Are You an Active Investor in the Stock Market?

[chroot]

We have a huge variety of very intelligent and talented people here, so I figure it's a good place to discuss to the stock market. It's an interesting time in the market right now, as it becomes more and more clear we're headed for a bear run in the near future.

Anyone else here an active investor? What are your thoughts on the economy?

- Warren

 

[En_lizard]

stock market investing is a money making job, right?

 

[chroot]

It can be a profession in its own right, but most people participate in it as amateurs, as a means of making secondary income.

- Warren

 

[J77]

stock market investing is a money making job, right?

If you've got the money to invest in the first place...

 

[Jimmy Snyder]

What are your thoughts on the economy?

My wife and were advised by Bear Stearns to buy, but Merrill Lynch said we should sell short and that's what we did. But the stock went up so we had to drop our shorts and go with Bear Stearns.

 

[Astronuc]

We have a huge variety of very intelligent and talented people here, so I figure it's a good place to discuss to the stock market. It's an interesting time in the market right now, as it becomes more and more clear we're headed for a bear run in the near future.

One can certainly make money as an investor, as opposed to being a broker, but one has to do thorough research on the market, the particular sector, and the particular company.

Back in '98, I told a friend to invest in NSC and CSX. During the following year, the share prices just about doubled. He decided to stay in the tech sector which had about doubled or tripled during the prior year or two. Then the bubble burst, and the NASDAQ and tech sector took a nose dive. He lost 70% of his investment, as opposed to doubling it.

Anyone else here an active investor? What are your thoughts on the economy?

I've been in and out. I prefer less risky investments these days.

There is a lot of volatility, and unfortunately, there are those who get access to information that most investors do not.

The market and the economy is highly leveraged, and probably a significant amount of debt will not be repayed. Default rates on mortgages and other loans are at an all time high.

Merrill Lynch just added $8 billion in writedown. Not a good sign.

The NYSE and Dow rebounded yesterday on speculation of more action by the Fed. Also, not a good sign. There is more concern about recession than there was a month ago.

And the Bush administration is still asking for $billions on a war that can't be won.

 

[turbo]

I'm investing in funds (through a self-directed IRA) that hold a wide variety of domestic and/or international stocks. Some are more volatile than others, but they tend to correct for one another over time. The stock market has increased in value over time, so I tend to just hold tight during downturns.

We certainly seem to be headed for a bear run, except in the energy market, where high oil prices due to ME instability will enable some serious price-gouging and record profits.

 

[Astronuc]

Oil and gas leases/trusts are doing well. There are a few companies that specialize in those. The ROI can be quite substantial.

 

[chroot]

IMO, there's no question we're in the beginning of a protracted bear run. The Dow transportation index rolled over with a convincing 50- and 200-day moving average "death cross" in mid-September. Those of you who subscribe to any portion of Dow theory know what that means -- fewer goods making it to customers means businesses upstream must be suffering.

The SPX also came very close to its own death cross in early October, but has bounced up and drifted back down, making a very distinct bearish inverted cup-and-handle formation. I'm not really one to believe technical analysis in vacuo, but with all of the other associated signs (dollar value declining, housing market killing banks, oil at record highs), I'm pretty sure it's meaningful.

The market has also been incredibly twitchy lately (just look at what has been happening to companies in relation to their earnings, good or bad), and IMO has only barely survived a couple of massive sell-offs in the past few weeks. The bulls are keeping the roof up with modest buying pressure, but they're getting tired.

I've been short the financial sector since early October (when their volatility all simultaneously tightened) and have, well, so far made a killing on the short side.

I'm not a financial advisor, and my advice is essentially worthless, but... I would advise anyone who invests in mutual funds to stop investing in mutual funds. I would advise anyone who invests in long large-cap positions to stop investing in long large-cap positions. I would advise anyone who has a significant amount of money in a 401k to reallocate most of it to cash. (Your fund managers cannot short the market, and you're going to get beaten up pretty badly if we have another year of bearish times.)

Good luck to all,

- Warren

 

[chroot]

By the way, the futures market is putting the chance of a 0.5% fed cut at 2%, but I'd personally put it at more like 50%. Be careful with any shorts into next week.

- Warren

 

[EnumaElish]

Healthcare.

 

[chroot]

Healthcare.

What about it?

- Warren

 

[EnumaElish]

I think as a sector of the economy it offers excellent long-term value.

 

[chroot]

I think as a sector of the economy it offers excellent long-term value.

Is this just sentiment, or have you done some kind of valuation analysis?

- Warren

 

[Greg Bernhardt]

I put some money into KMGB and then after earnings it dropped like 40%. Now I am in the dog house big time. :(

Stocks I watch every day are: ATI, TIE, NVDA, AAPL, GOOG, BIDU, RIMM, PTR, DRYS

 

[chroot]

I put some money into KMGB and then after earnings it dropped like 40%. Now I am in the dog house big time. :(

Ouch, Greg.. I'm sorry for your loss. Maybe it's about time we had a good thread going here. So you invested all your capital in one position, didn't use a stop, and are now stuck with a dog that don't hunt, eh?

