
  • They criticize the Facebook IPO as one where sellers knew things would get worse, and so they sold, delivering losses to buyers.? But Facebook stock is considerably higher now than the IPO price.? Those that took the losses from the IPO didn’t wait long enough.
  • Page 150 — it took a longer time after 1980 before 401(k)s began replacing Defined Benefit pensions plans in any major way.? Congress passed several pieces of legislation in the late 80s which made sponsoring a DB plan less attractive; that’s when the changes started in earnest.
  • Page 171 — there were many in the insurance industry that remembered being burned on Collateralized Debt Obligations [CDOs] 1998-2002.? It was a common insight that CDOs were weak assets, and underpriced among insurers.? A new class of buyers got skinned in 2008, particularly banks and hedge funds.
  • Page 180 — there were many firms that anticipated the fall in subprime lending.? I worked for one of them.? I wrote an article about it for RealMoney.com in late 2006.? It took a lot of courage to take action on the “Big Short,” and not many did.
  • The book dabbles on many topics, showing a superficial understanding of many ideas/events in order to show they one should not buy & hold.? The book plods for 80%+ of its pages developing what fails, and spends less than 20% of its time giving what one ought to do.? Their strategy takes up ~40 pages of a ~240 page book.

All that said, is the strategy a reasonable one?? Probably yes, but not if a lot of people adopt it.? Advanced amateur investors could implement the ideas of the book easily, those with less experience would need help to do it, and the authors offer that help, much of it free, and more for a fee.

Quibbles

Already expressed.? I’ll stick with value investing; I’d rather have a lumpy 15% than a smooth 12%.? This book could have been better if it focused on its positive strategy, fleshed it out more, so that average amateurs would have had a clearer direction on what to do.

Who would benefit from this book: If you don’t have an investing strategy and you want one, this book may benefit you.? I have read far worse strategies in many books.? If you want to, you can buy it here: Win By Not Losing: A Disciplined Approach to Building and Protecting Your Wealth in the Stock Market by Managing Your Risk.

Full disclosure: The publisher sent me the book after asking me if I wanted it.

If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.

Sorted Weekly Tweets

Sorted Weekly Tweets

Market Impact

 

  • Keep the Economists off the Trading Desk http://t.co/3E3OoDJLrS As Howard Simons said, “Stocks are not GDP futures.” Ignore the economy $$ Nov 01, 2013
  • ‘Skew’ Measure Points to Excessive Market Optimism http://t.co/sT8aVfJ2MI Calls priced high, puts priced low & we r not so bad u know? $$ Oct 30, 2013
  • Bear hunting http://t.co/nvnCpNfl1G Bear shortage has a few wondering who is left to buy from existing stockholders $$ Oct 30, 2013
  • Amazing fact #1: Market has been unexpectedly strong since May 1 | Amazing fact #2: Market?s YTD 2013 returns have never been negative $$ Oct 30, 2013
  • 3 ?amazing? facts about the stock market http://t.co/SKog36iBgE Amazing fact #3: The stock market?s Sept and Oct have both been positive $$ Oct 30, 2013
  • Wall Street is way too bullish http://t.co/dBNe8oaeho Collapsing time horizons may presage a bearish turn for the risky asset markets $$ Oct 30, 2013
  • BlackRock?s Fink Says There Are ?Bubble-Like Markets Again? http://t.co/cgj8MI5vls “Fed policy is contributing to ‘bubble-like markets.'” $$ Oct 30, 2013
  • Five Bad Ways to Pick a Mutual Fund http://t.co/9ZXV7y0lWv Good as far as it goes. Important: don’t chase performance or ratings $$ Oct 30, 2013
  • How Our Brains Betray Us http://t.co/ZFzTZT4t1t We tend 2b 2 optimistic about the future,& not realistic enough about the present $$ Oct 30, 2013
  • JP Morgan’s Subprime Troubles Ran Deep http://t.co/df0Ok7fQG4 The originators r all dead, so they go after one of the last standing $JPM $$ Oct 30, 2013
  • Bond-fund charts of the day, rising-rates edition http://t.co/q7DDAectXI Where @felixsalmon finds the speed of rates rising matters a lot $$ Oct 30, 2013
  • Six Ways to Ensure Qualified Borrowers Can Get Mortgages http://t.co/S7XBegLn4k Unrealistic article, though the part on servicing is good $$ Oct 30, 2013
  • Is Your Pension Courting Catastrophe? http://t.co/0kMj4FdCpO Good summary & resources, but few pensions invest 2much in CAT bonds $$ Oct 30, 2013
  • Are CAT Bonds The Answer to Today?s Retirement Planning Woes? 2 Early 2 Tell?More Transparency Needed! http://t.co/M7taq4X2XE Not4retail $$ Oct 28, 2013

