Debunk Myths in Investing: Book 3 Section IV: Experiences

13 Trade experience in 2014

Several lessons from my transactions in early 2014:

· Tax is part of the total return as defined as:

Total Return = Appreciation + Dividends + Covered Calls – Taxes – Inflation

Collection from Covered Calls are only applicable if I use it. From the current tax laws, I should be eligible for zero Federal tax on long-term capital gains as long as my tax bracket is 15% or less. I acted accordingly. However, my contribution to Medicare boosted up. Check out the current tax laws.

This year I have sold several big winners so far including BSX, CAMP and CSCO. The first two have returned over 100%. I did not sell them last year as my income bracket was higher after I converted some Rollover-IRA to Roth IRA.

· Sell half of the stocks that you do not like.

I did sell half of LF and half of LCC in 2013. Both were profitable then. They were going worse so far this year. LF is now losing about 30% while LCC (after merging with AAL) is over 150% return. Anyway I have cut down my exposure to these two stocks to half.

· Overbought.

AAL was overbought for sure. From Finviz.com, its RSI(14) is about 65%. It may be peaking too with SMA-50% = 20% and SMA-200% = 61%. However, I have to wait for August in order to qualify it for the long-term capital gain, which is virtually zero Federal income tax for me this year. It could be a mistake for me if the institutional investors dumped it before August.

I still liked the forward P/E of LF at 13. It seemed their new product could not compete with iPad.

AAL’s forward P/E was at about 7 but the debt was high.

· Over compensating its officers.

FBRC had granted too many shares to its officers as revealed by Finviz.com. I unloaded some quickly.

· Correction happened.

Bought several stocks during this correction. Need to wait for another month to see how they perform.

· From my book “Best Stocks: 2014, According to Me”:

The stock list of over 130 stocks beat S&P 500 by 142% between 12/16/13 to 02/19/14. The Small Cap list of 9 stocks beat S&P 500 by 675% (not a typo) for the same period. They may not be sustainable in the future. I did buy some stocks from the list.

· I did buy ARTX from the Small Cap list of the above book.

It went down 12% very fast. However, on 3/3/2014, it went up to 24%. A swing of 36% in a month or so! A guru asked us to have a 10% stop loss and I would not see the 24% gain if I followed his advice.

As of today (3/7/14), it went up by 74% since I bought it on 1/24/14.

I looked at the fundamentals and did not find anything special (so it must have been my good luck). TheStreet.com did an article and found some positives and some negatives.

There were several sell orders from insiders. However, their amounts were negligible compared to the number of shares they hold; there is an exception that the sell order of about $400,000 by the CEO last Dec. at 2.44 (today’s price is 5.45). It seems the CEO did not expect the stock price that high.

I normally do not buy stocks with a market cap of less than 150 M and ARTX was 50 M. It appeared in two of my short lists (Best-All-Around and Small Cap) in my book “Best stocks 2014, According to Me”. I looked for a stock with small cap again in March 3, 2014, and I could not find similar stocks. It could mean that there were fewer bargains in small cap stocks in March, 2014.

ARTX was bought in the wrong, taxable accounts. In today’s rising market (as of 3/14), I did not have enough short-term losses to offset the short-term gains of ARTX.

FUEL in the battery industry similar to ARTX has a better run. Most high tech companies are building better mouse traps. A better technology is being developed at MIT and it could replace all the current batteries in about 8 or so years.

On 3/25/14, it was up 50% in one day due to an article from Seeking Alpha and then next day it lost about 15%. It turned out to be a ‘pump-and-dump’ article.

· My orders on some stocks were not executed and they skyrocketed. The only way to buy them is using market orders. My new policy is to place two orders, one market order and one .5% less than the current price if I really like the stock.

14 The scents of a winner

During the beginning of Feb. 2014, I sold several winners expecting to pay zero in Federal tax this year. Besides tax considerations, I expected a correction was coming.

I sold the following long-term gainers: MSFT (37%), CSCO (48%) and CAT 10%. As a group, they beat the S&P 500 index by a small margin.

The three sold winners are BSX, CAMP and USNA. I bought BSX (138% return) two times without looking at the fundamentals at all. I try to find any common denominators in these two big gainers: USNA (99%) and CAMP (282%).

Here is a table comparing the two. The metrics are around the time I bought the stocks.

