The Big Picture | Apprenticed Investor

Good Advice During Turbulent Times

Sunday, March 23, 2008 | 08:39 AM

in Apprenticed Investor | Investing | Psychology/Sentiment | Trading

What happens when markets suffer a panic?

Well, a lot of things: investors deal with emotional outbursts, a frenzy of talking heads, and lots of really bad advice. At the same time, these dislocations create opportunity -- if you manage to keep your wits about you.

From an interesting article in the WSJ this week, comes this modified list.

1. Invest during a panic: When panic hits the front pages, put a toe in the water.

2. Don't speculate: Look for securities that offer modest, but predictable gains. Think Warren Buffett, not Steve Cohen.

3. Don't make too many bets: Feel free to sit most hands out. You should only place your bet when you really like the odds. You can be diversified without owning every asset class.

4. Be very wary of any boom: Remember, Price matters. Avoid buying tinto the hockey stick part of a surge -- that's way late in the cycle. If you are early into a sector, you should sell off 10% into each quarterly surge.

5. Don't put too much weight on expert financial analysis: Learn to become a self-sufficient investor. We have seen too many examples of where most Economists got the big picture way wrong, and when analysts were compromised by their firms.

6. Do you really need to pick individual stocks? Most people suck at stock picking. Givent he universe of ETFs, you have a lot of options without the indiviudal stock risk.

7. Invest in stages: 99% of people will not pick the bottom; even less get out right at the top. Use dollar cost monthly averaging with indexes, and invest over time.

8. Only invest for the long-term: That means five years or more. On rare occasions, it means 10-15 years. Daily moves are noise; focus on the signal.

9. Consider a really good active fund manager: They do exist, but they are rare. Look for mutual funds where the manager has a terrific long term record -- ideally 10 years or more.

10. Everything has risk -- even cash: Try thinking about what inflation is going to do to you if you sit in cash on the sidelines. There are, literally, no risk-free places to hold money.

A few caveats to the above:

a) Your own retirement timeline is very important. If you are 10 years or less from retirement, you need to be more conservative.

b) Know thyself. If you cannot deal with being underwater,then you must adjust accordingly. Long term is really very long term. That may mean patiently waiting for a decade or so -- think Japan in the 1990s, or the US from 1966 to 1982.

c) Inflation is pernicious, always present -- even when its less than 2%.

d) The time you have to manage your assets will determine how active you can be. Dollar cost averaging requires the leastamount if time and effort.

e) Simpler is better.