 

Companies & Industries

 

  • Phillips 66 to Build Texas Terminal to Export Propane, Butane Overseas http://t.co/XIUbREChpH Exporting nonstandard fuels from fracking $$ Oct 31, 2013
  • PwC Agrees to Purchase Booz to Expand Advisory Services http://t.co/TW21OqwH5Q Conflict of interests: auditing firms 4 which they consult $$ Oct 31, 2013
  • Now Amazon Is Just Giving Money Away http://t.co/mdtioUbM4K $AMZN -> great nonprofit that eats businesses continues like Galactus $$ #nomnom Oct 31, 2013
  • Stop Subsidizing Colleges? 100-Year Debt Binge http://t.co/76w7ngChue Colleges r more fragile than 2 last 100 years; don’t lend 2 them $$ Oct 31, 2013
  • Dell?s Mitzvah Rescued Buyout as JPMorgan?s Lee Warned of Perils http://t.co/hKyGu1VCnj Da dirt, da whole dirt & nuttin but da dirt $$ Oct 30, 2013
  • Who?s Right About Apple?s Cash Pile: Cook or Icahn? http://t.co/ZJNFMpVtXu Simple: Cook. Most of the $$ is overseas & can’t easily return Oct 30, 2013
  • How Mobile Technology is Changing the Way We Dine Out http://t.co/Su0Po5ezxx Social media affects how people choose restaurants $$ Oct 30, 2013
  • Why Consol is Diving Into Natural Gas While Others Jump Out http://t.co/m3nIsWFv8a Oil > Natgas > Coal | Simple, huh? $CNX $$ Oct 30, 2013

 

Insurance News

?

  • Harbinger Insurer Switches to Iowa Watchdog From Maryland http://stks.co/hsV7 Decamping 4 a more friendly & sophisticated regulator $$ $HRG Nov 02, 2013
  • Berkshire Hathaway defends asbestos claim-paying record vs stories by Mark Greenblatt of Scripps News http://t.co/lYcEQH13Ea FD: + $BRK.B $$ Nov 01, 2013
  • Buffett?s $40B Cash Pile Provides Acquisition Fuel http://t.co/WYZ5AWsBaj Would view largest private companies look4 transitional probs $$ Nov 01, 2013
  • Lincoln National Wins $4 Billion Annuity Reinsurance Deal http://t.co/E3v9AwvDb4 I find this dubious, but $WFC is the likely loser $$ Oct 31, 2013
  • Crop Insurance Hazards Shown in Lost Pheasants in Grasslands http://t.co/s96GcQn8jw W/Ag doing so well, we need to end the Ins subsidies $$ Oct 30, 2013

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Other

 

  • No Bones About It: Day of the Dead Is Finding New Life http://t.co/AGzU8olA1b Life is for the living; let the dead bury their own dead $$ Nov 01, 2013
  • Little Sign of Housing Bubble in Land Prices http://t.co/P8LyXzvyZu Overinvested for a long time; we shouldn’t subsidize home ownership $$ Oct 31, 2013
  • The 50 Greatest Breakthroughs Since the Wheel http://t.co/Hy0ePPNa9W Ambitious article that explains why innovation benefits us all $$ Oct 30, 2013
  • Drones Delivering Pizza? Venture Capitalists Wager on It http://t.co/njvc3uysge Sadly, the pizza was cold when it arrived. $$ Oct 30, 2013
  • If New York Freezes in January Blame Siberian Snow Now http://t.co/7oMGUa8poK These tendencies r weak, like most things on global warming $$ Oct 30, 2013
  • Cheaper Laser Sensors for Self-Driving Cars Are on the Way http://t.co/Nx09HA3zEW If sensors r that expensive, driverless cars r far-off $$ Oct 30, 2013