	CAMP	USNA	Average
Return	282%	99%
Bought on	12/24/12	01/28/13
Sold on	01/08/14	02/12/14
Days held	380	380	380
Screen	CAO	BF

Fundamentals
Expected E/P	39%	16%	28%
Earning growth	39%	16%	28%
ROE	40%	32%	36%
Total debt		0%
Short %	5%	28%
Technical
SMA200%	13%	-10%
RSI(14)	41%	50%	46%
Subscription
Zacks	Average	Average	Average
IBD	Best	Average-
Fidelity Analyst	Average-	Best
Blue Chip Grow	B	A	B+

Score
My Score	46	26	36
P-Score	3	3	3

Explanation

I leave out blanks in the average column where there is no common denominator. It is too small a data sample to draw a conclusion compared to my usual monitors.

Remember these metrics are for a long-term holding of stocks (for me it is one year and one day).

· Screens.

Both stocks had been selected from screens that have been proven winners. BF is my bottom fishing screen. CAO is my screen to search for candidates to be acquired.

· Fundamentals.

Both have pretty sound fundamental metrics. Expected E/P (P/E in reverse), Earnings Growth and ROE are above their respective average.

Short % is good if it is less than 10%. When it is above 25%, a short squeeze may be possible. The shorters of USNA made the wrong decision apparently.

· Technical.

Technical indicators are great for spotting trends, but not in spotting the bottom. When you hold the stock for a year, look for long-term trend such as SMA-200.

· Expert advice.

As in the table, all are not conclusive except the Blue Chip Growth’s Cash Flow grade; Blue Chip Growth is no longer free.

· My Scores.

I have two scoring system. Both stocks exceeded the passing grade (15) by a wide margin. “P-Score” is described in my book Scoring Stocks (passing grade is 2). “My Score” has been enhanced with the subscriptions services I am using.

SMA-200 for CAMP. Soucre: Fidelity

It is easier to use Finviz.com that has SMA-200%.

Update

As of 4/2014, CAMP has had a big plunge since I sold it. Lucky timing for me! I believe no stocks should double in a year; I did have TTWO that had been increased the stock price 4 times for a few years. CAMP had returned 280% in just over a year. There are a few rare exceptions such as buying Apple and Netflix after their IPOs. I bought CAMP back after the big plunge.

15 More hints

· If you are a value investor and can afford to wait for 6 months or so, find stocks with low P/E preferably. If you are a momentum investor, buy a stock with price trending up, but do not it too long as momentum may change direction.

· A good management can adapt and turn around a bad situation. If you do not have a visionary leader, the company will not do well. Steve Jobs had good vision.

· For huge profits, invest in small companies that do not pay dividends as they need to plow back all income to research and development. It is too risky for me to invest in penny stocks though.

· I prefer companies that have a good niche such as a new technology, a new drug, etc. The best time to buy is when the insiders are not restricted to sell their stocks (about 6 to 12 months after the IPO). By that time, the vision of the management and the marketability of the products and/or services are clearer. Most likely we have missed Microsoft, Google, Apple and Wal-Mart in that stage. However, in every decade or so, we have at least one such company.

· At one time, I bought stocks at 2% less than the market prices as most ‘bargain’ investors do. However, this strategy does not work for many rocket stocks that do not take a breather.

#Filler: Modern Crusade

Are the wars in the Middle East modern crusade? We should respect others and let them fix their own problems. Which religious books teach us to kill?

16 The power of correlation

If your friend says your baby is beautiful, it could be the act of political courtesy. However, if many strangers say the same, most likely it is true. It is the same for stocks.

If several subscriptions say the same thing, then most likely the stock would be a winner. Sometimes, it is just a self-fulfilled prophesy.

To illustrate, one service publishes their top 50 stocks. I entered the 50 stocks to a watch list in another reputable subscription service. Sort them with the ranks. Pick the top 5 stocks and do my own evaluation.

The following is my result doing this correlation of two subscription services. It is from 1/15/2014 for about 35 days. All returns were annualized. It is for illustration purposes only.

All 50 stocks

Select top

5 stocks

SPY

Return

39%

124%

-3.87%

Beat SPY by

1,108%

3,304%

Stocks	Return
URI	63%
GMCR	572%
MTW	186%
PII	-74%
TSCO	-127%

Avg.	124%

There is a very good chance that it is a winner if the market is not risky and it passed my evaluation.