Don't take any offense, but I'd say you have a lot to learn about capital management, valuation, and... the use of stops.

- Warren

 

[Greg Bernhardt]

Ouch, Greg.. I'm sorry for your loss. Maybe it's about time we had a good thread going here. So you invested all your capital in one position, didn't use a stop, and are now stuck with a dog that don't hunt, eh?

Don't take any offense, but I'd say you have a lot to learn about capital management, valuation, and... the use of stops.

- Warren

Yeah, but many times I'll see a stock bounce back. Who can predict a bottom? So it's hard for me to use stops and lock in a loss. Guess I'll have to wait it out and hopefully the stock will creep back up with the new few earnings reports.

 

[Ronnin]

It's nice to see a little financial talk here, I don't feel so lonely now. If anyone is interested in doing some theory testing and are a bit weary of committing real money I use http://www.investopedia.com/. You can play with fake money and they have a lot of good investment and trading info on there. Market is heading for a major correction, but I have been feeling that for about 6 months now and it has yet to roll over like I thought it should have. And oil, I just can't see how the market keeps absorbing these major bumps in and not be trading lower. Does Q4 just look that good?

 

[chroot]

Yeah, but many times I'll see a stock bounce back. Who can predict a bottom? So it's hard for me to use stops and lock in a loss. Guess I'll have to wait it out and hopefully the stock will creep back up with the new few earnings reports.

Again, I hate to say it, but this is pretty much a textbook example of what not to do... Many people ignore the signs of a retreat, don't use stops, and end up riding a stock down until it's halved in value. Then, as selling pressure mounts and drives the stock to what they feel are shockingly low prices, they finally succumb to panic and sell quite near the bottom, right before it begins moving back up. All of the people who lost money in the dot-com bubble lost money because they made these kinds of decisions.

You should never end up sitting on a non-performing asset. Ever. If you ever find yourself in a situation where you're "waiting out" a downturn, you have already made some serious mistakes. Unfortunately, once those mistakes have been made, you're screwed. There often is no good escape plan once you've lost a significant amount of your capital in one trade, so you should never permit that to happen. "Waiting it out" means you've effectively lost that capital for the duration of the wait, when it could have been making money somewhere else.

Some basic rules:

1) Never permit any single trade from losing 3% of your capital, or perhaps 5% if you are willing to accept greater risk exposure. Set stops when you buy the stock, and if the stop is executed, accept that you made a (small) mistake and move on. Putting in a properly-priced stop order is an instrumental and necessary component of customizing your risk exposure.

2) Because you generally cannot permit more than 3% capital loss per trade, you almost necessarily need to be in multiple positions at once. (Otherwise your stops will be very tight and you'll probably get stopped out frequently.)

3) Never take only one view of the market. Hedges are a critical part of mitigating risk. The reason mututal funds almost always underperform the market is because they are forced (via regulations and rules) to always take one view of the market.

Again, sorry to hear about your loss, Greg. If your stock rebounds, get out of it and take a break. Don't get back in until you've read more and have a more detailed plan of action.

- Warren

 

[Greg Bernhardt]

1) Never permit any single trade from losing 3% of your capital, or perhaps 5% if you are willing to accept greater risk exposure. Set stops when you buy the stock, and if the stop is executed, accept that you made a (small) mistake and move on. Putting in a properly-priced stop order is an instrumental and necessary component of customizing your risk exposure.

Lets take AAPL as an example. End of July it peaked at 146. Mid August 117. Now two months later it's at 182. If I exit at 3%-5% and move on I would have lost on a huge opportunity.

 

[EnumaElish]

Is this just sentiment, or have you done some kind of valuation analysis?

- Warren

Based on 401k index growth/valuations over the last few years (not individual stocks).

 

[EnumaElish]

I would advise anyone who has a significant amount of money in a 401k to reallocate most of it to cash. (Your fund managers cannot short the market, and you're going to get beaten up pretty badly if we have another year of bearish times.)

What is your time horizon here? Most elderly people probably have bulk of their 401k's in the money market. So that leaves the middle aged and younger, and my guess would be the market will have had sufficient time to correct any bearishness by the time they get to retirement.

Plus, why cash, and not, say, bonds?

 

[Greg Bernhardt]

Plus, why cash, and not, say, bonds?

would the dropping dollar value factor in?

 

[chroot]

Lets take AAPL as an example. End of July it peaked at 146. Mid August 117. Now two months later it's at 182. If I exit at 3%-5% and move on I would have lost on a huge opportunity.

Wrong!

If you bought in July, and promptly got stopped out, you would have taken your money and put it somewhere else that delivered performance through the entire month of August (say, in shorting the craptastic financial market that was causing those low AAPL prices to begin with). You would have made money all through August, rather than just sitting on your thumbs. Finally, after the smoke cleared after the margin call day in mid-August, you could have jumped back on the AAPL freight train and made a small fortune in the month of September, too.

If your entire perspective on the market is a single stock and what that single stock does -- over a week, a month, or a decade -- you are going to make very little money, if you make any at all. Put it this way, Greg: you're now well aware that your "wait it out" strategy is wrong, so stop defending it and learn how to better manage your investments next time around.

