Warren Buffett’s Secret to Making 100% a Year

by Phil - February 26th, 2011 10:51 am

I love the Berkshire Hathaway annual report!  

Especially Warren Buffett’s letter to shareholders.  The report gives us a great view of the overall economy from a man who has his finger in every pot and his letter to investors gives us a very good insight as to how things are going in the various sectors his operations cover.  Most importantly, what I have learned in my own 40 years or reading Mr. Buffett’s reports (my Grandfather was a shareholder) is what should shape any long-term investing strategy:  Patience and performance.  

I often preach to members the joys of letting gains compound and our $25,000-$100,000 virtual Portfolio, which is currently at $27,531 (up 10%) after 4 weeks, is an exercise in how to quickly compound small gains over the course of a year.  Primarily, we try to follow Warren Buffett’s Number One Rule of Investing, which is: Don’t Lose Money.  Buffett’s Rule #2 is: See Rule #1 and like us, it’s not that nothing Warren Buffett ever buys loses money – it’s just that he doesn’t ever buy things he isn’t willing to stick with UNTIL they make money.  Sure we take a few losses along the road but, by being selective in our entries, we don’t discard stocks that we carefully selected just because the market temporarily disagrees with our valuations.  

In our $25,000 virtual Portfolio, it’s only been a month so we’ve only closed our winners so far and they were SPWRA with a 100% gain (these are option trades), INTC with a 40% gain, NFLX with a 42% gain, EDZ with a 75% gain, XLF with a 15% gain, VIX with a 50% gain, USO with a 53% gain and XLE with a 5% gain.  In 19 trading day we have made 28 virtual portfolio moves (counting each leg) and, as I said, netted a 10% return to date.  Interestingly, we’ve been playing it very cautious as we still have over $18,000 of virtual cash on the sidelines, hoping for a sign to get a little more aggressive next week.  

How, you may wonder, are we going to get to $100,000 by December with just $27,531 in February?  THAT is the lesson Warren Buffett has to give us and that lesson is COMPOUNDING RETURNS!  Since 1965, Berkshire Hathaway has returned an overall gain of 490,409% to it’s shareholders.  $10,000 handed…

Tags: BRK B, BRK.A, Buffett, EDZ, GE, GS, INTC, KO, NFLX, SPWRA, SPX, SSO, USO, VIX, WFC, XLE, XLF

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Which Way Wednesday – 1,333 or Bust!

by Phil - February 16th, 2011 8:38 am

1,333.

That’s the number Art Cashin is looking for on the S&P as our breakout line.  I’ve been using 1,332 but Art is right as the bottom on the S&P in March, 2009 was 666.79 so, tecnically, 1,333.58 is a 100% gain on the S&P off that low, not 1,332, which was my lazy rounding off 666.  “Everyone’s got this psychological area of 1,333 [on the S&P 500]—they want to prove that we can double where we were from the panic lows,” Cashin told CNBC. “So later in the week, the bulls are going to circle the wagons and take another shot at it and that will tell us whether it’s a rest and recoup or not.”

Well, that pretty much sums things up.  Have a good day everybody…  

We had a good day yesterday with our bullish positions really starting to fly and our $25,000 virtual Portfolio is up to a virtual cash position of $26,240 in day 12 with a fairly even mix of winners and losers in our still too-bearish mixture.  The mixture on the Nasdaq yesterday was also bearish and you wouldn’t know it from their down 5-points finish (0.17%), but declining volume yesterday was 1.35Bn vs. just 637M of advance.  

Fortunately (by some amazing coincidence that could not possibly have anything to do with IBanks masking their selling by pumping the top of the Nas while selling the rest), this 2:1 bearishness in volume did not scare off the after-hours crowd, who immediately popped the Nasdaq futures from 2,382 to 2,391, right back to Monday’s highs as if 2 days of selling never happened.  

The Dow is just as excited with 80 points worth of gains since 3:30 yesterday and the S&P is, of course, right up on their 100% line, as are the Transports (see Dave Fry’s chart), which we’ll be watching as they test the 95 mark on IYT.  I had mentioned to Members in Chat yesterday that the Transports were the key to breaking the S&P over the line and we discussed FDX’s amazing action in yesterday’s post that seemed like a Gang of 12 effort to manipulate the Transports ahead of Cashin’s predicted run at 1,333 – NO MATTER WHAT!

We agreed and we were so bullish on yesterday’s dip that we even bought NFLX!  Now that is bullish!  Just a short-term in and out but you…

Tags: DE, IYT, JPM, NFLX, SPX, SPY, USO

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Which Way Wednedsday – On the 50% Line – Again

by Phil - August 4th, 2010 8:26 am

Wow, what a ride! 