If I selected the top 3 instead of the top 5, the return is even far, far better and there would be no losers. Why do most strategies always work after the fact or they only work on paper?

17 A guru’s misadventure

The following happened to a guru but it could happen to any investor. Bought a stock after a lot of research and watched it plunging. Sold it and watched it soaring. It is an example of the worst stock timing. I review it as a good lesson to learn from. The name and the dates were not revealed to protect the innocent.

· The stock is Bed and Bath.

I have mentioned retails and restaurants appeared to be easy businesses but actually are very tough businesses to make profits. If you kept track of the last 10 top retailers, you should find a very few still standing. The rest went bankrupt, merged or were acquired.

You’re better off to avoid this sector unless you have a good reason such as Best Buy after its big plunge in 1/2014.

· I do not agree with Peter Lynch’s method in finding gems in a mall. Following Peter’s rule, this guru shopped with his daughter and found it was a great business. Do not be confused with a good place to shop and a good place to invest. Do not invest in the company solely because you love their products you love. If the shop gives services or stuff free continuously, it may not be good for a potential investment.

The less services the company give, the more profitable they would. It is not true all the time. Circuit City went bankrupt due to stupid service such as allowing you to return your big TV after the big game. Most airlines make good profit by charging most services that used to be free. Most supermarket compete with low prices.

· Give one point for the guru in evaluating the company thoroughly. I bet he did not evaluate what is the entry point via technical analysis.

· Before you buy a stock, you need to have an exit strategy: How much do you want to gain and how much can you afford to lose.

· The stock market is controlled by institutional investors. Sometimes they are not rational. When they exit at the same time (indicated by the volume of the stock), you need to follow them (better to be a little ahead of them). Without the above two actions, your loss could turn into bigger losses.

· The guru sold the stock when it rose a little after many nights of lost sleep and his reputation was almost ruined. He was controlled by his emotion, not by the reason to sell the stock.

· This stock rose in price and made big gains recovering all his losses and eventually turned a small profit. When the P/E looks like it is improving, you do not want to sell. When the ‘P’ is lower and the ‘E’ is the same, then the stock becomes better valued.

In addition, one reason the stock was plunging was Amazon.com. It was invalid. Bed and Bath does not compete with Amazon.com directly: Most of their products are low-priced and you do not save that much. In addition many items such as chairs and tables are bulky to ship.

· The other lesson is ‘Buy Low and Sell High’ is better than ‘Buy High and Sell Higher’.

I learned a lot from this guru. It is a great real-life example. I give him credit as we learn from this and hopefully we will not repeat this common mistake.

Personally I do not often have this kind of problem. First I diversify, so one bad loss will not cause me any loss of sleep. Secondly, I sell it and never look back. Thirdly, I do not follow Peter’s mall way to find stocks as many companies do not sell their products in the mall.

# Filler:

On 1/16/2014, Best Buy was down 28% in one day after 160% gain in a year. It demonstrates:

· Newton’s Law of Gravity or ”What goes up must come down”.

· It is better to ‘Buy Low and Sell High’ than ‘Buy High and Sell Higher’.

· Once more, retail is a tough business.

· The virtue of diversification.

18 My misadventure

This is my misadventure of buying ARTX. The exact dates and returns are not important for illustration, but the few lessons are.

Small stocks are volatile

I bought this stock two times. It has a small capital cap around 50 M that I normally do not touch. The buy decision was based on my book “Best Stocks in 2014 According to Me”. It was down by 15% fast. As of 5/31/2014, it is up by 44%.

Lesson #1. If I followed most experts using a 10% stop loss, I’ll never see the better days of this stock. After the plunge, it recovered and gained about 30% profit.

Lesson #2. There are a lot of gems in micro-cap stocks if you look hard. They are not followed and/or researched by analysts.

Pump and dump

The stock moved up by 50% in one day due to an article in Seeking Alpha. I was up about 90%. I did not sell it for tax reasons. Then it plunged.

http://seekingalpha.com/article/2107833-arotech-corp-a-lithium-battery-stock-ready-to-quadruple-16-price-target

Lesson #3. Buy the volatile stocks in non-taxable accounts unless you have a short-term capital loss to offset the gain.

