Saturday, July 21, 2012

07/21/2012 Waiting out stupidity


Small Portfolio
XLF & IAU
6.75%
Position
Date
Return
Days
CSGS
10/3/2011
40.19%
292
NLY
10/25/2011
14.90%
270
KBR
10/27/2011
-19.10%
268
VG
10/27/2011
-42.86%
268
BT
1/4/2012
12.47%
199
SAI
5/30/2012
1.37%
52
XEC
6/5/2012
13.63%
46
DECK
6/15/2012
-2.75%
36
CVX
7/5/2012
1.70%
16
RIMM
7/16/2012
-6.48%
5
S&P
Annualized
1.14%
Small Portfolio
Annualized
5.91%
Large Portfolio
Annualized
8.09%



As expected, RIMM is struggling out the gate.  Would love to find a way to avoid that kind of thing, but there is a reason that Value Stocks are cheap: no one in their right mind would want them!

Of course, whenever I use my “right mind” I lose money.

The problem is that our minds tend to work faster than the businesses we try to invest in.  We think in terms of days and weeks, while businesses operate in quarters and years.  We see a good earnings report and a low current P/E and we want to invest in the company.

But a “Value Stock” is the exact opposite.  The usual mark of a value stock is an earnings failure.

In fact… a few earnings failures.  After a couple of them we start expecting that trend to continue.

And then, the trend doesn’t continue.  We get a positive earnings surprise.  And that darling growth stock with astronomical earnings does the opposite with a surprise earnings failure.

After a while the growth stock becomes a value stock and the value stock becomes a growth stock, and the whole cycle continues.

Value Stocks are cheap because no one wants them.  They have bad prospects for the future, and things are horrible now.  But the present slowly fades away and new earnings reports come.

The optimal holding period for my own model is currently 154 days (i.e. one to two earnings reports in the future).  With ten stocks that leaves me rotating about once every two weeks.

The next scheduled rotation is August 2nd.  Until then, there’s nothing to do but wait.  I have to force myself to wait, because my “right mind” gets bored waiting for the next few earning periods to bail me out of stupid stocks like RIMM.

Tim

PS… here are some articles about how our brilliant minds goof us up when we try to invest…

http://www.sciencedaily.com/releases/2012/07/120706184351.htm



http://www.ritholtz.com/blog/top-10-investor-errors/



http://www.fool.com/investing/general/2012/07/10/histories-of-things-that-never-happened.aspx


No comments:

Post a Comment