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NSA / Privacy

 

  • Furious Tech Giants Fight Back Against NSA Surveillance http://t.co/KSNmBfE2v4 Ripple effect from Snowden’s revelations get bigger weekly $$ Nov 01, 2013
  • Edward Snowden Has Japan Copying China?s Playbook http://t.co/iZ1sKibSSd Excessive secrecy creates environment for government wrongdoing $$ Nov 01, 2013
  • How anti-NSA backlash could fracture the Internet along national borders http://t.co/gswU55LYiS Democratic nations hate being NSA snooped $$ Nov 01, 2013
  • NSA infiltrates links to Yahoo, Google data centers worldwide, Snowden documents say http://t.co/Sr5YZD4u74 $$ shot: http://t.co/fTFufojKwz Nov 01, 2013
  • Tax delinquents by the thousands have security clearances, GAO finds http://t.co/8VnAziQSVN Easier 2 suborn someone who is in debt $$ Nov 01, 2013
  • Obama Unaware as US Spied on World Leaders: Officials http://t.co/DTz36LPrPE The surveillance state takes on a life of its own $$ Oct 30, 2013
  • The NSA?s Rent Is Too High http://t.co/xSGkk8GZvy Even if what they do were legitimate, they cost Americans far too much $$ Oct 30, 2013

 

PPACA / Obamacare

 

  • Health Policies Canceled in Latest Hurdle for Obamacare http://t.co/eT3EkcotYp I’m grandfathered for now, but how long will that last? $$ Nov 01, 2013
  • Obamacare?s Biggest Threat Isn?t the Website http://t.co/az9Imf0qBK burdensome complexity subsidy-based plan; failure universal coverage $$ Oct 31, 2013
  • You Can Keep Your Health Plan* http://t.co/Wi5xqZvdrB *Except if it not a health plan that the Obama Administration does not like $$ #lies Oct 31, 2013
  • Obama Tempers Insurance Pledge as Health Fight Rages http://t.co/fpZPH27KML An arrogant man who doesn’t understand economics and lies $$ Oct 31, 2013
  • Yes, People Are Losing Their Insurance Under Obamacare http://t.co/8aqWoASQfl Affects some people who buy their health plans on their own $$ Oct 31, 2013
  • The ObamaCare Awakening http://t.co/P01zM98SNZ Americans are losing their coverage by political design. That’s a feature, not a bug $$ #lose Oct 30, 2013
  • Insurers Oppose Obamacare Extension as Danger to Profits http://t.co/nsIz2wSoyT Clever Obama got the insurance companies2carry water4him $$ Oct 30, 2013
  • Americans lose coverage, Democrats say Obama too rosy about health care law http://t.co/jGg1lWtJA7 My plan was canceled; i had no choice $$ Oct 30, 2013
  • How Jon Stewart became President Obama?s biggest problem http://t.co/YAJ8fOnFJZ Lousy efforts from the govt deserve 2b exposed $$ Oct 30, 2013
  • Desperately Needed: More Geriatricians http://t.co/THkwfgtFqn We cannot create more Geriatricians via fiat in the sort run $$ Oct 30, 2013
  • The First Cracks http://t.co/UAnrYjlzXQ Some Democrats begin to question PPACA/Obamacare $$ Oct 30, 2013

 

Rest of the World

 

