July 12, 2015
I try to watch Jim Cramer’s ” Mad Money ” on CNBC as often as I can. He clearly enjoys what he does…his nightly stated intention being to help you make money. His encyclopedic knowledge of equities impresses me. He has helped me by pointing out paths less travelled which deserve investigation by me.
Superficially, he seems to be all about stocks, but his real message is to stay away from stocks…UNLESS you have the time and motivation to do all the research required to match wits with the guy on the other side of your trade. He suggests you channel your equity investments toward Index funds and Index ETFs such as SPY ( S&P 500 largest USA Equities ). That being accomplished, he will teach you to invest your ” Mad Money “, the money you have to play with, in a manner which is thoughtful not playful.
The USA stock market ended the week of July 10, as a week of Greek and Chinese inspired turmoil. This was the type of week sure to give one an ulcer had he not been occupying a knowledge inspired zone of calm and confidence. This comes from having a game plan and seeing the market obeying your every command.
The action of SPY since January 1 carries a relevant message…. tug of war within.
Market close December 31,2014,. $ 205.54. Market close July 10, 2015 $ 207.48. A gain of 9/10 of 1 % year to date. That is about as flat as you can get. That tells me this is a stock picker’s market. In other words, a market where having an edge wins. A market where the specific risk of individual stocks is higher than normal . A very dangerous market for the average investor. You had better know what you are doing or stay within the relatively safer precincts of SPY. The twelve moth appreciation of SPY has been 5%. Not a loss !, and its not scanty money market interest ( a net loss when adjusted for inflation )
If you are retired, and 5% will float your boat, I suggest you stay with SPY. Unhappily, 5% will not float my boat, unless I enjoy sailing with water up to my thighs in the main cabin.
The far more dangerous alternative is to invest in stocks, and here is where focus, motivation and knowledge improve your risk profile. The underlying question for every stock in your portfolio is ….WHY? Goldman Sacks has a ” Conviction List ” and you better have your own conviction list. And, you better be able to articulate a plausible reason for every stock on your list. And, your reason shouldn’t be because its on this list or that list. True conviction comes from your knowledge that you have done your work, not that Goldman has done theirs. Jim Cramer gives lots of clues on how to approach the work.
For instance, just the other night Cramer pointed you toward the ” 52 week new highs list ” as a place to start an investigation in a market that is selling off. If a stock is making new highs while the rest of the market is selling off, doesn’t that tell you that the new high stock is worth investigating !
By conviction list , I mean a list of stocks you would invest more money in if the market sells off….rather than freak out and have a perfectly good investment be shaken out of your hands ! By having a conviction list you would be buying while everyone is selling and selling into strength when your investment more than pans out. That is the recipe for making money with individual stocks.
My conviction list starts with my conviction about the primary direction of the market. Do I believe this market has legs ( yes I do ) WHY ?..low interest rates and high earnings yields relative to alternative investments. If you really believe this (as I do), then everything else you hear or read is just noise, a buying opportunity….so smile ! And, this week you had a pretty good example of the type of damage ( temporary ) noise can create. That the market closed Friday on a high note was , to me, indicative of its internal strength.
Turning to my portfolio, 40% invested, I was disappointed that equity prices didn’t continue lower as they hinted they would earlier in the week. Just a hedge fund head fake.
If the market won’t go lower, and allow me to buy on weakness, I’ll just need to create some synthetic weakness to allow me to purchase at lower prices. I don’t have a ton of patience ! I’ll create this opportunity by contracting to purchase specific equities at a specific ( lower ) price I select.within a specific time frame. For instance, I intend to contract conditionally to purchase a specific amount of Time Warner Communications at $82, expiry August.. As of the close Friday, Time Warner closed at $88.67 per share. My contracted buy price is 7.5% below Fridays close. Is buying at a 7.5% discount, buying on weakness ? Maybe. It certainly isn’t buying at a premium. And, here is the kicker….I’m to receive a 10.6% per annum premium ( up front ) for taking this risk. If I’m wrong and Time Warner gets assigned to me at $82 per share while the market price is $77 per share, I lose ( temporarily ) but I can apply the premium to reduce my per share cost from $82 per share. And, since I am convinced about Time Warner’s prospects, I’ll take my chances with a smile.
Why Time Warner ? , Why Disney ? , Why O’Reilly Automotive, Why Mohawk Industries ? Why Walgreen Boots Alliance ?, Why Apple ?, Why Gilead Scientific ?, Why CVS ?, Why SPY ? at a strike price of $199. Trust me when I tell you I have my reasons. But, this is my conviction list. I suggest you either create your own conviction list, buy SPY or stock up on TUMS. Also please read the DISCLAIMER in my Archives, April 19, which explains why your conviction in me could be better placed in you !
Oh, and a final word. Unless you can operate effectively on two to three hours sleep per night, I wouldn’t attempt all this ” conviction ” work while pursuing a full time career. Instead, I would follow Jim Cramer’s advice and invest in Index funds or Index ETFs. I know I could never have expended anywhere near the research effort required to create a conviction list during my working career. Its far better to watch grass grow ( SPY ) than fret you don’t have enough information to match wits with the hedge fund professional on the opposite side of your trade.
Richard Maurice Gore
Monday – Early AM – Greece Agreement in the wee hours. Expect that to impact the premiums I was expecting on my “synthetically” weakened conviction list.