Here we are back on the 50% retracement line at 1,121 on the S&P.  As Barry Ritholtz points out, it’s the 5th time we’ve been here and, as I said yesterday, Barry says "Its going to take a lot of something — good earnings, liquidity, sentiment, breadth, momentum, psychology, quantitative easing, something – to move higher from here."  Also great on Barry’s site today is a very neat summation of the housing crisis and his take on Timmy G’s NY Times Op Ed column, which I need to add my own .02 to. 

Mr. Geithner tries to give us that "something" Barry and I are looking for by boldly stating: "Welcome to the Recovery," writing that "uncertainty is understandable, but a review of recent data on the American economy shows that we are on a path back to growth."  He continues:

While the economy has a long way to go before reaching its full potential, last week’s data on economic growth show that large parts of the private sector continue to strengthen. Business investment and consumption — the two keys to private demand — are getting stronger, better than last year and better than last quarter. Uncertainty is still inhibiting investment, but business capital spending increased at a solid annual rate of about 17 percent. 

• Exports are booming because American companies are very competitive and lead the world in many high-tech industries.

• Private job growth has returned — not as fast as we would like, but at an earlier stage of this recovery than in the last two recoveries. Manufacturing has generated 136,000 new jobs in the past six months.

• Businesses have repaired their balance sheets and are now in a strong financial position to reinvest and grow.

• American families are saving more, paying down their debt and borrowing more responsibly. This has been a necessary adjustment because the borrow-and-spend path we were on wasn’t sustainable.

• The auto industry is coming back, and the Big Three — Chrysler, Ford and General Motors — are now leaner, generating profits despite lower annual sales.

• Major banks, forced by the stress tests to raise capital and open their books, are stronger and more competitive. Now, as businesses expand again, our banks are better positioned to finance growth.

• The government’s investment in banks has already earned more than

…

Tags: EWJ, Geithner, Jobs, SPX, SPY, USO

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Charts From the Future: 5% Rule Update

by Phil - July 25th, 2010 11:15 am

Yawn!

As I said in our last 5% Rule Update, way back on May 5th, I’m not a big fan of TA.  We have our 5% rule and it serves us well enough but that’s a statistical analysis, not a technical one.  The only TA I put a lot of stock in is Fibonacci Retracements but that, also, is really statistical science and has nothing to do with trying to predict the movement of squiggly lines on a chart. 

The 5% Rule does NOT tell you which way the market is going.  It does tell you where the resistance points will be.  Of course, knowing that and knowing what kind of bounces to expect and knowing where a proper breakdown or break-out occurs is kind of useful and, when it coincides with the tea leaves that are read by the "real" TA guys – you can really have something good to go by! 

Unfortunately, the 5% Rule is not really a RULE because it requires a cynical background in statistics, especially regarding aberrant values or "outliers" and a general understanding of market history as well as current market events because all need to be taken into account in order to give you accurate "consolidation levels" from which we base out chart movement.

The great Harry Houdini used to enjoy amazing audiences with demonstrations of the supernatural, especially when he would pull back the curtain and reveal the frauds that others were passing off as reality.  That’s how I feel about TA - we can use these very simple scientific "tricks" to project the movement of the market and others can paint their charts and dress them up in whatever language they wish to make it unique but, to me, it still all boils down to the fundamentals with the underlying movement governed by normal regression patterns influenced by capital flows and sentiment. 

Whatever you want to call it, here’s our chart from May 5th, where I said: "So what lies ahead?  Most likely a retrace back to 1,100 (25% of our run) but if that holds and we consolidate a bit, I will be downright bullish.  I will also be impressed if we hold 1,145, which was our last breakout line but, for now, we have a 3.75% drop from 1,218 but a poor bounce yesterday indicates we are likely to get down to a 5% pullback from 1,218 to 1,157 and…

Tags: 5% Rule, Fibonacci, SPX, SPY, technical analysis

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DARK HORSE HEDGE 7/11/10

by ilene - July 12th, 2010 1:39 am

DARK HORSE HEDGE 7/11/10

By Scott Brown of Sabrient, with Ilene of Phil’s Stock World 

A holiday-shortened week combined with little news provided the backdrop for a light volume positive week with the major indexes posting 5% gains.  Earnings season begins Monday July 12, starting off with Alcoa Inc. and followed by dozens of other companies.  The S&P is bumping up against several technical resistance lines.  After falling over 13% since the April highs, last week’s recovery pushed the SPX to 1077. 

On the chart below, our trend line drawn through the April highs and June rebound-highs indicates that the SPX is right at trend-line resistance.  The 50-day Moving Average also looms just above as another possible resistance area. 

[Chart by Free Stock Charts]

The 14-day RSI at 42.4 remains below a more bullish 50, and the 12-26-9 MACD at -13.6 remains shy of a bullish signal line at zero.  Factoring in the lack of volume in last week’s 5% rebound (and possible lack of conviction), the chart-evidence leads us to believe that the market isn’t ready to continue the uptrend in the short-term.  Notice all four positive days last week had volume below the 50-day Moving Average. Greater declining volume on Thursday and Friday isn’t particularly encouraging.