Source:
Opportunity in Credit Crisis
BRETT ARENDS
WSJ, March 19, 2008
http://online.wsj.com/article/SB120587859011946567.html

~~~

Don't Follow Wealthy Investors, Part 14

Sunday, February 17, 2008 | 07:00 AM

in Apprenticed Investor | Investing | Psychology/Sentiment

We have counseled readers time and again not to follow in the footsteps of various Billionaires, like Warren Buffett, Michael Dell, Eddie Lambert, Wilbur Ross, or Bill Gates. The ultra wealthy have different motivations and goals when they are "deploying capital" -- what you and I call investing. Capital deployment may not necessarily have as its goal straight up return maximization.

When Michael Dell buys his own stock, it is as much a PR move as it is an investment. He gets benefits from that purchase (Media coverage, analyst approval, retails sales promotion) that does not accrue to you.

Remember Kerkorian's bid for GM ? The old man was trying to wrest control of one of the most storied names in American Industry. That's an enormous ego stroke that you don't get for your 1,000 or even 10,000 GM shares. I suspect the short term returns were inconsequential to him.

How about Joseph Lewis' 7% stake in Bear Stearns? Taking a big stake in Bear made him a bold player in the high stakes game of Wall Street control. The loss of $500 million to Lewis is inconsequential; how'd that trade work out for those people who tagged along? Eddie Lambert's investment in Citi (C)? A disasterous bet he is now unwinding.

Don't imagine the Sovereign wealth funds are any better -- they have their own agendas, political or otherwise. Besides, from what we have seen so far, they ain't so hot anyway.

My point isn't that these guys are dumb (they are not) or bad investors -- history shows otherwise. No, the point is that thy have different motivations, tools, and terms than you, and blindly following them into any investment is simply foolishness. (when Warren Buffett makes a deal, you can rest assured he gets slightly better terms than you).

I was reminded of this issue again yesterday, thanks to an article about the newspaper business in Editor & Publisher.

I recall wondering in these pages why a bright guy like Bruce Sherman would ever want to get involved in a ~~dying~~ transitional industry like Newspapers. The nasty emails and comments from his acolytes were both amusing, while being astonishing naive. According to these folk, Bruce could do no wrong. Thus, I was an idiot for even thinking about criticizing this investment. Clearly, only a moron doubts anything about Mr. Sherman. Only Sherman -- and Chuck Norris -- never buys any stock that goes down. Oh, and on top of that, newspapers were cheap on a P/E basis, thus providing additional proof of my cluelessness.

Well, it seems Mr. Sherman has thrown in the towel. According to Editor & Publisher, recent SEC filings reveal Mr. Sherman's current newspaper holdings to be 0.0%.

Here's an excerpt from E&P:

"Bruce Sherman, whose Private Capital Management (PCM) investment firm nearly single-handedly forced the sale of Knight Ridder -- ushering in the era of Wall Street antipathy toward newspaper stocks -- formally bid the sector goodbye in a series of regulatory filings Thursday.

In documents filed with the Securities and Exchange Commission (SEC), PCM said it no longer owned any stock in The New York Times Co., Lee Enterprises or Belo, and that it was effectively done as an investor in The McClatchy Co. . .

It was remarkable to see all those 0.0% ownerships of class in filing after filing because PCM not long ago had serious stakes in the nation's biggest publishers. In September of 2005, for instance, PCM owned a gigantic 37.61% of McClatchy common stock. Thursday, the firm reported that it directly owned no shares at all, and was simply managing on behalf of an investor a tiny portfolio of 9,164 shares. In that same period, PCM owned a 15.07% stake in the Times Co., an 18.96% stake in Lee, and a 22.31% stake in Belo. It also had substantial positions in Gannett and a small amount of Tribune Co. stock."

Some of the emails about Mr. Sherman bordered on myopic hysteria over criticisizing any of his investments. These folks definitely have the first half of Strong Opinions, Weakly Held down pat. For their sake, I hope they are intellectually flexible enough to understand the second half. Perhaps the dittoheads who aped Sherman's march into media were at least smart enough to follow his retreat out of them . . .

I emphasize this again and again, but we might as well say it once more for the record: LEARN TO THINK FOR YOURSELF. The importance of this cannot be stated enough.

Source:
Sherman's March: Man Who Forced Knight Ridder Sale, Says Goodbye to Newspapers
Mark Fitzgerald
February 15, 2008 5:40 PM ET updted Friday
http://www.editorandpublisher.com/eandp/news/article_display.jsp?vnu_content_id=1003711330

New Column up at The Street.com (02/01/08)

Monday, February 04, 2008 | 11:00 AM

in Apprenticed Investor | Data Analysis | Investing | Markets

RealMoney

I have a new Apprenticed Investor column up at TheStreet.com, titled What Investors Need to Know About Historical Data.

This was a rather different writing experience for me, as it was a collaborative effort with readers. The intro quote, and the entire sidebar was based on feedback from you guys. This not only made the column better, but it allowed me to make the piece far broader than I could have on my own. Thank you for both your efforts and the substance of what you added.
>

"A man with one foot in a bucket of ice and the other foot in a bed of hot coals is, on average, very comfortable."

"One option is to obtain a college degree in statistics. But that's time consuming and expensive. Rather than spending another four years in school, I suggest a simpler approach to handling statistical data. When confronted with "incontrovertible proofs" based on historical data, ask yourself this short list of questions."

>
The rest of the column, consisting of questions you should ask yourself when confronted with persuasive historical data, were loosely based upon what we discussed last Sunday.

Sources:

What Investors Need to Know About Historical Data
Barry Ritholtz
TheStreet.com, 02/01/08 - 09:33 AM EST
http://www.thestreet.com/s/what-investors-need-to-know-about-historical-data/university/apprenticed/10401545.html?

15 Ways to Check Data (Reader Suggestions)
Barry Ritholtz
TheStreet.com, 02/01/08 - 10:56 AM EST http://www.thestreet.com/s/15-ways-to-check-data/university/apprenticed/10401546.html?

Fun With Data Analysis: The Art of the Plausible

Sunday, January 27, 2008 | 10:50 AM

in Apprenticed Investor | Data Analysis | Markets | Mathematics | Quantitative

Barron's Mike Santoli looks at one of our favorite pet peeves: The use and abuse of data. His column this week, The Limits of History, notes that this has become especially prevalent of late:

"People who try to handicap the markets for a living practice the art of the plausible. Many trudge from conference room to lunch table to banquet hall lugging PowerPoint decks full of unobjectionable statistical touchstones for commission-wielding clients. At times of investor confusion and market dissonance, such as now, their art is often reduced to carving a slice out of economic history that ratifies their existing outlook."

Mike then proceeds to look at a "dog's breakfast of the kinds of historical analogies making the rounds." What is especially amusing about his list is the number of "Every time X happens, Y has occurred" that collectively produce all manners of mutually exclusive results. Since "X" occurred we will definitely have/avoid a recession; Stocks are undervalued/overvalued; Markets must rally/fall.

What is an investor to do? Whenever you are confronted with an "incontrovertible proof" based on historical data, prior to taking any action, I suggest asking yourself this short list of questions:

• Do we have enough historical examples? Is the data sample statistically significant?

• Causation or Correlation? Does "X" cause "Y" to occur? Or, are we presented with two things that may have the same underlying causes? Is there even interaction between X & Y?

• Coincidence? How possible is it that these two items are utterly unrelated (i.e., proof-we-are-clueless Superbowl indicator).

• Look for differentiating elements in different time periods: What factors are similar? What factors are different?

• Compare interest rates, inflation, dividend yield, P/E contraction or expansion, sentiment, overall market trend, business cycles -- across different eras. Might that account for potentially different outcomes?

• Any recent market environmental changes (regulation shift, financial innovation, etc.) have an impact? What might these specific changes do to the data? Consider Decimalization, ETFs, online trading, change in dividend tax, etc.

• Subjective versus Objective measures: Are the factors under discussion hard numerical data, squishy or somewhere in between? Percentage of stocks over 200 day moving average is objective; I find some chart pattern readings subjective. Earnings at time have been rather subjective; official inflation measures somewhere in the middle.

• Consider things in terms of probabilities, not outcomes: Assume a causative factor resulted in a specific event (X --> Y) 7 out of 9 times. The most you can say is that when "X" occurred in the past, it has resulted in "Y" approximately 78% of the time.

• There is a difference between historical occurrence and future likelihood. In the example above, this does not necessarily even mean that since "X" has just occurred, there is a 78% that "Y" will happen. Consider: was the first X/Y occurrence really a 100% or zero? Did the second one become 100% or 50%, then next a 66% or 33%?

• Contextualize data: Sometimes a single data point -- even a mean or median -- only tells half a story. Any data point can be trending or reversing. Going higher, lower, topping, bottoming. Each of these may have differing implications for what comes next. Inflation is high, but coming down. Gold is high -- and going up. It helps to think of data not as a still photograph, but as a frame in an ongoing film.

I'm sure there are more -- that short list is off the top of my head.

Any others? Please make your suggestions below. If we get enough good ones, I'll try to massage this into a more formal column.

Source:
The Limits of History
Mike Santoli
Barron's, MONDAY, JANUARY 28, 2008
http://online.barrons.com/article/SB120130827516518451.html

New Column up at TheStreet.com (01/22/08)

Tuesday, January 22, 2008 | 11:41 AM

in Apprenticed Investor | Investing | Markets | Psychology/Sentiment | Trading

RealMoney

I have a new Apprenticed Investor column up at TheStreet.com, titled "Why Bottom Guess?"

The premise is that most individuals are poorly served by trying to catch the falling knife. Instead of bottom guessing, waiting until the downtrend is broken will better serve their interests.

Here's an excerpt:

"One of the questions we get each correction is whether or not traders/investors should try to pick market bottoms. The background music is an orchestra of bottom callers, the vast majority of who are, shall we say, premature. Eventually someone gets it right, but I never have been convinced it wasn't a function of random luck.

For the vast majority of Wall Street participants, however, this guessing game tends to be rather expensive. [It] is exceedingly difficult. The ideal conditions and circumstances for bottom picking are rare, and the tools necessary to do so are even rarer. Most traders and investors do not have:

* the requisite skill to identify these circumstances;
* the obligatory patience to wait for these conditions;
* or the compulsory discipline to cut losses when the trades don't work out.

For most people, the risk/reward ratio is simply not worth the capital risk . . .

Source:
Don't Just Do Something. Sit There!
Barry Ritholtz
TheStreet.com, 1/22/2008 9:41 AM EST
http://www.thestreet.com/s/dont-just-do-something-sit-there/newsanalysis/investing/10399641.html

12 Investment Principles

Sunday, January 20, 2008 | 11:21 AM

in Apprenticed Investor | Investing | Trading

Here are a dozen guidelines from Doug Kass.

These were developed, according to Doug, regardless of market conditions, as sound investing practices:

1. Err on the side of conservatism.

2. Learn from the best, in classic investing books or through conversations with trustworthy individuals.

3. Avoid advice from those who lack flexibility and are dogmatic.

4. Be more concerned with return of capital than return on capital.

5. Trade/invest with below-average positions in order to take advantage of the market's volatility and opportunity.

6. Take a base on balls, hit a single, but don't go for the fences.

7. Buy straw hats in the winter (meaning, but out of favor items).

8. Buy only the best of breed in periods of economic/market uncertainty.

9. Always leg into a position.

10. Be patient.

11. Buy when your hands are shaking; sell when you become overconfident and complacent.

12. Always remember investing is about common sense.

Good stuff. Thanks, Doug.

Source:
12 Investment Principles for the Abyss
Doug Kass
RealMoney Silver, 1/17/2008 11:40 AM EST
http://tinyurl.com/3xujp6

11 Rules For Better Trading In 2008

Sunday, January 06, 2008 | 07:24 AM

in Apprenticed Investor | Trading

Guy Lerner writes the Technical Take newsletter (thetechnicaltake.com). The following rules are his guidelines for improving your trading in the coming year.

11 Rules For Better Trading In 2008