  • Will Toilet Rules Prove EU’s Waterloo? http://t.co/0jLUpeIA1a Standardizing toilet specifications across different cultures is futile $$ Nov 02, 2013
  • Japan Stocks Sink to Monthly Worst in Developed Markets http://t.co/XHJewfR5NZ Really difficult 2c how Japan normalizes econ policy $$ Nov 01, 2013
  • Ignore Greek Elections: Stocks Might Be the Best Buy in over 60 Years http://t.co/7tKWQ365RW Good call from @valuewalk timely/contrarian $$ Oct 31, 2013
  • Greek Recovery Makes Stocks World?s Best as Paulson Buys http://t.co/m25XYjWQsE Buy on the rumor, sell on the news, stick a fork in it $$ Oct 31, 2013
  • Eike Batista’s Empire Soared, Then Melted Into Bankruptcy http://t.co/3lh9catSFf At best, a huckster. At worst, a robber. A cheater $$ Oct 31, 2013
  • Japan Salaries Extend Fall as Abe Urges Companies 2 Raise Wages http://t.co/jOprQhpTsk Abe has quite an imagination; markets will dictate $$ Oct 31, 2013
  • OGX Bankruptcy Filing Caps Batista?s $30 Billion Demise http://t.co/MkIdlrCKNv He seemed incredible to me at first, he is credible now $$ Oct 31, 2013
  • Political Gridlock, Beijing Style http://t.co/xCrcTd2htZ Entrenched economic interests fight Party leadership seeking economic reform $$ Oct 30, 2013
  • Rebuilding Reserves Means U-Turn on Treasuries http://t.co/5EH3t378gb The $$ is not the only game in town, better liquidity than others $$ Oct 30, 2013
  • India Breast Cancer Surge Hinders Private Exams for Women http://t.co/Fumyl2WHTO Big problem, few resources; makes me feel sorry for them $$ Oct 30, 2013
  • Study Sheds Light on the Dark Side of China’s Urbanization http://t.co/GZFyxNKEHn Communism alienates from the means of production $$ #China Oct 30, 2013
  • The Lust Beneath Japan’s Sex Drought? http://t.co/APyIFrlth7 Japan’s sex culture is perverse, & their society shrinks as a result $$ Oct 30, 2013
  • The China Americans Don’t See http://t.co/E8FwXk1H6W China is weaker than it looks b/c it can’t handle dissent against the Party $$ Oct 30, 2013
  • Greek Government Bonds Pay Off Big for Fund Managers http://t.co/9LiFTr8BED Every dog has its day, & this bond mgr rates a healthy “arf” $$ Oct 30, 2013
  • Man Making Ireland Tax Avoidance Hub Proves Local Hero http://t.co/Iy2CVenb3f Controversial fellow who is not universally admired $$ Oct 30, 2013

 

Monetary Policy

 

  • Fed?s Bubble Alarm Stuck on Snooze http://t.co/Wwx4fARLH4 Not in Fed’s interest 2 go bubble hunting, do bad enough w/inflation & unempmt $$ Nov 01, 2013
  • JP Morgan sees ‘most extreme excess’ of global liquidity ever http://t.co/WurN40hJfP Global QE leads to a surfeit of spendable funds $$ Nov 01, 2013
  • Yalies Yellen, Hamada Put Tobin Twist Theory to Work in QE http://t.co/Okj2CGXZfo Op Twist might work at low debt levels, not at high $$ Oct 31, 2013
  • Sen. Paul Ties His Fed Bill to Vote on Yellen Nomination http://t.co/5hBSNbsOCg Auditing Fed’s monetary policy decisions is a good idea $$ Oct 30, 2013
  • http://t.co/SrNx6yfP2T Negative interest rates are a way for the government to steal from those that want to keep their risk profile low $$ Oct 28, 2013

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Politics & Policy

 