Analysts are projecting that second-quarter earnings of S&P 500 companies rose 42 percent, according to S&Ps Silverblatt.  Investors will again be watching the earnings and revenue figures along with guidance as concerns over a double-dip recession remain.  The Dark Horse Hedge maintains a SHORT tilt in our Long/Short approach to achieving higher Alpha (return over benchmark return) and Sharpe Ratios (return for each unit of risk taken) with a low Beta (correlation to market move and direction--i.e. we’re striving for less correlation to market movement).  

We will be watching the trend lines and technical signals this week to add new posititons.  If the market struggles and can’t penetrate the trend line, we will likely recommend adding 2 SHORTS and 1 LONG position.  In contrast, if the market reacts well to early earnings announcements and can break through the trend line, it is likely that the RSI and MACD will confirm a move through the 50-day Moving Average and provide reason to go to a BALANCED position by adding 2 LONGS.

We are continuing to hold our previously entered (July 1, 2010) short and long positions:…

Tags: Dark Horse Hedge, earnings, Sabrient, SPX, Stock Market, trend lines, volume

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Testy Tuesday – Bottom Busting or Big Bounce?

by Phil - June 29th, 2010 8:27 am

Wheeee, what a ride!

Finally all our very boring sitting around at 75% cash makes us feel smart as the market makes what we hope is that final blow-off bottom to re-test our lows.  I already sent out an Alert to Members this morning so a lot of this is old news to them but nothing has changed since 4:30 so here’s a quick reprise – What we are mainly seeing in the futures this morning is 2 major factors that are driving the markets lower:

1) Japan, where too strong Yen (88.6), -0.1% industrial output, -1.7% exports, rising unemployment (just 5.2%) AND lower houshold spending (-0.7%) numbers sent the Nikkei down 1.25% today to 9,570.  If you think about it though, pretty much all of that is a strong Yen issue because it lowers demand for the exports (making them more expensive) and then factories slow down and people get laid off and household spending drops from that PLUS the fact that it’s now cheaper for them to buy imports so they can buy the same stuff at lower prices. 

So, overall, nothing people shouldn’t have expected but ugly to read about.

2) China, where the Shanghai fell 4.27% today to 2,427, which is a lot because they are a 10% limit down market on individual stocks so you can bet the selling isn’t done if the AVERAGE was down 4.27%.  The Hang Seng was ugly too, falling 2.3% to 20,248.  What sent China off a cliff was kind of silly.  The Conference Board, which is a NY-based research firm had reported that Chinese economic indicators rose 1.7% in April – something at the time (June 15th) we thought sounded a bit high.  Well, funny thing is it turns out the people at the Conference Board must have been high on something because it turns out they made a "calculation error" and the correct number was just 0.3%.

There is a third factor in play and, earlier this morning I thought it was too silly to be considered but, apparently, you can panic retail investors over pretty much anything.  On Thursday, there are $547.5Bn worth of bank-loans from last year’s special liquidity program that are due to roll over and there are rumors circulating that the ECB won’t renew the facility at all.  The ECB has, in fact, already promised to replace it with rolling 3-month loans at the…

Tags: AAPL, CAT, OIH, PFE, SDS, SPX, TBT, TZA, VIX, XLB, XLF, XOM

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Foolish Thursday – Through the Looking Glass

by Phil - May 6th, 2010 8:28 am

"If you don’t know where you are going, any road will take you there." – The Cheshire Cat

I like to sit with my daughters (8 & 10) on the couch and look at news pictures on my laptop – it’s a good way of getting them involved with the day’s events, teaching them about my job and teaching them about the world (albeit from my twisted perspective).  The USA Today is exellent for this as is Reuters and the NY Times.  As CSNY said:

Teach your children well and feed them on your dreams…

Can’t you see, you must be free to teach your children what you believe in, to make a world – that we can live in? 

Since they are kids, I often simplify what’s happening so we have a general classification of "protesters" to explain why the army or police are attacking people with no guns.  Yesterday, my 8-year old had a "eureka" moment when she said to me "Why is everyone around the World protesting – it is because of the bad economy?"  Well, she pretty much nailed it, didn’t she?  As I’ve been warning for years, the poor (all of the bottom 90% at this point) have been pushed to the edge and they are now starting to push back – so much so that it’s obvious to an 8-year old that we are on the verge of a global revolution…

That led to a little photo project we did together, where I also got to teach my daughters one of my favorite songs: "We Won’t Get Fooled Again!"  As the great and powerful Bush the 2nd once said: "Fool me once, shame on, shame on you.  Fool me ya can’t get fooled again."  That pretty much sums up my attitude on the markets right now – we cashed out at the top and, until we see some pretty DEFINITIVE proof that it was not a top, we’ll be sticking to mainly cash, thank you very much!  While Alice’s Red Queen may have said "Sometimes I’ve believed as many as six impossible things before breakfast," we’re having a little trouble swallowing what’s being dished out by our government and the MSM.  Richard Davis’s article on the lagging GDP is one example, as are many of the fine articles in our Phil’s Favorites section.

