Miscellaneous

27 Follow the trend

Many sectors are affected by the aging population such as health insurance, drug companies, health care delivery… I had a great year in drug companies in 2014 but not that great in 2015.

Common sense is the best way to look at specific sectors and follow with a thorough analysis. As of 09/24/2015, the following were my holdings including sold stocks in my taxable account in 2015.

Health insurance stocks:

Stock	Buy Date	Sold Date	Return	Annualized
AET	10/15/14	N/A	59%	63%
CI	10/15/14	N/A	63%	67%

Video game stocks:

The video game industry is thriving too as we spend a lot of our time in playing video games. It is very expensive to produce a franchise video game, so it will be limited to a few companies. The franchise video games have their product cycle. GLUU produces games for the mobile devices. They have a deal with a Chinese company to dip into that huge market. Game Stop may not be a good one long-term as most games will be delivered on-line by-passing the retail stores.

Stock	Buy Date	Sold Date	Return	Annualized
EA	03/26/15	N/A	23%	45%
EA	03/26/15	N/A	23%	45%
GLUU	01/28/15	N/A	32%	48%
TTWO	10/08/13	01/05/15	59%	47%
TTWO	10/07/13	01/05/15	63%	50%
TTWO	09/11/13	01/05/15	64%	48%

GLUU is more risky than the others and that is why I only had one purchase. The annualized returns are in a similar range.

EA and TTWO are not the largest video game companies. I wish they would be acquired to boost up my profits.

I have two more purchases on TTWO that I gave to my grandchildren and they are not listed here. I bet they are stable and growing companies for the long term. While my grandchildren are playing the games, I hope they know they’re also the owners of the company.

28 Tech stocks in the last 20 years

I tried to use my historical database to test out the NASDAQ 100. The return was great. To illustrate, from 1/4/1999 to 6/6/2001, the annualized return is 54% vs SPY’s 1.6% without considering dividends. Do not ‘wow’ too early. One reason for the high performance is due to the survivor bias. Many internet companies were taken out from the index and/or the database, and hence the performance as a group is deceivingly high.

The following chart is for the popular high tech companies for the selected 10 years. For every one of the following successful high tech companies, there must be many that do not make it.

	1990-2000	2000-2010
	Annualized Return	Annualized Return
Microsoft	940%	-4%
EMC	7500%	-7%
Apple	20%	65%
Dell	8200%	-7%

Average	4000%	12%

The above figures are estimates for demonstration purpose without considering dividends and compounding. Dell has been privatized today. Now, we can draw some conclusions.

· Tech stocks usually beat the S&P500 index. Risk usually pays.

· 1990-2000 are the golden years for tech stocks.

· 2000-2010 are not so good for tech stocks due to the crash of 2000. If it were not for Apple, the return of this portfolio would be negative.

· Except with Apple, it indicates the first ten years (or the early phase) of the tech stocks gave us the best returns. After they become mature companies, they seldom maintain the same growth rates. The worst of the group in the first 10 years become the best after 2000.

Buy when the market does not favor this sector

Interestingly, you should buy when the institutional investors are dumping such as buying Apple in May, 2013 as recommended in my book Scoring Stocks. Ensure they have value first by scoring them fundamentally and allow at least one year for the market to recognize the values.

I reviewed my old blog and found some bargains I described in 12/03/2012. Here is the performance summary. Again, all performance returns are annualized.

The stocks are AAPL, CSCO, INTC, MSFT, XRX, STX, WDC and ALU.

	One year later	Two years later
Ann. Return	84%	59%

SPY Ann. Return	28%	23%
Beat SPY by	200%	157%

Interestingly, AAPL is the weakest performer in both tests. It must start with a high price.

30 Many small fish or a few big fish

Do you want to buy many stocks or just concentrate on a few stocks?

There are advantages and disadvantages for both. Interestingly, the advantage of one strategy is the disadvantage of the other. I’m speaking from my own experiences.

Before 2012, I bought more stocks at smaller amounts than today. Besides diversification, I enjoyed a larger database to monitor my performances on many screens and the metrics I used. Virtual trading could achieve the same performance monitors. However, real trading is quite different as it does not include how we actually trade. I would not learn seriously the lessons from virtual trading such as losing all my money in one stock. We cannot avoid losing money but some can be avoided and/or we can reduce our losses.