1. Be data centric in your approach. Take the time and make the effort to understand what works and what doesn’t. Trading decisions should be objective and based upon the data.

2. Be disciplined. The data should guide you in your decisions. This is the only way to navigate a potentially hostile and fearful environment.

3. Be flexible. At first glance this would seem to contradict Rule #2; however, I recognize that markets change and that trading strategies cannot account for every conceivable factor. Giving yourself some wiggle room or discretion is ok, but I would not stray too far from the data or your strategies.

4. Always question the prevailing dogma. The markets love dogma. “Prices are above the 50 day moving average”, “prices are breaking out”, and “don’t fight the Fed” are some of the most often heard sayings. But what do they really mean for prices? Make your own observations and define your own rules. See Rule #1.

5. Understand your market edge. My edge is my ability to use my computer to define the price action. I level the playing field by trading markets and not companies.

6. Money management. Money management. Money management. It is so important that it is worth saying three times. There are so few factors you can control in the markets, but this is one of them. Learn to exploit it.

7. Time frame. Know the time frame you are operating on. Don’t let a trade turn into an investment and don’t trade yourself out of an investment.

8. Confidence and conviction. Believe in your strategies and bet wisely but with conviction. There is nothing more frustrating than having a good strategy work as you expect, yet at the end of the day, you have very little winnings to show for your efforts.

9. Persistence. It takes persistence to operate in the markets. Success doesn’t come easy, and if it does, then I would be careful. Even the best strategies come with losses, and they always seem to come when you get the nerve to make the big bet. Stay with your plan. If you have done your home work, the winning trades will follow.

10. Passion. In the end, trading has to be about your bottom line, but you have to love what you do and no amount of money is worth it if you aren’t passionate about the process. No matter how much success you enjoy, in the markets you can never stop learning.

11. Take care of yourself. No amount of money is worth it if your health is failing or you have managed to alienate yourself from family and friends in the process.

Good stuff. Thanks, Guy.

New Column up at TheStreet.com (01/03/08)

Thursday, January 03, 2008 | 10:00 AM

in Apprenticed Investor | Investing | Markets

The new Real Money column mentioned yesterday has been moved to the free TheStreet.com site.

For some reason, its been retitled: 13 Things You Wish You'd Known in 2007. I much prefer the educational spin of yesterday's title, Lessons From 2007: A Baker's Dozen, although I have to admit its kinda clunky as far as titles go.

I listed the 13 bullet points yesterday, here's a flavor of two of them -- one technical, one fundamental:

4. Day-to-day stock action is mostly noise:

This is blasphemy to some people, but it's true. Markets eventually get pricing right, but the key to understanding this is the word "eventually."

Over the shorter term, markets frequently under- or overprice a stock before settling into the right approximation of value. This process typically occurs over broad lengths of time. Unfortunately, that doesn't stop some rather suspect interpretations of what these short-term movements mean. I look at these tea readings as Rorschach tests, revealing more about the speaker than they do about the subject.

Case in point: the homebuilders. It seemed that every time there was even the slightest uptick in the group, some bozo would declare that the bottom of the real estate cycle was in. Indeed, every dead-cat bounce or short squeeze was trotted out as proof positive that the housing problem was over. Only it wasn't, and the homebuilders cratered some 70% off their highs. You don't need to be a technician to know this: The little squiggles on the chart mean a whole lot less than the big squiggles do."

5. P/E matters less than you think:

One of the things I heard a lot this year was "I (dis)like this stock because it has a (high)low P/E." News flash: P/E ratios alone tell you very little about a stock's future prospects.
If that sounds like blasphemy, please look at a few examples: Google, Apple and Mosaic (MOS) all sported high P/Es at the beginning of the year. Their stocks have done splendidly. On the other hand, back in January, retailers, financials and homebuilders all had reasonably cheap P/Es. (How'd they do?)

It helps if you think of P/Es not as a photo but as video. The direction matters more than the mere number: Were P/Es likely to come down as sales ramped up? Or were P/Es modest because they were at the top of a profit cycle, and were likely to fall? The answer to these questions explains the difference between the winners and losers.

The rest of the column is filled with other such wit and wisdom . . .

Source:

13 Things You Wish You'd Known in 2007
Barry Ritholtz
TheStreet.com, 1/2/2008 2:11 PM EST http://www.thestreet.com/s/13-things-you-wish-youd-known-in-2007/newsanalysis/investing/10396669.html

New Column up at Real Money (01/02/08)

Wednesday, January 02, 2008 | 10:15 AM

RealMoney My year end review of the lessons provided by 2007 is now up at Real Money.

The details are at the subscription only site, but here are the bullet points:

• Ignore market rumors
• Buy sector strength (Corollary: avoid weak sectors):
• Never blindly follow the “Big Money” (a/k/a Professionals make dumb mistakes also):
• Day-to-day stock action is noise
• P/E matters less than you think
• Ignore deteriorating fundamentals at your peril
• Nothing is more costly than chasing yield
• Know what you own
• Simple is better than complex
• Stick to what you do best
• Fess up!
• Risk management matters
• The Trend is still your friend

Its on the subscription only site, but I will try to get it moved to the free TheStreet.com section tomorrow . . .

Source:

Lessons From 2007: A Baker's Dozen
Barry Ritholtz
RealMoney.com, 1/2/2008 6:54 AM EST
http://www.thestreet.com/p/rmoney/investing/10396497.html

Lessons from 2007

Tuesday, December 25, 2007 | 07:47 AM

in Apprenticed Investor | Corporate Management

I am working on a year end article for the Street.com -- A Dozen Lessons from 2007 for CEOs, fund managers and investors.

Since you guys so quickly answered my first question, here's another:

Next question: What company(s) handled a major mishap, error, or disaster well? Did someone mess up, but did a sincere mea culpa and was not punished?

I remember there was at least one (Traget? Schwab?) but I cannot recall what it was

Anyone recall who that might have been ?

