Jan 2010
Hitting New Highs With Steel, Oil And Search
January 08, 2010 12:24
Even after the market's powerful rally off last March's low, there are few investors who have fully recovered from the stock market crash as Tim Siegel has. Here are four stock ideas from a patent attorney whose portfolio has shaken off the bear market and moved on to new peaks.
As of Jan. 6 Siegel's Sector Opportunity Fund I, a Marketocracy.com portfolio I've been tracking for more than five years, was 24% higher than it was at the market high of Oct. 12, 2007. Since inception on Sept. 30, 2004, it has gained 240%, handily beating the 14% gain by the S&P 500 average. (Click here to see his complete track record.)
Siegel has demonstrated the kind of investment skill that many investors need to get their portfolios back on track. That's why his portfolio was recently added to Marketocracy's SWAN team, a rarefied group of investors who consistently make the right calls on the market, both in stock selection and market exposure.
One of Siegel's favorite stocks right now is Apache (APA), an independent oil and gas producer.
"In November 2009 China produced automobiles at the rate of 16 million autos per year. Ten years ago, the yearly figure was closer to 1 million. It is no exaggeration to say that China is filling up with cars. This is why the price of oil has recovered to about $83 per barrel, despite the fact that employment in the industrialized world has been severely reduced. When U.S. and European employment begins to grow again, watch out. We will have strong demand growth, but weak supply growth. The price of oil could move a lot higher."
A patent attorney by day, Siegel uses the same skills that help him analyze and protect inventions to analyze the stock market. He says patent knowledge comes in handy in the analysis of many companies.
"A lot of stock analysts pore over corporate financial information, but few are well equipped to understand a firm's patent portfolio. For many companies there is a vast trove of data that is largely overlooked in assessing a company's total worth. This opens up exploitable opportunities," says Siegel, who analyzes his stock choices in the context of broad geographical and historical themes. "I am interested in everything, and I use that curiosity and the knowledge it uncovers to predict how world trends will affect stock prices." Read More...
As of Jan. 6 Siegel's Sector Opportunity Fund I, a Marketocracy.com portfolio I've been tracking for more than five years, was 24% higher than it was at the market high of Oct. 12, 2007. Since inception on Sept. 30, 2004, it has gained 240%, handily beating the 14% gain by the S&P 500 average. (Click here to see his complete track record.)
Siegel has demonstrated the kind of investment skill that many investors need to get their portfolios back on track. That's why his portfolio was recently added to Marketocracy's SWAN team, a rarefied group of investors who consistently make the right calls on the market, both in stock selection and market exposure.
One of Siegel's favorite stocks right now is Apache (APA), an independent oil and gas producer.
"In November 2009 China produced automobiles at the rate of 16 million autos per year. Ten years ago, the yearly figure was closer to 1 million. It is no exaggeration to say that China is filling up with cars. This is why the price of oil has recovered to about $83 per barrel, despite the fact that employment in the industrialized world has been severely reduced. When U.S. and European employment begins to grow again, watch out. We will have strong demand growth, but weak supply growth. The price of oil could move a lot higher."
A patent attorney by day, Siegel uses the same skills that help him analyze and protect inventions to analyze the stock market. He says patent knowledge comes in handy in the analysis of many companies.
"A lot of stock analysts pore over corporate financial information, but few are well equipped to understand a firm's patent portfolio. For many companies there is a vast trove of data that is largely overlooked in assessing a company's total worth. This opens up exploitable opportunities," says Siegel, who analyzes his stock choices in the context of broad geographical and historical themes. "I am interested in everything, and I use that curiosity and the knowledge it uncovers to predict how world trends will affect stock prices." Read More...
Diversification Is Not Enough
January 05, 2010 12:28
The stock market has belched blood twice in the last decade. Don't be unprepared the next time it happens.
In the last decade the S&P 500 has suffered two severe drops--one of 46% and the other of 56%--that have ruined many people's financial plans. We think the next 10 years are going to be more of the same: big booms followed by devastating crashes. If you cannot afford a 50% loss at some point in the next 10 years, you can't afford a strategy of being 100% invested in the market all the time, even if you have a diversified portfolio.
Why? Because the big risks we are facing are systemic risks from which diversification will not offer much downside protection. In the past, systemic risk was generally ignored and the emphasis was placed on diversifying away other kinds of risks. Now that we have seen that a systemic crisis can result in the whole market losing half its value, we can't afford to ignore it anymore. For this reason, investors need to pay as much attention to protecting their portfolios as they do to the performance of their portfolios.
The epicenter of the systemic risk we are facing is still the financial sector.
One of the biggest lasting effects of the financial crisis is the collapse of credit for small companies like those in the Russell 2000. This makes the ProShares UltraShort Russell 2000 ETF (TWM) a good choice for investors looking for some protection from another devastating systemic crash. If there is another crisis, small companies will fall hard just like last time, and this leveraged inverse ETF is designed to rise by double the daily drop in the Russell 2000 index.