From 2012 on, I doubled most my buys except the risky ones. I even place two orders on the same stock with one almost at the market price. For some really good stocks, I even bought 3 times my average purchase.

The changes are due to:

1. I cannot find too many good stocks.

2. I do not have time to follow so many stocks.

3. I find some marginally sound stocks that may not perform and/or they are risky.

It turns out that my total return is better than my previous return and I spend less time in investing.

# Filler: The world is round, honey

My spouse complained I made the wrong turn. I replied eventually we would be right as the world is round. Time wise I was wrong but logic wise I was right.

31 Secular market

In a secular bull market, there is greater profit potential in growth stocks especially the momentum stocks than value stocks. The industrial commodities and oil industries will generally outperform the overall market in a growing economy.

In a secular bear market, value stocks especially the dividend stocks will generally outperform the overall market. When the government lowers the interest rates to stimulate the economy, timing is important to switch between industries that are sensitive to the interest rate. The value of long-term bonds is inversely proportional to the interest rate. A bond with a low yield will depreciate when the interest rates rise as it is better to buy a new bond yielding higher interest.

There are market cycles within a secular market, so trade according to the current phase of the market cycle. However, be diligent to weigh more on stocks in a secular bull market, and vice versa.

Afterthoughts

· My friend Joseph wrote:

My own discipline is to conduct deep research, buying unloved and undervalued stocks in out-of-favor sectors in which I see a catalyst for change in investor perception and/or in the sector or company’s ability to use that change to increase their revenues, market share and margins. I buy the best quality firms anywhere I find them, the less “popular” the area the better (yielding better entry prices,) then hold unless market conditions change, or I find a more compelling investment -- if we are in a secular bull market for example!

But during secular Bears, no matter how exceptional the company, I know their stock can be battered by a general market malaise as well as by a single news item, or event beyond their control. In big "B" Bear markets, people are fickle and will panic at the slightest provocation. So we use the same scrupulous research methodology but we also conduct a daily review of all client accounts and a regular reallocation of assets. Different phases in the market cycle call for different measures.

32 Double down

When you lose 25% on a stock, do you want to buy more, or even double down? Most likely the advice is ‘No’, but there are exceptions. Find out why it is down and check out the arguments about why it might recover. Here are some of my actual experiences.

· I would average down on CAT, or even double down on CAT. I just bought the company and it lost 10%. CAT did not have a good audience in shorting the stock. It would recover when the economy improved. At this price (about $75 in July, 2012) and its low P/E, it could be hitting the bottom. The institutional investors were selling it like hot cakes. [Update: As of 1/2015, it is $84 and the fundamentals are still great except with the high debt.]

You need to be patient as you're swimming against the tide. Wait for two or three years for the economy to return.

· Averaging down is about timing.

Take CROX in the last several years as an example. CROX had a good audience of shorters and it suffered from several temporary setbacks. The chance of losing 50% was about the same as gaining 100% to me at the time I evaluated the company. After one year, it gained over 200% from the bottom. However, averaging down does not always work.

· When doubling down is important. Stay away when the downward momentum is too high and/or there is no good chance of recovering. I had to admit I lost a lot when I doubled down on CROX too early. My 200% gain of CROX did not recover the losses of the trades on this stock due to getting in too early.

When a stock has been doubled, most likely it is not wise to double your buy (or you call it double up). The reward / risk ratio would usually be decreased. There are exceptions. I prefer to “buy low and sell high” rather than “buy high and sell higher”.

Make sure the setback is temporary and it is supported by good fundamentals. When the stock has a potential to go to zero due to fraud or a big lawsuit pending, it would be a fool's game to double down. Companies sue each other, or are being sued by the government all the time. Identify how serious the lawsuits are.

· Again, timing is everything. No one can determine the bottom of a stock constantly, but we can detect the trend via charts such as SMA-50 (Simple Moving Average of the last 50 trade sessions). Analyze the stock you want to double down on by performing both fundamental analysis and technical analysis.