~~~

UPDATE: Reader suggestions, Q1:

One of the bullet points is: "Stick to what you do best."

I came up with 2 good examples, but I could use some more:

What was online broker E*Trade doing writing sub-prime mortgages?

What was investment bank Bear Stearns (BSC) running 2 hedge funds?

H&R Block are supposed to be tax preparers, not mortgage lenders.

And exactly what was GM's expertise in underwriting mortgages (the snarkier amongst you might be wondering exactly what-the-hell GM's expertise is in anything)

From Worst to First Second: Business Week Forecast 2007

Friday, December 21, 2007 | 07:19 AM

in Apprenticed Investor | Financial Press | Investing | Markets

For the past 15 or so years, BusinessWeek has been doing a big year end issue, listing various strategists' forecasts for market and rate expectations.

In terms of the "contest," its a combination of % gains from the S&P, Dow, Nasdaq, Russell 2000 and 10 year rate.

Despite my views on forecasting and investing, I've been participating in the survey the past few years. Its fun, and my firm always likes the PR, so my attitude has been what the hell.

My first year participating, I pitched BW on running a "Folly of Forecast" counter programming; That idea went nowhere fast: "Its a big double issue that sells lots of ads -- You wanna participate or not?"

So I did. By coincidence, I was in the top few forecasts -- right until the last few days. Then the picks slipped to somewhere in the top 10. It all seemed rather random.

The following year (2006), I stumbled into some infamy by making the most Bearish forecast by far (36% correction). As a macro overview, many of the issues we identified turned out to eventually become big problems. But as a market call, Dow 6,800 was pretty awful.

The following year, I moderated the guesses. So you can imagine my bemusement when I got an email from BusinessWeek earlier this month:

"You are looking like our potential winner (barring a sudden big move in the market), so I was wanting to get in touch with you as well. I don’t see to have a current number for you. Can you give me a call? Thanks."

It turned out that every pick we made -- Dow, S&P, Nasdaq, Russell and the 10 Year Yield was spot on -- all within 1% of current prices. To make matters even more amusing, our sector pick (Consumer Staples) did very well, and our best stock idea -- Mosaic (MOS) -- was far and away the biggest gainer amongst the pro picks, up 217% for the year.

click for larger table

I think you can see how this is going to play out.

"Barring a sudden move in the market?": You guessed it -- everything moved away from our numbers, and by the end of the week, I got the following email:

"So sorry I wasn’t in touch yesterday. Looks like the market gave you a bum break. By my calculations you’re not the winner, but are very close. Congratulations – and sorry things didn’t work out otherwise."

So, close but no cigar.