If, as we all hope, the market is spared another crash, a contracting or slow-growing U.S. economy and a continued lack of bank financing create strong headwinds for small companies. In this scenario, TWM may lose money and you have to look at this as the cost of providing some protection against a system-wide crash. It may help to think about this position like fire insurance for your home. Is fire insurance a bad investment if your house doesn't burn down? On the contrary, fire insurance enables you to enjoy an asset you could not afford to lose. There is value in that.
At this point, the SWAN (Sleep Well At Night) team has about 8.5% in double-inverse ETFs like TWM. Long positions make up 73% of the portfolio with the balance in cash. Since the 8.5% hedge consists of 2x leveraged ETFs, they offset about 17% of the long positions so the net exposure is about 56%.
The hedge position serves two purposes. It reduces losses in the event of a crash and provides some buying power to take advantage of the low post-crash prices so the portfolio can recover more quickly.
Using inverse ETFs to hedge is preferable to shorting stocks (which is the conventional way to hedge) because if the market goes up and you start losing money on the hedge, the size of the inverse ETF position shrinks so it hurts you less as the market moves against you. In contrast, a short position that goes against you becomes a bigger position in your portfolio, so the pain increases the more the market moves against you.
Adding a little TWM to your portfolio gives you some protection from a systemic crash and enables you to sleep better at night with your portfolio of stocks even though there is a risk of losing nearly 50% in a crash.
In this era of systemic risk, investors have to protect themselves, because most mutual funds, index funds and ETFs are designed to stay 100% invested no matter what happens.
Ken Kam is founder of Marketocracy.com and Marketocracy Capital Management, a Web site and advisory service tracking the trades of the best online investors. Kam may hold positions in the securities mentioned in this article.
In the last decade the S&P 500 has suffered two severe drops--one of 46% and the other of 56%--that have ruined many people's financial plans. We think the next 10 years are going to be more of the same: big booms followed by devastating crashes. If you cannot afford a 50% loss at some point in the next 10 years, you can't afford a strategy of being 100% invested in the market all the time, even if you have a diversified portfolio.
Why? Because the big risks we are facing are systemic risks from which diversification will not offer much downside protection. In the past, systemic risk was generally ignored and the emphasis was placed on diversifying away other kinds of risks. Now that we have seen that a systemic crisis can result in the whole market losing half its value, we can't afford to ignore it anymore. For this reason, investors need to pay as much attention to protecting their portfolios as they do to the performance of their portfolios.
The epicenter of the systemic risk we are facing is still the financial sector.
One of the biggest lasting effects of the financial crisis is the collapse of credit for small companies like those in the Russell 2000. This makes the ProShares UltraShort Russell 2000 ETF (TWM) a good choice for investors looking for some protection from another devastating systemic crash. If there is another crisis, small companies will fall hard just like last time, and this leveraged inverse ETF is designed to rise by double the daily drop in the Russell 2000 index.
If, as we all hope, the market is spared another crash, a contracting or slow-growing U.S. economy and a continued lack of bank financing create strong headwinds for small companies. In this scenario, TWM may lose money and you have to look at this as the cost of providing some protection against a system-wide crash. It may help to think about this position like fire insurance for your home. Is fire insurance a bad investment if your house doesn't burn down? On the contrary, fire insurance enables you to enjoy an asset you could not afford to lose. There is value in that.
At this point, the SWAN (Sleep Well At Night) team has about 8.5% in double-inverse ETFs like TWM. Long positions make up 73% of the portfolio with the balance in cash. Since the 8.5% hedge consists of 2x leveraged ETFs, they offset about 17% of the long positions so the net exposure is about 56%.
The hedge position serves two purposes. It reduces losses in the event of a crash and provides some buying power to take advantage of the low post-crash prices so the portfolio can recover more quickly.
Using inverse ETFs to hedge is preferable to shorting stocks (which is the conventional way to hedge) because if the market goes up and you start losing money on the hedge, the size of the inverse ETF position shrinks so it hurts you less as the market moves against you. In contrast, a short position that goes against you becomes a bigger position in your portfolio, so the pain increases the more the market moves against you.
Adding a little TWM to your portfolio gives you some protection from a systemic crash and enables you to sleep better at night with your portfolio of stocks even though there is a risk of losing nearly 50% in a crash.
In this era of systemic risk, investors have to protect themselves, because most mutual funds, index funds and ETFs are designed to stay 100% invested no matter what happens.
Ken Kam is founder of Marketocracy.com and Marketocracy Capital Management, a Web site and advisory service tracking the trades of the best online investors. Kam may hold positions in the securities mentioned in this article.