11/14 Kelly Letter Topics
Weekly market review
The bottom holds
Big bounce volume
Recession projections
The magic midpoint
LevMark Timer holds
Crocs is dying
Hope for Goldman
Importance of retest
At the beginning of every year, financial magazines and newspapers roll out their picks for the upcoming year. These range from suggestions from the magazine's own editors to suggestions from so-called experts. I generally spend ten or twenty minutes at an airport newsstand each year with a pen and paper to write down the most interesting ones to me -- and then watch during the year for a time to buy cheaper.
We're getting some pretty cheap prices right now, which has triggered my attention but not my investment yet. I don't buy cheap. I buy VERY cheap.
Someone you can always count on to point you to overpriced stocks heading for cheaper prices is Kevin Landis, the manager of Firsthand Tech Value. Unfortunately, he doesn't point out such stocks as short candidates, he suggests buying them. I first assailed Mr. Landis in this article written in October 2002 when his fund was down 68% so far that year. So far this year it's down 13% and his big new year's pick, UTStarcom, is down 27%. Check out the chart line from the beginning of the year to now. That's quite a discount and might just entice you to buy, but of course the strongest buy signal would be news that Mr. Landis is selling.
SmartMoney suggested buying Maxtor, the hard drive company, at a price of $11. It closed this week at $6.78. That's a drop of 38%. It's easy to see why the magazine was excited about the chart. On May 20th last year, the stock hit $6.07 then rose to a high of $15.38 on October 17th. Settling back to $11 from there seemed like a good buying opportunity as the economy was supposedly kicking back into high gear. Plus there was all that cheer about tech spending picking up and, lick your lips, hard drives are going to be used in much more than just computers -- they'll be used in home game centers, personal video recorders like TiVo, car dashboards, and so on. You can read SmartMoney's report here. Now that the stock is almost back to where it was a year ago, few people are interested. The industry is too competitive, margins are too thin, it's a commodity product, and so on. Worth a look, I'd say.
There are others on my list, but those two are the biggest droppers so far. I haven't bought either. I'll be sure to mention if and when I do.
Stocks are down. My old standby, Sun Microsystems, has been wandering among prices below $4. I mentioned in February when I suggested selling at prices between $5.50 and $5.85 that my goal was to buy back in somewhere below $4.
So here we are and I must be buying, right? Not yet. I've noticed since I started swing-trading Sun about two years ago that the low and high points of its swing range are gradually rising. My experience started with Sun at about $2.50 in September 2002. Then it rose to $4.25. Then it settled to $3. Then it rose to $5.50. Then it settled to $3.25. Then it rose to $5.90. Now it's back at $3.86. You can see the action on this two-year chart.
From that general improvement, I think it's wise to set the new buying trigger at $3.75 and below. I'd love to get more shares at around $3.50 and there's a small chance that the summer doldrums -- what with high gas prices, increasing terror danger, and rising interest rates on the way -- could knock Sun back down below $3.25. I'd keep buying all the way down. I expect Sun to finally get above $6 on the next up cycle, perhaps from September to December.
About that time frame I really have no idea, though. What I do have an idea about is the value that Sun represents at prices below $3.75. It has a good franchise, tech spending is picking up, and Sun's offerings are more diverse than they've been in the past.
As always, I'll let you know when I buy and at what prices. You can either check this space from time to time, or enter your email into the field at the top of this page to get my free financial planning newsletter.
I emailed the book reviewer mentioned in my last post and received the following back from him:
I would like to emphasize a key point I made that still sticks in my mind like a sliver and makes me wonder why anyone needs a human to tell them which stock to invest in if intuition is so unimportant in the long run. Here is part of my post which I would like you to consider in a little more depth and let me know what you think...
"If all it took was simple number crunching to pick good companies to invest in, then a mindless computer could make each of us millionaires and pick the companies for us. No more gurus, no more tedious analysis."
You are still saying that your book tells people how to analyze a company objectively and with the same information available to the experts, yet if successful long term investing did not take a severe dose of intuition or luck, then a computer could analyze the market for us, tell us which companies suck and which to invest in, and whadda ya know, we'd all be millionaires 20 years down the line. Well, plenty of financial data is available for a computer to analyze and make the same decisions and conclusions that you hope people will make by following your formulas, so I still see a major contradiction here. Why are humans still involved in the process if successful investing is merely the result of analyzing objective, freely available, computer analyzable information? That makes no sense.
The short answer is that successful investing is NOT merely the result of objective analysis. I never claimed that it was. However, success in stocks does require some number analysis along with judgment.
While a computer cannot analyze numbers and spit out a list of winners, it can certainly help you choose winners by running the numbers and spitting out a list of companies that fit your basic criteria. For example, companies that: are profitable, carry no debt, have a P/E under 20, and are trading below their 52-week averages. Will every stock on that list succeed? No. How can we find the winners on the list? With further research and, yes, judgment.
The raw numbers analysis is a good start. Even if you have poor judgment, your odds of succeeding are better from a small universe of carefully-screened, high-quality stocks than from an open pool of good, bad, and ugly stocks.
But let's look at the judgment portion of success, as that seems to be the reviewer's main qualm. The purpose of my books is to help you find good stocks. Part of that involves teaching ways to acquire good judgment. Reading what management has to say helps. Hearing the opinions of other investors helps. Reading information about competitors helps. Thinking long and hard about what a company is really worth helps. We need to think ahead to what kind of free cash flow a company will generate in the future, then discount that back to today's dollars and decide how much we're willing to pay for it. Is it possible that after running those numbers, arriving at our own assessment of the company, and then patiently waiting to buy at a price that's reasonable to us, we could still lose money on the stock? You bet it is! I mention that more than once in my book. However, we greatly increase our odds of success when we invest after walking a path such as the one I just outlined.
The whole point of careful investing is to reduce risk. The goal is not to eliminate risk. If we must eliminate risk then we should just hold cash. But to seek the higher returns of stocks, we must take on risk. To achieve the highest return possible with the lowest exposure to risk is our ever-present challenge. Meeting the challenge requires good numbers analysis and careful judgment. Computers can help, but they can't do it all.
On a final note, so what if it takes judgment? So what if it takes skill? Are we incapable of developing good judgment and fine skill? I don't think so. We must practice at everything we do, investing included. Some people have more talent than others. Does that prevent us from trying to improve our golf swing, our singing, our painting, our poker game, or indeed our investing? No, it doesn't.
Having a good set of golf clubs won't guarantee your success at golf, but it will help, and moreover, it's necessary. Knowing how to analyze numbers won't guarantee your success at investing, but it will help, and moreover, it's necessary.