  • Prosecutor Pleasantly Surprised to Find There’s a Law Against Fraud http://t.co/nqneLdc6JP Regulators use FIRREA to prosecute finl fraud $$ Nov 01, 2013
  • Wife Poisoning Husband?s Lover Tests Weapons Law at High Court http://t.co/0p7Otz5hyD Upheld, would federalize all crimes using chemicals $$ Nov 01, 2013
  • Speedy Lunches Urged at SEC as Union Decries Time-Clock Watching http://t.co/RpXErNaSct Never knew SEC workers had a union $$ #huh Nov 01, 2013
  • Policymakers think of investment like magic; just because u invest does not mean everyone will be better off; investment can b a waste $$ Oct 31, 2013
  • 12 Steps toward a Simpler, Pro-Growth Tax Code http://t.co/vQWaVnHUw8 Problem is 2Much deferral of income tax & favoring investment $$ Oct 31, 2013
  • Gross Says America?s Privileged 1% Should Pay Higher Taxes http://t.co/c9i5W8i9R2 Real problem is definition of income; 2much deferral $$ Oct 31, 2013
  • Counties Made for Horse and Buggy Reject Savings http://t.co/oZshDLJGA6 Ppl value tangible/local govt & don’t begrudge its costs so much $$ Oct 31, 2013
  • Budget Deficit in US Narrows to 5-Year Low on Record Revenue http://t.co/9puVuXTbNm But it needs 2 shrink further, it is 2 big $$ Oct 31, 2013
  • Obama’s Broken Promise of Better Government Through Technology http://t.co/bWn3F3Pphy Bigness of govt tends to sabotage tech development $$ Oct 31, 2013
  • Christie Confounded as Padded Services Send New Jersey Taxes Soaring http://t.co/HTRKeQwchD NJ & corruption? We r supposed 2b surprised? $$ Oct 31, 2013
  • The expected future payments from defined benefit plans is the acid test for municipal finances; that includes social security & medicare $$ Oct 30, 2013
  • Pension Pinch Busts City Budgets http://t.co/dUid8OAyuI W/underfunded plans, watch the cash cost curve: what u expect to pay going fwd $$ Oct 30, 2013
  • The Great Pension-Bonus Giveaway Fiasco http://t.co/JWiO616X5e One of the stupidest things in pensions, allowing ppl 2spike benefits $$ Oct 30, 2013
  • Evangelical Pastors, Marriott CEO United on Immigration http://t.co/1AG0STUpK2 So long as we do not give them benefits, immigrants r good $$ Oct 30, 2013
  • Armed agents seize records of reporter, Washington Times prepares legal action http://t.co/NCJ33BSDjG State & Military abuse reporter $$ Oct 30, 2013
  • Software Helps GOP House Majority Leader Isolate ?Astroturf? Emails http://t.co/eDPLGwo1a7 Easy 2c lazy ppl who only have time 2 copy $$ Oct 30, 2013
  • Mystery of the ‘Missing’ Global Warming http://t.co/3xkNAd50JA Argues that rising water temperatures r more indicative of the problems $$ Oct 30, 2013
  • Colorado Secessionists Struggle as Trend Lifts Democratic Votes http://t.co/BJ9g0CbS6K Secessionists r unrealistic; Congress won’t do it $$ Oct 30, 2013
  • Reagan Revolution Misses Tax Fiefdoms Flourishing in US http://t.co/feUsHyGL5B Many local municipalities levy taxes; some do little $$ #IL Oct 30, 2013
  • Obamacare and the Death of Liberalism http://t.co/VLVk1GiJrT Liberalism ends when entitlement promises fail; I say give it 10-15 years $$ Oct 30, 2013

 

Wrong

  • Wrong: Germany Hits Back at US Over Economic Criticism http://t.co/hsoeuvvtLd Neomercantistic Germany’s surpluses will not get paid back $$ Oct 31, 2013
  • Wrong: Startup Defeats the Captcha, Wins One for the Machines http://t.co/vVAMnaBdJG Captchas have evolved beyond what has been cracked $$ Oct 30, 2013
  • Wrong: The political middle is dying. But it?s not redistricting?s fault. http://t.co/zRplttRK5w We need to force the middle to govern $$ Oct 30, 2013
  • An interview with Alan Greenspan http://t.co/eLgAExy6bQ One constant w/Greenspan is he will not accept blame for the mistakes he made $$ Oct 30, 2013
  • Wrong: PPP and Japanese Inflation Expectations (Extremely Wonkish) http://t.co/1G5MpBSnhw As usual, Krugman says inflation won’t hurt $$ Oct 30, 2013

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Replies, Retweets, & Comments

  • $$ @ritholtz It is a plan if you prefund the deductible, which many medical service providers r requiring w/PPACA plans b4 service granted Oct 31, 2013
  • @viccan1 I don’t believe in conspiracy theories Oct 31, 2013
  • First, this isn’t new. I had professors talking about this in the early 1980s. Second, what may work when… http://t.co/MDJSt6EHaQ Oct 30, 2013
  • I do not want to spend my days, writing out the i’s & j’s. But i’s & j’s are an enigma, when squashed between a double sigma $$ #mathpoetry Oct 30, 2013
  • If you too should choose to skew sir, with the skew-goose, please sir, do sir — w/apologies to Dr. Suess $$ Oct 30, 2013
  • http://t.co/prav9FGJ2h “Now Fink tells us. He was more of a cheerleader for QE at its start.” ? David_Merkel http://t.co/MNHiiBTfnp $$ Oct 30, 2013
  • “The difficulty w/prosecution is apportioning blame. Easier to go after the corporation.” ? David_Merkel http://t.co/qOh82vAqvU $$ Oct 30, 2013
  • RT @RCdeWinter: This seems truer and truer every day. http://t.co/cKGi6IBdJH Oct 30, 2013
  • RT @TFMkts: Exactly how has QE helped jobs? NFP pattern no looks no different before and after QE http://t.co/Y0IUuDxT3B Oct 30, 2013
  • RT @mccarthyryanj: Amazing hire of @MattGoldstein26 by @DealBook. A really big loss for Reuters Oct 30, 2013
  • “Consider Stocktwits. They created cashtags. To refer to Google, you would type $GOOG. Twitter?” ? David_Merkel http://t.co/ZxWfSQjwze $$ Oct 28, 2013