Congratulations are in order for Leo Grohowski, Chief Investment Officer, BNY Mellon Wealth Management (but was at US Trust at the time), who had the best predictions.

~~~

Now for the really telling part: The old format -- 80 or so strategists in a big double issue laden with ads? That's now gone. Business week is now doing a much smaller version, with a dozen or so folks polled -- much like last year's WSJ version.

Blame the economy: While I can imagine assembling that issue was huge pain in the ass, but I suspect this year, the print advertising business was just too soft to justify the time and effort of a major issue.

The business is simply not there . . .

Sources:
Fearless Forecasts from the Pros 2007
BusinessWeek magazine DECEMBER 27, 2006
http://tinyurl.com/3x3ube

Where Things Are Headed in 2008
Peter Coy
December 20, 2007, 5:00PM EST
http://tinyurl.com/27sh34

Goldman Sachs: Sell Tech Selectively

Sunday, December 02, 2007 | 07:31 AM

in Apprenticed Investor | Corporate Management | Earnings | Technology | Valuation

Yeoman's work by Barron's Eric Savitz, who pens the must read techblog Tech Trader Daily, in assembling a laundry list of stocks downgraded by GS (published Friday after the bell).

The money quote from Goldman analysts states they have become "incrementally more cautious on tech fundamentals given the current macroeconomic backdrop."

Additionally, "with software a typically back-end loaded sale, if there is any concern on budgets in the early part of 2008, we would expect CIOs to hold off their purchases until later in the year."

The main area of concern: "Companies with large enterprise exposure and significant dependence on the U.S. consumer."

Ouch.

I have long advocated deciding on an exit strategy prior to owning a stock. While these downgrades may not mean immediately selling them, at the very least you should be revisiting your pre-planned exits. If you are unsure about selling, your trailing stop losses should give you some protection in the event of a selloff. If you are not using trailing stops, then you may want to tighten up your existing stops -- especially on those names that have enjoyed a good run.

What follows is a list of stocks affected by estimate cuts and/or price target changes by sector.

Semis/Chip stocks:

Advanced Micro Devices (AMD)
ATMI
Broadcom (BRCM)
Entegris (ENTG)
FormFactor (FORM)
International Rectifier (IRF)
Intel (INTC)
Intersil (ISIL)
Microchip (MCHP)
Micrel (MCRL)
Marvell MRVL)
Micron (MU)
Maxim (MXIM)
National Semi (NSM)
Nvidia (NVDA)
Teradyne (TER)
Texas Instruments (TXN)
Volterra (VLTR)

Hardware:

Dell
Directed Electronics (DEIX)
EMC
Emulex (ELX)
IBM
Intevac (IVAC)
Isilon (ISLN)
Lexmark (LXK)
Network Appliance (NTAP)
Sun Microsystems (Java)
Brocade (BRCD)

Goldman previously made similar moves this week in Software:

Adobe (ADBE)
Autodesk (ADSK)
BEA (BEAS)
BMC
Computer Associates (CA)
Check Point (CHKP)
Citrix (CTRX)
Cognos (CGNS)
CommVault (CVLT)
Informatica (INFA)
Macrovision (MVSN)
McAfee (MFE)
Oracle (ORCL)
Quest Software (QSFT)
Red Hat (RHAT)
RightNow (RNOW)
SAP
Secure Computing (SCUR)
Symantec (SYMC)
Tibco (TIBX)

Communications:

Netgear (NTGR)
Corning (GLW)
Cisco (CSCO)
Nortel NT)
Aruba (ARUN)
Juniper (JNPR)

Payment processing companies:

ADP
Paychex (PAYX)
Global Cash Access (GCA)
Global Payments (GPN)
Master Card (MA)
MoneyGram (MGI)
Amdocs (DOX)
Convergys (CVG)
CSG Systems (CSGS)
Synchronoss (SNCR)

IT services:

Accenture (ACN)
Bearing Point (BE)
Sapient (SAPE)
Affiliated Computer Services (ACS)
Computer Sciences (CSC)
EDS
Unisys (UIS)
Cognizant (CTSH)
ExlService (EXLS)
Infosys (INFY)
Patni (PTI)
Satyam (SAY)
Witpro (WIT)

Let me reiterate this: A downgrade on this many stocks is worth noting, but does not mean the world is ending. Experienced traders know to have a plan in effect, to follow their discipline, and to not get panicked into doing something foolish -- on the long or short side.

Sources:
Goldman Turns Wary On Tech Sector; Cuts Estimates, Targets For Dozens Of Stocks
Eric Savitz
Tech Trader Daily, November 30, 2007, 4:25 pm
http://tinyurl.com/yuqg75

Goldman Turns Cautious On Software, Citing Macro Factors; Cuts Ests
Eric Savitz
Tech Trader Daily, November 27, 2007, 9:41 am
http://tinyurl.com/ypl6u2

Follow Up: Nine Stocks for Playing the Long Side Safely

Tuesday, November 27, 2007 | 11:00 AM

in Apprenticed Investor | Financial Press | Investing | Technical Analysis | Trading

Back in June, I did a column for theStreet.com, titled: Nine Stocks for Playing the Long Side Safely. An emailer yesterday asked for an update on the stock choices, so we whipped out the trusty XL spreadsheet (nine_stocks_safely.xls), and away we go:

The conceit of the article was based on several factors, but the most important were finding stocks with good risk/reward characteristics. These were names near good entry points, and that offered tight stop-loss protection so that losses were a reasonable percentage away.

The list we picked included:

AON Corp. (AOC)
Input/Output (IO)
Service Corp. (SCI)
Xerox (XRX)
Mosaic Company (MOS)
Charles Schwab (SCHW)
Schering-Plough (SGP)
Abbott Labs (ABT)
Warner Chilcott (WCRX)

Someone asked me yesterday how those stocks have performed, and as of last night's close, the answer was pretty good:

click for full table

With the Dow Jones down 5.29% since then, and the S&P500 sliding 6.74%, a gain of 5.10% looks pretty good. Those numbers assume you bought in at the closing price the day of the recommendation (or the next morning's open), and honored all of the suggested stop losses. Nothing gapped below the stops, so you should have been able to get out at or near the stop prices.

Most of the losses were small, single digit losers -- Xerox was a big 15% loss. Mosaic (MOS) was a jumbo winner, AON was a 13.5% gainer, and *Schwab -- a stop out loss that we bought back -- was also a winner.

* The asterisk: We have a rule about stop losses -- if a stock gets stopped out for a reason we find acceptable -- we will allow ourselves to buy it back ONLY IF AND WHEN it trades back over the stop loss point.

That's exactly what happened with Charles Schwab (SCHW). Because of a secondary offering, the stock price traded down through our stop loss of $18.50 to ~$18, and then popped quickly back over it. After getting stopped out, we bought it back for our managed accounts between $18.50 - ~19.50.

The 5.1% gain assumes Schwab was stopped out. If we were to include Schwab, the returns over the same period are even better: ~7.20% (not too shabby). Either way, a 1000 basis point out-performance versus the SPX, WITH VERY LOW LEVELS OF RISK is something to shoot for again in the future.

If I can develop another theme -- more safe ways to play the long side? -- I'll try to put together another list like the June version . . .

