The RVB Index

So I am working on creating my own type of oscillator. It's not great, and, quite frankly I don't know how to use it for buy / sell signals. It's a simple chart - I have 11 items I use to determine the market's health, and I give them all equal weight. Then, I just add up the +'s and the -'s and come up with a score. You can see that lately my oscillator is showing some serious market weakness. One difficulty with this oscillator is that it is calculated off of my interpretation of several market charts, so there is some susceptibility there. I may simplify it over time - we'll see.

The red line is the raw calculation, and the black line is a moving average. Right now, I wouldn't be opening new positions, the market's going to make a choice of direction soon.

A Trader’s Story (Also known as “What to do when all hell breaks loose”) (Orig. written 6/17)

This story happened to yours truly (only a few hours ago) and serves as a good example of a few good trading lessons. I know it’s cliché, but it’s soooo true that we learn our best lessons when the going gets tough.

Yesterday, I made the decision to go long (that is to buy) 100 shares of West Company. It has shown good growth and was breaking out on stronger volume. Near the close, I made my purchase and as always, had confidence in the trade but was willing to accept about 2 points of risk.

Fast forward to this morning, and check out the chart of West, WSTC. You’ll see an unusual day on June 17, 2005 – one that is more volatile than any session I have been able to find for WSTC. The stock opened 7 dollars lower, and actually hit a tick down $17.88 (-47.66%) at one point. There was a 4 dollar spread between the bid and the ask price. At this point – what does a trader or an investor do?

1) Something’s wrong. I obviously made a mistake of some kind. The question is to figure out what the mistake was, and correct it.

Action: I scoured Yahoo Finance and CNBC to see if there was some kind of news for WSTC. There was none. Thus, I concluded that this was some kind of anomaly, a statistical glitch.

Action: I pulled up the chart and saw one of my mistakes. The stock has many days in which only 19,000 shares trade. This stock was not liquid enough for me to have in the first place! Thus, the share price is easier to manipulate, than, say GE’s stock price because of the number of shares traded daily.

2) My heart has dropped through my foot. Now what? I know I’m acting in fear. I’m also acting in greed saying to myself, “I can’t get out of this thing down 17 freakin’ points!” (I didn’t use “freaking”). So am I being too greedy telling myself that this thing will come back?

Well, here’s the thing: I know I’m afraid, and I know I’m being greedy. So, I’m trying to throw those emotions out and ask myself, “If I weren’t in this position, what would I be trying to do?” My answer was that I wanted to buy the stock down 17 points, figuring that the price would return to normal. This was because my “unemotional” (note the quotes) analysis led me to the conclusion that this was an anomaly. Therefore, I decided that I would hold it for a bit to let the dust settle and exit. I have a strong belief that most of these things clear up in 10 minutes or so in the market, when there is no news story leading to the stock price decline.

After a few minutes, the stock was still trading down 4 points. But, the spread was coming back to earth, and I wound up exiting the trade only 0.65 below my entry point. I DID have to sell, because in this situation, it’s better to get out so that I can think more clearly (not clouded by fear and greed), not to mention I have to execute on the discipline of my stop getting hit.

This situation reiterated some of the rules of trading / investing:

1) Check your emotions at the door – or at least know how they act on you and your decision-making so that you can assess the situation clearly.
2) Don’t lose money. This is better said as “Play Defense.” A good defense in football still gives up yards, just not in big chunks. You will not be right all the time in this business, but if you play defense like this, you’ll live in the markets and protect your precious capital. If you do expect to be right all the time, find something other than investing and trading.
3) Follow your plan. My stop on this stock was 34.55. It got hit (in record time), and I found a way out. Your brain comes up with the plan in an unemotional state, and is the best judgement. When you’re in a trade, emotional forces begin to act on and challenge your ability to make good decisions.
4) Be accountable for all of your trades. I was responsible here, nobody else. Blaming others or using excuses doesn’t cut it, and will only lead to your demise as an investor.

Thanks to Ugly, I learned that there was a firm having technical issues that probably led to the problems at the open for WSTC. Nonetheless, I will take my loss of $78 and live to fight another day.