To conclude, there is no “Yes and No” answer. Your success requires you to do some homework (analyzing the outlook and via charts) and sometimes you need some luck. Most of the time, walking away from a loss is better than having additional losses on the same stock.

Even the best investor makes a mistake once in a while. If the mistake is beyond his/her control, it is not a mistake but just bad luck. Forget it and move on. If the mistake is due to poor analysis, learn from it and never repeat the same mistake. In any case, move on and do not be emotionally attached.

# Filler:

· Identify exceptional companies with a durable competitive advantage.

· High taxes have been proven bad for the economy and the stock market throughout our history.

· As Gandhi said, the world has enough resources for all but we're not unselfish enough to share.

33 Institutional investors

Institutional investors include banks, hedge funds, insurance companies and mutual funds. They are important as they move the market, not the retail investors.

You want to follow them closely. When they buy specific stocks, buy the same stocks and vice versa. It is better to be one step before their actions. Due to their large holdings, usually it takes more than a week to finish the trade. Basically this is how day traders make money by jumping onto their wagons. When you see a sudden surge in volume of a specific stock, there is a good chance the institutional investors are trading.

Several sites including GuruFocus.com keep track of the stocks they are holding and their current trades. Finviz.com has similar information. IBD gives higher ratings to the stocks that are held by institutional investors.

Normally the stocks owned by the institutional investors have larger market caps (over 1 billion) and most have stock prices over $10.

Once in a while, their trades are not rational. When you act against them, you need a good reason and be patient.

I took advantage of them using Apple for illustration:

· Recommended in my book Scoring Stocks to buy Apple in June, 2013 (the publish date) while most of the institutional investors were dumping Apple. Apple scored very high in my book then.

· I recommended to sell Apple in my blog in Feb., 2015 when Apple was $132. The profit is about $60 per share from the recommended dates.

· I took advantage of the correction making 12% in 2015 for holding Apple for about 2 months.

34 Adaptive strategy

What is the best metric for evaluating stocks? Most people will tell you P/E. I use estimated earnings (E) and P/E becomes Forward P/E (a.k.a. Expected P/E). Switch it over to E/P for easier to understand, and it is termed Earnings Yield (EY = P/E). However, the ‘E’ is not ‘expected’ which is better to predict future stock value. I prefer EY to be calculated with Forward Earnings and most sites do not provide it but you can calculate it easily.

When the market favors momentum stocks, fundamental stocks even with good Earnings Yields may not work. In this case, I prefer momentum stocks with EY better than average.

EV/EBITDA (obtainable from Yahoo!Finance) is better than P/E as it includes interest, debt and cash. Switch it over and it is True Earnings Yield (my term).

Some may tell you ROI and there is a successful book on ROI.

Both P/E and ROI should not be the only metric as there is no single evergreen metric. That is why most people have poor performance by following them blindly. It is the herd theory: The performance is usually decreased in the longer term when too many folks follow it.

Here is my test on the S&P 500 stocks from April 1, 2019 to July 1, 2019.

I used the top 10 stocks from each sort. Commissions, dividends and spreads are omitted for simplicity. SPY’s return is annualized to 13.8%.

Value parameters

Top 10 stocks sorted by	Best SPY¹
EY in descending order	-251%
Dividend Yield in descending order	-291%²

Opposite of the above

Top 10 stocks sorted by	Best SPY¹
EY in ascending order	6%
Dividend Yield = 0	138%³

¹Beat by % = (Avg. return of 10 stocks – SPY) / SPY

²Including dividend yields for the average 10 stocks and SPY, “Beat SPY’ is reduced to -241%.

³Just randomly picked the 10 stocks that do not pay dividends as there are more stocks with no dividends.

35 FAANG stocks

To many, FAANG stocks define the market. To me, a conservative investor, it is not. For market-cap ETFs such as SPY, FAANG has more weight than other stocks. As a group, FAANG has been very profitable for the last year. To me they seem to be risky today. The following tables summarize them and I’ll check them in a year and/or after September (usually the worst month) to confirm my findings. It is also a case of momentum vs. value.

All the info is available free on web sites such as Finviz.com. All data were based on 8/5/2017. These are for info only and I’m not liable for any errors. Returns are annualized and dividends are not included.