I sold my YRCW for about 100% gain from my retirement account. I postponed selling the same stock in my taxable account due to not willing to pay short-term capital gain taxes. I ended up selling it for about 30% loss and of course I did not have to pay taxes. LOL. Do not let the taxes affect your stock trading.

Lesson #4. To me, most likely it is a “pump-and-dump” manipulation. Micro cap stocks can be manipulated easily.

19 A tale of two portfolios

The first portfolio (20 stocks) was described in my SA article Amazing Returns more than a year ago and the second portfolio (15 stocks) was described in my book, Best Stocks 2014, According to Me, and was also mentioned in one of my comments in the article.

The first portfolio consists of Banner (NASDAQ:BANR), Key Tronic (NASDAQ:KTCC) (2 times), Questcor Pharmaceuticals (NASDAQ:QCOR), The Active Network (NYSE:ACTV) (acquired), Iamgold (NYSE:IAG), Advanced Emissions Solutions (NASDAQ:ADES), Nacco Industries (NYSE:NC), Velti (VELT, delisted), Alpha Natural Resources (NYSE:ANR), Apple (NASDAQ:AAPL), Citigroup (NYSE:C), Deckers Outdoor (NYSE:DECK), Microsoft (NASDAQ:MSFT) (2 purchases), Alcatel-Lucent, S.A. (NYSE:ALU), Dollar Tree (NASDAQ:DLTR), Caterpillar (NYSE:CAT) and Boston Scientific (NYSE:BSX) (2 purchases).

The second portfolio consists of Universal Insurance Holdings (NYSE:UVE), Gray Television (NYSE:GTN), Esterline Technologies (NYSE:ESL), Johnson Controls (NYSE:JCI), Nexstar Broadcasting Group (NASDAQ:NXST), Pozen (NASDAQ:POZN), China Lodging Group (NASDAQ:HTHT), CVS Caremark (NYSE:CVS), Home Inns & Hotels Management Inc. (NASDAQ:HMIN), Arotech Corporation (NASDAQ:ARTX), Canadian Solar (NASDAQ:CSIQ), Jazz Pharmaceuticals Public (NASDAQ:JAZZ), Motorcar Parts of America (NASDAQ:MPAA), Micron Technology (NASDAQ:MU) and Och-Ziff Capital Management Group (NYSE:OZM).

The first one has an average return of 53% beating SPY's (an ETF simulating the S&P500 index) 25% by 112% from 1-4-2013 (the publish date of the article) to 1-4-2014, a year later.

The annualized return of the second portfolio is 31% beating SPY's 16% by 94% from 12/16/13 (the publish date for the book) to 2/15/14 (2 months later). The choice of the end date will be explained later. Dividends are not considered in all calculations.

The second portfolio is one of several short lists from the 135 stocks recommended in the book. The best short list is from Small Cap which has an annualized return of 98% beating SPY by 512% for the same period. It consists of the following nine stocks: Arotech, Consumer Portfolio Services (NASDAQ:CPSS), Entravision Communications (NYSE:EVC), Gastar Exploration (NYSEMKT:GST), Dot Hill Systems (NASDAQ:HILL), Lee Enterprises (NYSE:LEE), MTR Gaming Group (NASDAQ:MNTG), RAIT Financial Trust (NYSE:RAS) and Star Gas Partners (NYSE:SGU). Recently, small stocks are not doing as good as before.

The returns are pretty good, but they are not in the discussion here. I would like to see what we can learn in investing.

You cannot learn from someone you do not respect

There was a lot of criticism and doubt in my original article. I welcome all of them as I can learn from the comments and in how I should be more defensive in writing. However, some do not make a lot of sense.

The short duration would boost my annualized returns. Yes, the annualized return of a week is not meaningful, but a month is, at least for 20 stocks. The annualized return is a two-edged sword and it can amplify the losses too.
Sometimes I do not have a choice such as comparing the performance of my momentum portfolio. It has an average holding period of one month. Now, I compare the performance of the 20 stocks for one full year.
I could have skipped my losers. They were all real trades within the specified period in my largest taxable account. Actually, I skipped some huge winners that missed my criteria by days. Now, I use the publish date of the article as the start date.
Today's low commission should not be a concern even for 20 stocks. My commission is $5 per trade and it represents a negligible percent of the trade.
I did have a loss at one time on my second portfolio. There was nothing to be concerned with. If you believe you never want a loss, do not invest and let inflation eat up your investment. The yardstick is whether you can beat an index such as the S&P500.