There you have it. Quite the start to a Friday!

Buy 'em and go on vacation!

My aplogies for the lack of blogs recently. The good news is that little has happened in the markets since my last entry. I've been busy, and the markets have been fairly boring.

Today I want to talk about two great mutual funds that you can buy, and then feel comfortable enough to not check up on them very often. Both of the funds have similar investing styles. Niether of them will likely beat the S&P 500 when the markets are hot. But, when the markets are cold, these funds earn their keep, protecting their gains by switching to conservative investments like bonds.

1) The first is the T. Rowe Price Capital Appreciation fund (PRWCX). T. Rowe Price is a leader in the fund industry, and their philosophy is not to charge its customers ridiculous expense fees. For a fairly actively managed fund, the expense ratio is a low 0.78%, while yielding 1.46%. The manager has recently turned over, however, the strategy is still in tact. Since Jan 1, 2001 the fund is up about 60%, versus just 10% for the S&P. Like I said, when the markets are cold is when this fund earns its keep. Morningstar gives it a 5-star rating (its highest rating) and the fund only has an 18% turnover rate. If you look at a 10-year return, the fund is up about 270%, versus only 200% for the S&P 500. Until the market top of 2000, the fund had slightly underperformed the index, but the fund successfully cashed in its chips near the top, and has a history of good management not getting too overweight in momentum sectors that can come crashing down (like internet stocks in the bubble).

2) The second fund is the Vanguard Wellington fund (VWELX). This fund has a similar strategy. It is a little bit more actively managed, with a 24% turnover ratio, which is still not very high. It also underperformed the overall S&P 500 during the great years of the mid-to-late 90's, but the fund has done very well during the thin years. The fund has a lower expense ratio than the first fund mentioned at 0.31%, but you'll notice that this fund hasn't outperformed the S&P 500 by as wide of a margin. It checks in at about 220%, vs. 200% for the index, vs 270% for the T. Rowe Price fund above.

Take a look at both of them. They're similar in nature and very, very good long-term investments. In fact, in my opinion, they're two of the best mutual funds in the world - because they do what you want - they make money, and they don't require much monitoring.

Apple Computer

I wanted to share a recent email conversation regarding Apple Computer:
Rich,
May be worth investigating or just buying.... It may be time to pick up Apple (AAPL). Have you heard? Apple announced today they are going to base their next product on Intel. (Early next year) Why? Because basically, Microsoft can't seem to figure out how to tap into the electronic Movie sharing business...ala iPod... Apple has this technology but has always lacked the ability to keep up with its own software development. Now that it will be in the "Intel channel" it automatically gains "par" compatibly with mainstream software developers. Instead of "Little" Apple Software Eng, they now will be able to use the existing software development model that gives Microsoft the "Width" in the industry that has allowed it to dominate the PC software market. Think of it... A PC or MAC? Hardware is simply a commodity these days. Its the software and O/S that drives the PC market.

http://www.wired.com/news/mac/0,2125,67749,00.html?tw=wn_tophead_4

Mac OS running on Intel? Get ready to buy your (First) Mac! This combination of products will blow away the Windows O/S/Intel "Bloatware" configuration. I will be going back to Mac!

Note: Other small software companies that produce streaming videos may also see a jump.

View my response:
I did hear about it this morning on CNBC while drinkin' my morning cup o' joe...

Apple down 0.32. Investors aren't too excited. Don't get too hopped up on the news...this will probably make apple more price competitive...and could be the break they need to gain market share...but let it work itself out first. Financially the company will take some time to prove itself via this move. They're not going to gain 10% market share next week, or even next month. It's a great move, competitively, though...and means AAPL can be right in the future, perhaps. However, AAPL's stock price right now is MUCH more tied to beating iPOD expecations and the iPOD's success...and iPod sales seem to be slowing.

My style isn't very speculative...I like to watch and see if things are working before buying. How about instead of buying, we just put it on a shopping list, and if someday it looks right, then we go.

BTW - apple was soooooooo right last year. Now its awfully hard to figure out.

:-)