POST OF THE DAY
Kua`aina Partners
View From a Wolf's Den

Format for Printing

Format for printing

Request Reprints

Reuse/Reprint

By IcyWolf
July 2, 2004

Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light. How are these posts selected? Click here to find out and nominate a post yourself!

Howdy, (WARNING, just post #1 in a long-winded wolf's meanderings)

Well, I originally started intending to just give you all an update / overview of Nuke John's wonderful little momentum system, but of course anything that straightforward just about demands additional complications <wry wink>. So maybe my intro to the alchemy that we call Foolish Investing (vs. foolish investing) might help those wiser than myself - the wise being those folks able to learn from the mistakes of others rather than having to personally make em. Hang on, here we go ...

It occurred to me that since I started seriously considering equity investing ... well, its been quite a ride. I really started in earnest just about at the height of ye olde bubble. And so ya can guess in which direction the ride was accelerating at the beginning. But us 4 leggers are persistent if nothing else, although others might call us just slow to learn <smile>.

I read almost like wolves eat ... I gulped down anything I could lay my hands on, without even chewing on it a bit. I very rapidly moved from being a reasonably fiscally conservative kind of critter, to being an overly confident and underly knowledgeable equity hound <shudder>. A quick 50% decline did its magic though and a wee bit of humility was unavoidable. And then I wandered into the Fool's own little cyber ghetto here. Another frenzied round of gulping down all sorts of info and perspectives and systems and stories etc. etc.

I began to realize, albeit rather slowly, that while I was building a database of knowledge, I had no idea on how to actualize any of it towards my goal of being a superior equity investor. And so I slowed down the ingestion of everything, and actually started thinking about what I was reading. And it was then it was apparent that in spite of the vast amounts of reading and learning, I remained unsatisfied ... hungry still?

That was until I read Nuke John's explanation of his wanderings in the hinterland of chance speculations in search of the Holy Grail of investing ... a system that worked better than an index fund without requiring an in-house Cray and a support staff the size of some small countries. Nuke J and the folks at the Kua'aina Partners Board didn't snicker and sneer (well not too much anyways <g>) upon seeing my mangy unorganized growling self, and more or less took me under their collective wings and started my education in earnest. One of the initial lessons I learned there was when you think you got a way of doing things to make money, DO NOT BET ON IT � not right away! Create a paper portfolio and play with it at LEAST 6 months and learn. If its good it will only get better with practice, if its like Swiss cheese, at least you'll still have enough of your cash to buy bread and meat with to make a sandwich <g>.

Maybe investing really is like life? What any of us gets out of it is proportional to what we put into it? Naw... that makes too much sense ... there must be a way to make more money than even Warren but without ANY risk, right <wolven wink>?

It occurs to me that maybe some of you have never been exposed to (or worse yet have forgotten) Nuke John's Fundamental and Technical Analysis (NJF/TA) for success and personal fulfillment. And so least you furless 2 leggers remain more disadvantaged than nature has left you, I'll try to help at least a little, by presenting my own understanding of NJ's methodology. Be warned though ... I am nowhere near as experienced, erudite, interesting or concise as Nukie ... so proceed at your own risk!

First off ... Nukie did extensive testing over YEARS that was distilled from (Ahhh ... distillation ... one of the truly remarkable discoveries of the furless <fog-filled warm memories>) copious reading and thought and discussions here and elsewhere. Refer back in KP for Nukie's reading lists and recommendations ... its formidable enough to take even many of the youngest among you into your retirement years.
 
He seemed to notice that if one were thoughtful, careful, consistent and informed, one could best the beast we call "Market". Nuke seemed to favor momentum in general, and maybe its my presumption, but it seemed he promoted looking at a series of technical indicators tailored for holdings in the weeks to multiple month periods, vs. day trading or years of holding. At least as I have been practicing my version of his system, I have seldom held for less than a couple weeks, and there are only a few stocks that I have held for 1 year or more.