- Warren

 

[turbo]

would the dropping dollar value factor in?

Certainly a factor. If liquid assets (dollars) devalue, it will take more of them to buy a fixed asset, and if the fixed asset appreciates over time, a later bounce in the value of the dollar may present an opportunity for profit-taking before the market corrects for the revaluation.

 

[Astronuc]

I think as a sector of the economy it offers excellent long-term value.

Perhaps as a sector, but one has to look at individual stocks.

How about Wellcare?

CHICAGO (MarketWatch) -- Shares of WellCare Health Plans were hurting Thursday, losing as much as 70% after scores of federal and state agents raided the health insurer's Florida headquarters.

The acting U.S. Attorney for Middle Florida announced the raid on Wednesday, saying in a statement that agents from the Federal Bureau of Investigation, the U.S. Heath and Human Services Department and the Florida Attorney General's Medicaid fraud-control unit all participated in the execution of a federal search warrant at WellCare's (WCG 42.67, -72.50, -62.9%) offices, in Tampa.

In a brief statement posted to the company's Web site, WellCare Chief Executive Todd Farha said that the company is cooperating with investigators: "We operate in a highly regulated industry and are committed to full compliance."

He added that "all essential services remain operational and uninterrupted."

WellCare was down almost $73, or 62.3%, at $42.41 in midday action after scraping as low as $35 earlier. On Tuesday, it hit its 52-week high of $128.42.

Ouch!

 

[chroot]

Based on 401k index growth/valuations over the last few years (not individual stocks).

You have to be kidding me. Behold, the S&P healthcare SPDR versus the whole S&P500. It's a total dog! You'd have made 40% more over the past 5 years just by investing in the S&P!

http://finance.google.com/finance?c...00&chddm=490705&cmpto=INDEXSP:.INX&q=AMEX:XLV

- warren

 

[Art]

I play around a bit both with real money and at MSN's/Motley Fools CAPs site where you can try to beat the market and the other players. CAPs is a great place for investment ideas as you can look at the individual players' performance rankings and so weight the value of their advice based on their actual performance.

They use the S&P 500 index as a benchmark and the idea is to do better than that which btw 80% of professional fund managers do not!

They record tips from professional market commentators such as Jim Cramer (he's in the 79th percentile) so you can compare your performance against theirs.

I'm in the 94th percentile myself mainly because I take the advice of the players whom I rate on board, many of which have an 80%+ accuracy rate, before tipping stocks .

Many of the people there actually work in companies they comment on or in the sector and so have far more knowledge than it would be possible for the average investor to glean without an inordinate amount of time and effort.

Some of the analysis are really excellent. As an example there's one guy works in the real estate business who provided a superb detailed piece on the prospects for home builders. Which ones would fail, which will come out of the current mess strongest etc. Definitely an opportunity to make money in that sector in the future though too early to take a long position yet.

At the moment companies feeding the growth of the emerging economies are strong. Some ADRs are definitely overpriced but with a lot of new wealth in places like China chasing relatively few public companies it is likely the bubble will continue to grow in the short term especially for those companies feeding the raw material into China's manufacturing plants. It won't last for ever but as they say 'make hay while the sun shines'.

 

[russ_watters]

What is your time horizon here? Most elderly people probably have bulk of their 401k's in the money market. So that leaves the middle aged and younger, and my guess would be the market will have had sufficient time to correct any bearishness by the time they get to retirement.

Plus, why cash, and not, say, bonds?

I'd agree with this - and you're around 30, aren't you, warren? A 401k is, by definition, retirement savings and should not be played with in this way. Mutual funds in a 401k for a 30 year old should be bought with the intention of holding them for 20 years or more.

Anyway, I do see the possibility of a bear market, but I think if it were going to happen it would have happened by now. The housing market probably hasn't bottomed out, but the sub-prime mortgage fiasco probably has. And with the fed relatively aggressively cutting interest rates, I think that they may well prevent the bear market that we'd be in right now if they hadn't cut rates after that big drop a couple of months ago. Looking long-term, we're four years removed from the bottom of the previous bear market, but only 15% (in the S&P) above the beginning of that bear in 2001. That implies to me that the stock market is not overvalued and will probably go up for a little while longer.

 

[russ_watters]

One can certainly make money as an investor, as opposed to being a broker, but one has to do thorough research on the market, the particular sector, and the particular company.

Before I bought my house, I had a little portfolio of tech stocks that did very well for me. For a while, I was very in-tune with what was going on in the computer industry and made a killing (percentagewise - I didn't actually have much money in) on AMD during the 1ghz race. The computer industry is, I think, a unique opportunity for investors due to the active rumor mill pursued by the fanboy culture of computer geeks. The companies even play to the rumor mill and their press releases gain far greater scrutiny with the geeks than those in other industries. The geeks predicted a good year ahead of time (before the Athlon was even released) that AMD was going to win the 1ghz race and drive Intel into a performance wall that their chips couldn't break through for another year after that.

Riding product release and technology cycles in an industry you know well can be a good way to gain an edge in the market. For short term (to me, anything under 5 years is short term) investing.