In "Through the Looking Glass" (you can tell I have kids!) Alice said "It’s no use going back to yesterday, because I was a different…

Tags: 5% Rule, debt, DIA, France, Greece, Spain, SPX, SPY

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Peter D – Confessions of the PSW Strangler

by Phil - February 3rd, 2010 4:49 am

Peter D has a long-running and very successful system of selling premiums on a regular basis that’s well worth learning.

Investors selling a short strangle are expecting the underlying stock to not move much in either direction. The strategy is accomplished by selling a call option at a higher price than the current stock or ETF price and by selling a put option at a lower price than the current stock or ETF price. Both of the options will have the same expiration month. The investor in a short strangle benefits from the underlying moving within the spread between the call strike and the put strike.

There are two reasons we like this strategy a lot at PSW:

1) It’s boring!  Unless the market is MUCH more volatile than normal, taking sensible, NON-GREEDY, out-of-the-money short option positions is a fairly market-neutral way to place our bets.  While the risk/reward ratio may seem inverted, statistically it’s a winning play over time.

2)  It’s perfect for our "be the house, not the sucker" philosophy of trading.  We are always looking to SELL volatility. The idea behind this trade is that front-month volatility is relatively expensive compared to historical long-term volatility and we take advantage of selling a very high cumulative volatility over the course of the year.  

We recently ran a collection of comments following through on some trades over time and quite a while ago Sage wrote an article relating about using short strangles on longer-term stock plays, which provides some additional ideas on how to apply this strategy.  Peter has been kind enough to provide us with a definitive guide to help set you on the road to a successful career as a strangler.  The following is a collection of posts (make sure you use the links) on Short Strangles and the Crazy plays on the indices (SPX, RUT, NDX, etc.):
 
1- The Crazy play consists of a Short Strangle and a protective long put vertical. These plays are mainly for virtual Portfolio Margin accounts, with balance greater than $125,000, preferably over $200k as the margin can swing wildly.  

2- Very rough comparison among Short Strangle, Iron Condor, Buy/Write and straight stock purchase. Note the rolling tips in the second to last paragraph.
 
3- VIX, the effects of.
 
4- Possible adjustments of the Crazy Play.
  
Additional discussion on doubling down.
   …

Tags: NDX, Option Trading Strategies, Options Education, RUT, Short Strangle Strategy, Short Strangles, SPX, VIX

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Is The Stock Market Top In?

by Chart School - January 19th, 2010 4:29 am

Is The Stock Market Top In? or Could This Be The Last Chance To Buy Stocks At Support?

Is The Stock Market Top In?

Courtesy of Charles Hugh Smith, Of Two Minds

Is this the top of the global equity rally which has run up for 10 months? A case can be made for "yes."

Is the top in on global stock markets? The case can certainly be made on a technical basis. In one of our private email exchanges, correspondent B.C. mentioned a possible turning point in the stock market around the third or fourth week of January. Curious about the timing, I asked if he could provide some context for that possibility. Here are his comments: 

As for the "potential" cycle turn date, it is based on the Elliott Wave (EW) Fibonacci 61.8% scaling of the decline from Oct. ’07. But, as you well know, EW works "when it works" (selection bias or effect and post facto rationalizations); and, if it does operate at some deep structural level, there is the ongoing challenge to discern in real time the relevant scale within which a phenomenon is (or is not) occurring.

The Jan. timing also fits within the time-price self-similarity of the Nikkei in late ’99 to early ’00 and the SPX in 1939, which could extend with an ongoing topping pattern to the SPX 1220s-40s into Feb.-Mar. in terms of an idealized time-price symmetry; and (2) the tendency for stock prices to peak early in the second year of a presidential term during secular bear markets and decline for the year on average.

Were the pattern to fit generally with the EW scaling, we are completing a "b of C" within a larger secular descending triangle pattern, and we will see a C-wave decline of 3 waves into ’13-’14.

The bullish sentiment is rather consistent with a B or 2 wave, particularly today in that it is the general consensus of the Wall Street/DC establishment and at least a significant plurality of the "investor class" that the Fed saved the day; "reforms" are being implemented to prevent a repeat of the serial crises; the "worst is over"; and the economy is "recovering" and at no risk of a relapse. I see the structural effects of Peak Oil on the price of oil, debt service, and consumer spending creating a persistent

…

Tags: Dollar, elliott wave, GDP, Gold, SPX, Stock Market

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