Survivor Bias

VELT was delisted and ACTV was acquired. I used my sold price for VELT and the proceeds I received from ACTV to calculate my return. Hence, the return is not precise for simplicity sake.

When you test a strategy, your return could appear better than the reality. In this case, VELT and ACTV are not selected in your test as they've been taken out of your historical database; few handle this bias.

Usually, the delisted stocks lose a lot of value and the stocks being acquired gain a lot of value, so they would balance out the effect. In reality it is not. There are more stocks delisted and/or bankrupted than the stocks being acquired. In addition, usually their average loss is more than the average gain of the stocks being acquired.

Countries and sectors

Usually, I do not trust the foreign countries that do not have a regulator similar to our SEC, especially on small stocks. VELT, a loser here, could be one.

I outlined in my books several sectors to be cautious of, including miners and ANR and IAG belong to this sector.

Size of purchase

I had double a buy on BSX and a low position on VELT. I did not place a large buy on ALU, a winner but risky at the time of evaluation. I gained some and lost some. In general, you want to double or increase the purchase when the appreciation potential is good with an acceptable risk.

Fundamental analysis works

Most of the 20 stocks scored high in my two scoring systems (one using simple metrics available to all). Value stocks need time for the market to realize their values as they're swimming against the tide. The short-term return usually does not mean anything, though it does this time.

The second portfolio is intended for short-term swings (3 months for me).

Fundamental analysis does not work

It is not contradictory. It depends on what the stocks are intended for. The second portfolio is for short-term swing trading. I used fundamental analysis to the minimum. There were about 135 stocks recommended in the book and I did not have time to evaluate each stock fundamentally in detail. If I did, the information would be obsolete. I provided a simple method in my book on how to do fundamental analysis.

These stocks are selected from the strategies (screens, subscriptions and screening recommended stocks from the subscriptions) that have been proven recently. They're described in my book The Art of Investing which covers most of my investing ideas. When you select the stocks based on momentum, do not hold them too long, as momentum usually does not last longer than 3 months.

Account

I have all the 20 stocks in the first portfolio in my taxable account and most of the stocks in the second portfolio in my retirement accounts.

I placed ARTX in a taxable account by mistake. I did not sell it when it gained more than 50% in one day due to the tax consideration.

Holding period

It is targeted for over one year for the first portfolio so they are eligible to the low tax treatment on long-term capital gains. For one year or two, my Federal tax on a huge capital gain was virtually zero taking advantage of a provision in the tax law.

I use two months for the second portfolio, as this is the time I start to sell the stocks for the short-swing portfolio. I compare different periods and this is the choice. In actual trading, I take advantage of their weekly fluctuations using technical indicators such as Bollinger Bands.

"Buy and hold" is not for me

Before 2000, market timing was a waste of time. Since 2000, we have had two market plunges with the average loss of about 45%. I have a simple chart to detect market plunges. It will not catch the peak and bottom as it depends on the falling/rising market. Hopefully, it will give us plenty of time to prepare as the last two.

The second reason I churn my portfolio is improving the appreciation potential. It is just my preference. When I sell a stock, it does not mean I'm not buying it back.

Risk tolerance

I am more conservative as a retiree. However, I was more than 'all in' (using my equity credit) in 2009. It depends on individual risk tolerance and situation.

Conclusion

Using these two portfolios, I have covered a lot of my ideas in investing. Implement the ideas that make sense to you and your requirements.

We need to have a trade plan to find stocks, analyze them, order them in the right account and sell them. Enhance your trade plan and stick to it. In addition to the described portfolios, I have one for momentum where I keep stocks for a month or less. I have other strategies such as Top Down and Sector Rotation. When the market is risky, I sell more stocks than I buy. Today I'm taking a break.

20 Applying strategies

I exchanged trading ideas with my reader JsIRA via comments in my article, which is described in the last article in this book. The lesson is we have to apply the strategies, follow them strictly and measure their performances periodically. In this case, the stocks in the first portfolio were bought for long-term holding and the stocks in the second portfolio were bought for short-term holding.

I forgot why I bought these stocks after a long while. It turned out that the 20 stocks (actually 15 stocks as some were bought more than one time) I bought described in the article were bought for long-term capital gain (one year for me). It was evident as all except one were bought for my taxable account.