One of the first explanations I read from him on Kua'aina involved a VERY basic investing principle he applied (more details later). Oversimplifying just a tad for now, when we buy a stock it basically can go up or down. If you LIMIT your losses to something like 10%, but let your winners run with a STOP/LIMIT that remains about 10% under every new weekly high ... in time and with enough investments, you will come out ahead. Anything you can do to bias the percentage of rising stocks to falling stocks will decrease the time to break even and or increase your returns � think FUNDAMENTAL ANALYSIS (FA) here! No implantations of Einsteinium brain stem cells necessary for this one <smile>. Then he mentioned something that I could well associate with ... its natural for us to get too involved and personalized with regards to our picks ... so we might benefit from some more or less automated way to have exit and entry points for our INVESTMENTS. Speculation can be on whatever basis you want, but investment requires either the total control of or elimination of emotions! For us passionate lupines, Technical Analysis (TA) offers a way to save us from ourselves!

A subsequent lesson I learned from NJ had to do with Price and Volume. You can look it up in any number of places, but no single technical indicator correlates with successful investing across the board. But when prices move on above average volumes, the odds are in favor of things continuing (not by a lot, but one doesn't need much of an advantage to make a big difference over time), providing ... well ... let me not get too far ahead of myself here (I hope you all noticed this advanced technique of a bit of suspense and tension to keep you involved, its not natural for lupines, we prefer to gulp our prey <smile>).

But maybe one of the most important things I learned from NJ early on was that investing is like anything else ... you will get out of it whatever you put into it. Invest hope and rabbit feet and crossed fingers, and you're most likely to get arthritis and cold marginally edible rabbit stew. Do some reasonable and consistent Due Diligence (DD), and then have a system for exit and entry points, and work at it consistently and methodically, and one can regularly hope to do better than people who do less � which appears to be most!

So why do so many Mutual Fund managers etc. under-perform index funds etc. .... Maybe its because they make a direct parallel between heightened risk and higher returns? Maybe they ain't as bright as they think they are? Legends in their own minds? Maybe, in reality heightened risks mean more and deeper losses and less positive returns but some are higher? To this poor mangy 4 legger, increased risk generally means MORE investors are more likely to lose MORE, not a guarantee of higher returns!

And so back to NJ's system � it seems to rest firmly on bedrock of DD. And this DD is clearly focused on 2 things: Being able to understand exactly what it is a company does to make money / profits (in other words, the company should be making money, it should be profitable ... why invest in something losing money??) AND being able to see exactly what competitive advantage a company has over its competition, both are CRITICAL in this form of DD. If you can't understand what makes them able to beat their competition and exactly how they make money doing it NOW, they ain't worth further study much less investment! Companies that pass these 2 tests are on THE WATCHLIST!

Nukie keeps a list of between about 150 and 200 companies on his WATCHLIST that to his satisfaction have a demonstrable competitive advantage (allowing them to outperform their competition going forward). Well, OK, he really filters a little bit better than that <smile>. Generally he doesn't like stocks priced below $5 or trading less than 200K shares per day or no profit making stocks. But these are rules of thumb (ROTs) and are subject to suspension for good enough reasons! Exceptions to rules are sometimes the best opportunities for the disciplined WELL-INFORMED investor.

Moi? I look for a little bit more than that ... I want to see a company with all that PLUS it has to have positive and increasing free Cash Flow, it has to have below its industry's D/E, and it has to have a very low and non increasing level of short positions (few things scare this wolf more than buzzards starting to flock up around something <smile>). They are pros at scavenging successfully; otherwise they die, so I can't ignore em! Also, if the SEC is sniffing around or marking a company, I generally stay away. If the management turns over more often than small pebbles in a swift stream, I avoid em. I tend to NOT bet against an Industry/Sector trend (trend being defined here as the 50dEMA rising AND being above the 150EMA). If anything even smells fishy even though I can't put my paw on it, I avoid em. I have to confess that I have a real penchant for Dividend bearing stocks! I seem to have noticed that they are generally less volatile than their growthy cousins PLUS they actually pay ya for waiting to see stuff happen <smile>!


Become a Complete Fool
Join the best community on the web! Becoming a full member of the Fool Community is easy, takes just a minute, and is very inexpensive.