 

Industry Ranks November 2013

Industry Ranks November 2013

Industry Ranks 6_1521_image002

 

My main industry model is illustrated in the graphic. Green industries are cold. Red industries are hot. If you like to play momentum, look at the red zone, and ask the question, ?Where are trends under-discounted?? Price momentum tends to persist, but look for areas where it might be even better in the near term.

If you are a value player, look at the green zone, and ask where trends are over-discounted. Yes, things are bad, but are they all that bad? Perhaps the is room for mean reversion.

My candidates from both categories are in the column labeled ?Dig through.?

You might notice that? I have no industries from the red zone. That is because the market is so high. I only want to play in cold industries. They won?t get so badly hit in a decline, and they might have some positive surprises.

If you use any of this, choose what you use off of your own trading style. If you trade frequently, stay in the red zone. Trading infrequently, play in the green zone ? don?t look for momentum, look for mean reversion. I generally play in the green zone because I hold stocks for 3 years on average.

Whatever you do, be consistent in your methods regarding momentum/mean-reversion, and only change methods if your current method is working well.

Huh? Why change if things are working well? I?m not saying to change if things are working well. I?m saying don?t change if things are working badly. Price momentum and mean-reversion are cyclical, and we tend to make changes at the worst possible moments, just before the pattern changes. Maximum pain drives changes for most people, which is why average investors don?t make much money.

Maximum pleasure when things are going right leaves investors fat, dumb, and happy ? no one thinks of changing then. This is why a disciplined approach that forces changes on a portfolio is useful, as I do 3-4 times a year. It forces me to be bloodless and sell stocks with less potential for those with more potential over the next 1-5 years.

I like some technology stocks here, some industrials, some consumer stocks, particularly those that are strongly capitalized.

I?m looking for undervalued industries. I?m not saying that there is always a bull market out there, and I will find it for you. But there are places that are relatively better, and I have done relatively well in finding them.

At present, I am trying to be defensive. I don?t have a lot of faith in the market as a whole, so I am biased toward the green zone, looking for mean-reversion, rather than momentum persisting. The red zone is pretty cyclical at present. I will be very happy hanging out in dull stocks for a while.

That said, some dull companies are fetching some pricey valuations these days, particularly those with above average dividends. This is an overbought area of the market, and it is just a matter of time before the flight to relative safety reverses.

The Red Zone has a Lot of Financials; be wary of those. I have been paring back my insurers, but I have been adding to P&C reinsurers.? What I find fascinating about the red momentum zone now, is that it is loaded with cyclical companies.

In the green zone, I picked almost all of the industries. If the companies are sufficiently well-capitalized, and the valuation is low, it can still be an rewarding place to do due diligence.

Will cyclical companies continue to do well?? Will the economy continue to limp along, or might it be better or worse?

But what would the model suggest?

Ah, there I have something for you, and so long as Value Line does not object, I will provide that for you. I looked for companies in the industries listed, but in the top 5 of 9 balance sheet safety categories, and with returns estimated over 12%/year over the next 3-5 years. The latter category does the value/growth tradeoff automatically. I don?t care if returns come from mean reversion or growth.

But anyway, as a bonus here are the names that are candidates for purchase given this screen. Remember, this is a launching pad for due diligence, not hot names to buy.

I?ve loosened my criteria a little because the market is so high, but I figure I will toss out lot when I do my quarterly evaluation of the companies that I hold for clients and me.

Industry Ranks 6_19997_image002

Full Disclosure: Long SYMC, DOX

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