When we monitor our trades, separate the short-term stocks and long-term stocks. The following are the summaries.

The 20 stocks are for long-term holding in the first portfolio. After a year from the published date of the article, the return was 53% beating the SPY by over 100% without considering dividends. My actual return should be smaller. VELT was delisted and I used the price I sold for calculating performance. ANET was acquired and I used the price they paid me.

The other 15 stocks in my second portfolio are for short-term holding. After about 3 months from the published date of my book “Best Stocks 2014 According to me”, the return is 60% vs. the SPY's 22%.

The difference between these two portfolios is that the stocks in the short-term portfolio were not fundamentally analyzed. Why? Value stocks are bought against the tide and it needs time for the market to realize their values. Short-term swing stocks are bought for momentum and for short-term gains.

21 Explain the unexplainable

I have three scoring systems for stocks based on fundamental metrics. They work fine. It means the stocks with high scores usually perform better than the stocks with low scores.

However, the highest percentile does not perform as predicted. I guess the fundamentals have been boosted due to unaccountable events such as a pending lawsuit or a profitable drug being expired. Technical analysis may spot these events.

There was a spin-off company with excellent P/E. However, it was structured with high, long-term debt that turned out to be the reason the stock did not beat the market in the following year.

I have some strategies that work fine even the stocks usually score low in my scoring systems.

I list the following three stocks screened from one of these strategies. Let’s review their performances in 1 year and 2 years from today (3/1/2014). I would like to see whether they are consistent with their historical performances.

Sometimes, my third best strategy “Buy higher and Sell even higher” works. It has defied Newton’s Law of Gravity, or I have proven the law is wrong. LOL.

Most of the following metrics are obtained from Finviz.com on 3/1/2014.

NVO is a Danish drug company. The Danes may be paid many times more than a typical Chinese scientist. In the long run, they and the USA cannot compete with the Chinese due to the huge wage gap, their huge number of STEM graduates and the Chinese relaxed clinical trials. It will take another 10 years for the Chinese to establish their research facilities. It has no debt compared to MYL’s Debt/Equity of 163%. NVO is in ethical drug vs. MYL’s concentration on generic drugs.

3/1/2014	NVO	ALK	MYL	Average
Score
ST Score (15)	8	16	8
LT Score (15)	12	22	15
P-Score (3)	1	5	2
Fidelity’s analyst	4	10	7
Short Float%	3%	4%	7%	5%

Fundamentals
Expected E/P	4%	8%	5%	6%
ROE	38%	30%	20%	39%
P/CF	52		36
Q-Q Sales Gain	4%	7%	-2%
Q-Q Profit Gain	5%	76%	-21%

Total debt	0%	43%	163%

Technical
SMA20%	10%	9%	17%	12%
SMA50%	20%	12%	22%	18%
SMA200%	35%	31%	44%	37%
RSI(14)	79%	71%	78%	76%

Ann. Return 1 yr.¹	0%	47%	3%	17%
Ann. Return 2 yr.¹	7%	39%	-8%	12%
SPY 1 yr.	13%
SPY 2 yr.	3%

¹Ann. Return are updated in 3/2016.

Explanation

I have three scoring systems: long term (passing grade 15), short term (passing grade 15) and P-Score (passing grade 3) which is described in my book “Scoring Stocks”. Only ALK passes all three systems and has the highest score of Fidelity’s Equity Summary Score (with passing grade = 5), which is based on the past performances of the analysts. Only Expected yield (E/P) and ROE in Fundamentals are consistent with each other.

They are more consistent to each other in technical metrics. The trend is up but they’re near to the peak levels and RSI indicates they’re overbought (70 or higher). From the recent updates, the scoring systems work.

22 Bottom fishing in a stormy sea

As of 6/6/2016 today, I cannot find too many good buys. The smart fisherman is still mending the nets (testing out my screens) instead of venturing out to the stormy sea (the market).

I bought AMAG one or two weeks ago; maybe I'm not a smart fisherman. I may have spotted the bottom of this stock. It is not perfect timing which should be two weeks earlier. However, I do really want to maintain a good percent of cash in this risky market.