~~~

This was prepared for a six month update, to be published next week at TheStreet.com.

This assumes you bought equal shares of each. I haven't done the math on what happens if you bought equal dollar amounts . . . but here's the XL doc if anyone wants to bother (nine_stocks_safely.xls).

Source:
Nine Stocks for Playing the Long Side Safely
Barry Ritholtz
RealMoney.com, 6/8/2007 4:44 PM EDT
http://www.thestreet.com/_tscrss/markets/activetraderupdate/10361606.html

3 Things You Need to Do (but Won't)

Sunday, November 18, 2007 | 08:49 AM

in Apprenticed Investor | Investing

I had a very interesting conversation this week with a writer/editor from a Men's fashion magazine.

Not, as you may have first surmised, due to my snazzy sartorial choices -- especially, the many and varied Ted Baker ties I wear when called upon to don a suit for the tube.

No, his question was more financial in nature. This gentleman asked a rather intriguing question, which, this being a quiet Sunday morning, I will share with you.

He said to me:

"I'm not very good with finances -- I'm not a numbers guy. Many of my readers are the same way. We all know we should be doing something with investing for retirement, but we don't know what to do. Everytime I ask someone, I get a long winded, jargon filled answer. Can you give me three simple suggestions -- in plain English -- that my readers should do to get started?"

No problem, I said. I have three simple things for your readers to do. These will save them and make a ton of money: Pay off your credit cards, Max out your tax deferred accounts, and start Dollar Cost Averaging into a few ETFs.

I enjoyed the back and forth enough, I decided to make this an Apprenticed Investor column (forthcoming in a few weeks). Meanwhile, here's a quick preview:

1. Pay off your credit cards: Most people pay have much higher credit card rates than they realize -- they creep up over time, especially if you have any sort of a balance. Even a late payments to someone else will also send your rate higher.

Paying these balances off are the equivalent of a guaranteed return of 18% (or whatever your rate has become). RISK FREE, GUARANTEED. You wont get that deal anywhere else.

2. Max out your tax deferred accounts -- 401k/IRA: Putting money into these accounts gives you the equivalent of an extra 40% or so investment capital (depending upon your present tax rate), which then compounds over the decades until you take it. When you retire and withdraw these monies (which should have appreciated nicely) you will be in a much lower tax bracket.

3. Dollar Cost Averaging ETFs: The simplest investment thesis: Set your account up for dollar cost averaging for a few different ETFs. Each pay period (or monthly), but the same dollar amount of your choices. example: $100 of DIA, $100 of SPY, $100 of Qs, etc.