Stocks	Current Price 8/5/17	From 8/5/16 to 8/7/17	From 8/7/17 to 8/7/18	From 8/7/18 to 10/7/18
FB	169.62	37%	7%	-84%
AMZN	173.85	29%	88%	2%
AAPL	156.39	48%	30%	48%
NFLX	180.27	48%	94%	-4%
GOOGL	945.79	17%	33%	-47%
Avg.¹	247.41	44%	50%	-17%
Beat SPY by		214%²	233%	-440%

SPY		14%	15%	5%

¹All averages in this article are estimates.

²Beat = (44% - 14%) /14=214%. Similar to other calculations for “Beat”.

Fundamentals as of 8/5/2017

Stocks	P/E	P/E FWD	P/S	P/B	Debt/ Eq.	Sales Q/Q	EPS Q/Q	ROE
FB	37	26	15	7	0.00	45	69	23
AMZN	16	14	6	4	1.11	2	18	27
AAPL	18	15	4	6	0.73	5	10	35
NFLX	221	90	8	25	1.55	32	58	13
GOOGL	34	24	7	4	0.03	21	-28	14
Avg.	65	34	8	9	0.68	21	25	22
Beat SPY ¹	164%		277%	186%
SPY²	25		2	3

¹Very rough estimates.

²Most fundamental metrics are from other source than Finviz.com, so there may be small discrepancy.

Technical as of 8/5/2017

Stocks	SMA50%	SMA200%	RSI(14)	52-week height	Short%	Insider Trans.
FB	8%	23%	67	-3%	1%	-86%
AMZN¹	35%	8%	51	-6%	1%	0%
AAPL	5%	17%	63	-2%	1%	-31%
NFLX	10%	26%	59	-6%	6%	-69%
GOOGL²	-2%	8%	41	-6%	0%	0%
Avg.	11%	16%	56	-5%	2%	-37%
Beat ³ SPY by	1020%	173%	-9%

¹Recent double top. Bearish.

²Multiple top.

³Very rough estimates.

The two SMA (Simple Moving Averages) technical metrics are positive.

Summary

As a group, FAANG is fundamentally unsound but technically sound compared to SPY. I said the same on the market. As suggested, use trailing stops if you own any of these stocks. When they turn to be technically unsound, this is the time to exit. They could stay in the current valuations for a long time. However, when the institutional investors are dumping them, they will fall very fast and steep. SMA-20% would be a good indicator for an exit. NFLX is the most fundamentally unsound.

The rosy pictures of these stocks have been priced in. I recommend you sell the stocks with P/E over 35 unless you have a good reason not to. It is insurance to protect your profits. Even if they still rocket higher, you still will have a good sleep. When any bad news occurs, it would rocket back to earth. Newton’s Law of Gravity?

If you are one of the lucky owners of these stocks, use trailing stops (i.e. stops from the current prices instead of your buy prices) to protect your profits.

On 1/2020, most of these stocks are still fundamentally sound but technically sound.

Summary

This book is lengthy with a lot of information on strategies. I have used some of them based on the current market conditions and my own requirements. I include some I believe they have values to some investors. For just a moment, forget everything you’ve learned here and elsewhere on strategies and use your common sense to see whether the following makes sense to you.

· Evaluate your requirements and select the strategy or strategies you want. Test them thoroughly on paper before committing real money.

· Need to check recent performance of your screens. There are no evergreen strategies that I know of. This is why many gurus have failed in 2015 (and so far in the first part of 2016) as the market changed.

· Some strategies perform better in up markets and vice versa.

· Stick with my three-step process: Market Timing, Screen Stocks and Evaluate Stocks.

When the market is risky, do not buy stocks. “Strategy” is the first part of Screening Stocks and the second part is when and why to sell stocks. You need to provide exit strategy such as stop orders to reduce further losses.

Some strategies perform better for holding stocks short term (3 months or less), while some (most based on value) perform better in the longer term (12 months or more).

Some strategies perform better in a specific stage of a market cycle. Select several strategies for paper trading. Use the one that performs best in the last month or two. It could continue the performance in the coming month. In any case, use stops to protect your investments.

Debunk Myths in Investing

Thursday, March 26, 2020

Investing Strategies