Today I bought SWKS. It belongs to bargain stocks judging from the fundamentals. I could not find anything really wrong with this stock except it is within walking distance from my house. It could be the only company that I would attend their quarterly meetings (hopefully serving goodies). I sold some holdings with good profits, but some left-overs are losers. Its downfall could be its tie with Apple. When Apple is not expected to do well, so are their suppliers.

They sell their component products to other phone manufacturers. Apple is also fundamentally sound today. When the institutional investors are dumping Apple, it could be our time to buy it (as long as there is a valid reason) and vice versa on selling it. We CAN beat the hedge fund managers. More than 80% of them cannot beat SPY after their hefty fees. Why folks invest with them is beyond me.

GILD is another candidate for bargain hunters. I have added too many already, so I do shy away this time. In addition, it has a lot of debt while SWKS has none. [Update, 4/2020. It surges recently due to the new drug that could cure Cov-19 patients, but I sold all a while ago.]

As in life, investing is only educated guesses. Do your own home work and no one is responsible for your gains/losses but yourself.

Most authors and gurus tell you how great their returns are AFTER-the-fact. Today is only several days after I bought these two stocks. Even if they do not perform, they are good examples of looking for bargains in a risky market.

Tips from Peter Lynch

He made a lot of money for his investors in Magellan’s fund. I came in late to his funds, but I also left early when he retired early in 1990. Many did not want to leave due to the potential tax burdens. His successors never achieved the same performance in Peter’s 9 years with the fund. Peter was smart enough to know that his fund was so big that it was the market, and no one could beat the market by that margin consistently.

The following is my summary and my comments on his tips from several YouTube videos

https://www.youtube.com/watch?v=IhnfqbIiGC4.

1. Study more stocks and pick the best.

Same as do your homework.

2. Emotionally detached. Do not sell at the bottom.

No one can predict market. My article could limit the loss and save the cash for reentering the market. Buying at early recovery is very profitable.

3. Investing in companies whose products / services you understand.

We all have expertise in our own field and the mall is better place to find good consumer products.

However, today’s mall is pretty much destroyed by Amazon.com. In this case, you should buy Amazon.com, and short many retail outfits and the mall owners. Also check whether Amazon.com has reached its growth potential or not. You may miss Zoom, but as of 10/2020, the stock is too expensive. With the momentum, I do not want to short this stock.

Made big profits in McDonald’s as the sales/profits had been rising for years. However, most of the profits were derived from real estate holdings.

I do not totally agree with it. There are many companies that we do not know but we can learn and understand what their technologies that could be potentially profitable. Buffett did not invest in Apple as he did not use a mobile phone, but his research team should.

4. Easier to beat the professionals than expected.

Fund managers have to stick with large companies and they cannot time the market.

5. Invest in profitable small companies.

Small companies have a lot of risk, but they also have higher profit potential than matured companies.

6. Find a few good stocks particularly at their early stage.

It is harder to do than say. When the stock moves from Russel 2000 to Russel 1000 (promoting from an index for smaller stocks), they could be candidates.

A fast growing stock may never be too late to invest.

7. We can find these stocks earlier than the professionals and many funds cannot invest in these stocks.

8. Sell a stock when the fundamentals decline.

That’s where my score for fundamentals or Fidelity’s Equity Summary Score comes in.

9. Do not sell when they have short-term problems such as not meeting the earnings prediction.

10. If you do not have time to research stock, buy ETFs that simulate the market. It is not Lynch’s idea (as a fund manager) but mine and Buffett’s.

11. Buy growing companies and sell the matured companies that their markets have been saturated (i.e. no place to grow). That’s why P/E may not work all the time; you need to consider quarter-to-quarter sales growth and earnings growth; actually year-to-year for the past 5 or even more years is important.

12. Buy good cynical stocks at the bottom and sell at the top.

It is hard to determine the bottom and the top. However, you need to ensure the company would not go bankrupt by ensuring the income can service its debt.

13. Consider turnaround companies.

Check the balance sheet. They need cash for turnaround such as promoting new products/services. Skip those companies that have hints of failure of the turnaround. Disney was one at one time by using the hidden assets. Brand names are not included in the financial statements.

14. Do not sell when you double the profit or you loss 10%.

Agree if they are good stocks. I have some ‘good’ stocks that went to almost zero value; one Chinese solar company was due to the U.S. policy banning it to the U.S. market.

Debunk Myths in Investing

Thursday, February 11, 2021

Book 3 Section IV: Experiences