When prices are high, you buy less shares; When prices are low, you buy more. Its pretty foolproof.

~~~

I warned the editor that most people won't do these things. They are like diet and exercise -- we know we should, but most of us just don't.

Such is the fate of us slightly cleverer, pants wearing monkeys . . .

Lessons From Stock Market Wizards

Sunday, November 11, 2007 | 09:05 AM

in Apprenticed Investor | Markets | Psychology/Sentiment | Trading

One of the first books I read in this business oh-so many years ago was Stock Market Wizards. It had a profound impact on my thinking about trading, psychology, risk, capital preservation, etc.

Sometime ago, I came across a good discussion of the lessons from the book at Simply Options Trading. What follows is my edited adaptation of those rules he derived from Stock Market Wizards:

1. All successful traders use methods that suit their personality; You are neither Waren Buffett nor George Soros nor Jesse Livermore; Don't assume you can trade like them.

2. What the market does is beyond your control; Your reaction to the market, however, is not beyond your control. Indeed, its the ONLY thing you can control.

3. To be a winner, you have to be willing to take a loss;
(The Stop-Loss Breakdown)

4. HOPE is not a word in the winning Trader's vocabulary;

5. When you are on a losing streak -- and you will eventually find yourself on one -- reduce your position size;

6. Don't underestimate the time it takes to succeed as a trader -- it takes 10 years to become very good at anything; (There Are No Shortcuts)

7. Trading is a vocation -- not a hobby

8. Have a business/trading plan;
(Write This Down)

9. Identify your greatest weakness, Be honest -- and DEAL with it

10. There are times when the best thing to do is nothing; Learn to recognize these times (Nothing Doing)

11. Being a great trader is a process. It's a race with no finish line.

12. Other people's opinions are meaningless to you; Make your own trading decisions (The Wrong Crowd)

13. Analyze your past trades. Study what happened to the stocks after you closed the position. Consider your P&L game tapes and go over them the way ~~Vince Lombardi~~ Bill Parcells reviewed past Superbowls

14. Excessive leverage can knock you out of the game permanently

15. The Best traders continue to learn -- and adapt to changing conditions

16. Don't just stand there and let the truck roll over you

17. Being wrong is acceptable -- staying wrong is unforgivable

18. Contain your losses
(Protect Your Backside)

19. Good traders manage the downside; They don't worry about the upside

20. Wall street research reports are biased

21. Knowing when to get out of a position is as important as when to get in

22. To excel, you have to put in hard work

23. Discipline, Discipline, Discipline !

The links in parantheses are part of The Apprenticed Investor series I did for the Street.com.

Stock Market Wizards: Interviews with America's Top Stock Traders

Hat tip: Simply Options Trading

Hulbert's 4 Big Lessons

Sunday, July 15, 2007 | 08:27 AM

in Apprenticed Investor | Investing | Markets

Mark Hulbert is the founder and chief honcho of Hulbert Financial Digest. He's been tracking investment newsletters for almost 3 decades. In addition, he is a columnist for Marketwatch, and a contributor to both the Sunday NYT business section and Barron's.

I've long appreciated his rigorous approach to markets, analyzing data, and working off of specifics, rather than emotions.

Last week, he had a Barron's column that was quite informative. He analyzed which strategies have worked over the years, and which have not. From that, Hulbert noted that several important investment lessons could be drawn.

Here are the highlights:

"Certain investment truths are timeless enough to transcend the year-to-year, or even decade-to-decade, cycles of the various financial markets:

>
Lesson #1: Returns in excess of 20% to 25% annualized are unsustainable.

Every newsletter Hulbert monitors that has ever gained more than 100% in any given year has suffered through other years in which it produced big losses. Clearly, regression to the mean is a powerful force in the investment advisory arena.

To be sure, Warren Buffett, chairman of Berkshire Hathaway, has outperformed the best-performing newsletter and mutual funds. Since 1980, the net asset value of Berkshire Hathaway has grown at an annualized rate of around 22%. But even Buffett has had weak years, under-performing in the late 1990s when Tech was king.

>
Lesson #2: There is more than one road to riches

Hulbert looks at these intractable investment questions:

• Is fundamental analysis better than technical analysis?

• Is successful market timing possible?

• Is buy-and-hold better than in-and-out trading?

After studying Newsletter writers for twenty-seven, he notes he is "no closer to answering these questions" than when he started. However, he did discover the following:

Over the last 27 years, the top performing newsletter advocates the long-term buying and holding of good quality stocks. No surprise, considering that 20 of the 27 years were a bull market.

But consider that the second-place newsletter involves a combination of both fundamental and technical analysis, as well as market timing. The average holding period of its recommended stocks is less than six months. And in third and fourth place are newsletters whose approaches are based exclusively on technical analysis.

>
Lesson #3: Discipline is the premier investment virtue.

What is the difference between success and failure? I believe the answer is discipline.

Discipline is what keeps us from reacting impulsively and emotionally to what happens in our portfolios. It is a willingness to stick to a strategy during those temporary times it may be out of synch with the market.

>
Lesson #4: Past performance is a helpful guide to picking an adviser -- if it is measured over a long-enough period.

Consider what happened if you chose to follow the five newsletters in January 2000 which, had the best performance over the trailing 12 months. (Or, you could have bought the top performing mutual funds). Four of those five newsletters still exist today, and their average return over the last seven and one-half years has been minus 2.9% on an annualized basis. The fifth of these newsletters was discontinued in mid-2002; at that time, its return since January 2000 was minus 39.6% annualized.

The bottom line? In my opinion, the random walkers are close to being right when performance is measured over the shorter term. But they become wrong in important ways when returns are measured over the very long term.

Very interesting stuff. Thanks, Mark.

Source:
Getting More Out of Lessons
MARK HULBERT
Barron's, Tuesday, July 3, 2007
http://online.barrons.com/article/SB118343520842056372.html

Efficient Market/Random Walk Joke

Monday, July 09, 2007 | 09:58 AM

Here's my variation on the classic EMH joke:

Two Economics professors are walking back to their offices after giving a lecture on the Random Walk of stock prices.

"Look!" says one of the academics, "There's $1.7 billion dollars!"

"Nonsense!" says the other. "The market efficiency hypothesis states that security prices fully reflect all available information. That money is impossible."

"Schmucks!" laughs Jim Simmons of Renaissance Technologies. He picks up the money and goes back to his office.

You may now return to your previously scheduled belief system.

Trade Like a Scientist

Sunday, June 24, 2007 | 08:01 AM

in Apprenticed Investor | Psychology/Sentiment | Technical Analysis | Trading

Doc Steenbarger has a terrific