The start of a new year is always a good time for reflection about one's life and goals... and investing, as well. I decided this year to get a number of my acquaintances together to have a sort of a roundtable discussion about the stock market. They all work in the securities industry or follow the markets closely and I thought that this might be interesting to some of you here on FC. A short summary of the people who participated follows: Become a Complete Fool
Dayt Rader - An avid daytrader with whom I went to high school. We occasionally keep in touch.
Char Treader - A technical analyst who works for a money management firm on Wall Street. She spends her days analyzing charts in order to determine the future behavior of the market and individual stocks.
Rearvu Mear - An analyst who works for Skunkworks Capital Advisors. He describes himself as a classic trend follower.
Cheep Izgood � Cheep is a value investor who manages private accounts for wealthy investors.
Hugel Yoverpaid � A hedge fund manager from New York City. He claims that he will use any investment approach in order to make his partners money.
I (Dan) moderated the discussion.
Dan: I want to thank all of you for coming over and I'd like to begin by asking each of you what you expect to happen in the market this year. Cheep, why don't you begin?
Dayt: I thought you said this would be a roundtable discussion. This table is square. And why do I have to sit at a corner?
Dan: Does the table shape really matter?
Dayt: If you're going to call this a roundtable discussion you should have a round table.
Hugel: I agree. I could have my interior decorator get you a round table if you would like to postpone the discussion.
Dan: Sigh... I'm going to ask each of you to try to ignore the shape of my table. Let's get...
Dayt: That would be easier if I didn't have to sit at the corner.
Dan: I will switch places with you. [We switch places.] Now, let's get started. Cheep, what do you think about the stock market for 2005?
Cheep: I wish that I had good news for you, but valuations have gotten out of control and I expect that this is going to be a tough year for the stock market. I think that the bear will fully reassert itself. At the low point during 2002 we never saw the kind of bearish sentiment that makes a good market bottom, but I do expect that it will happen within the next two years.
Dan: What would make you feel bullish about the market?
Cheep: Continued good earnings coupled with a negative PE for the market overall.
Dan: I don't understand. How can we have a negative PE with good earnings?
Cheep: I expect that stock prices will be negative.
Dan: So someone will have to pay me to take their shares of, say, GE?
Cheep: Exactly. When that happens I will load up.
Dan: Doesn't that seem unlikely? Why would I pay someone to take my stocks?
Cheep: This is the psychological effect of a deep bear market!
Rearvu: Oh this is ridiculous! The market has been trending upward for about the last two years and we had a nice rally at the end of last year. My work shows that the path of least resistance is up.
Cheep: Trends do reverse you know!
Rearvu: You don't even know what a trend is.
Dayt: Gentlemen! This is a perfect example of why I daytrade. No one knows what is going to happen this year. Holding stocks overnight is extremely dangerous with the possibility of terrorist events and the uncertainty in the oil-producing Middle East. Not to mention the danger of computer crashes and my bad heart.
Dan: Why are you worried about computer crashes? How would they affect the stock market?
Dayt: I mean my own computer crashing. It runs Windows... when it runs. Need I say more?
Dan: And your heart? You're only about 35 years old.
Dayt: Well, it's a bit of a sad story. My daytrading activities have caused me to get tendinitis in my wrists, for which the doctor prescribed Vioxx. I haven't noticed any negative effects, but I am very concerned.
Dan: Char, what do you think about the market next year?
Char: The market is currently in an overbought condition. Short term we expect the S&P 500 to fall to the 1151.23 level. Then if support holds the decline will be over. We may get a nice rally or perhaps the market will move sideways for awhile.
Dan: So the market will drop to 1151.23, but not 1151.22 or 1151.24?
Char: That's what my work shows.
Dan: Then, you're saying that if the market doesn't continue dropping it will rise or go sideways.
Char: Correct. That is a very concise summary.
Dan: You get paid for this kind of a forecast?
Char: Sure. That Porsche 911 outside didn't buy itself.
Dan: Couldn't anyone, even me, make a forecast that has just as much chance of being correct?
Char: Sure, but who is going to believe you? People listen to me when I say it.
Dan: No wonder you don't want me to divulge the name of your firm. Hugel, what do you think?
Hugel: I can make money in any kind of market, so I don't care what the market does and I don't bother forecasting it.
Dan: Sounds reasonable enough. How was your performance the last couple of years?
Hugel: My investors made 10% last year, but a series of unfortunate events caused me to lose about 25% the previous year.
Dan: I thought you could make money in any market.
Hugel: I can, but we spent most of 2003 short. The strength of the rally caught us by surprise.
Dan: That's too bad. I suppose you, personally, didn't make any money this year since you have to make your investors whole first.
Hugel: Oh no. I dissolved the fund in the second half of 2003 and started a new one early last year.
Dan: That doesn't seem to be an ethical thing to do.
Hugel: You can't expect me to work for just the 1% administrative fee can you? I mean that is only a six figure income.
Dan: [I started choking on my coffee and spewed it all over his expensive shirt] Sorry, about that. I guess I should pay to dry-clean your shirt.
Hugel: [Dabbing with a napkin] If you're going to spray me with coffee, at least make it Starbucks next time. Luckily I only wear my shirts once anyway, so no need to clean it.
Dan: Do you have any stock recommendations for this year?
Hugel: The one position I am willing to divulge is Google. We bought in recently. I initially thought the thing would be a flop, but I was wrong, so we now own it.
Dan: Why did you think it would flop?
Hugel: I really thought that since the Internet has been around for awhile everyone would know where everything is by now. I mean, how much time does it take you to find your way around a new town after you move? I turned out to be wrong. People still need to do searches to find what they are looking for, apparently.
Dan: Rearvu, what do you like right now?
Rearvu: I love Travelzoo!
Dan: Travelzoo? This is hardly an inexpensive stock.
Rearvu: I know, but just look at the chart. It knows how to go up and the valuation is reasonable given its prospects. Earlier this year I read a wonderful post on the Foolish Collective about Travelzoo. It presented a very convincing argument for owning Travelzoo for the next 10 years.
Dan: What was the argument?
Rearvu: If subscriber growth continues at 100% for the next 10 years, they will have something like 7 billion subscribers. As the poster pointed out, this is despite the fact that we only have about 6 billion people on the planet.
Dan: I wrote that post! It was a joke. Clearly they can't continue to double their subscriber count every year for 10 years. [It was post 34365.]
Rearvu: You wrote that?! Wow! You should apply for a job with my firm. That was some great work.
Dan: No it wasn't. It was a bunch of crap that I intended to be funny. They can't ever have 7 billion subscribers.
Rearvu: Their subscriber count doubled last year. I expect it to continue. The post even mentions that, according to the 10Q, the stock is not traded on a national exchange, when it is, in fact, traded on the Nasdaq. This is how underfollowed the company is. Even management doesn't know where the stock is traded!
Dan: But the post was a farce! They can't grow that fast.
Hugel: Rearvu, tell me more about what the post said.
Dan: Oh, give me a break! I can't believe this.
Rearvu: Well, it compared the market price per homepage link for Google and Travelzoo. Travelzoo's was far lower than Google's. Something like $23 million for Travelzoo vs. $4.6 billion for Google.
Hugel: Wow! If Travelzoo was valued similarly to Google you'd make a fortune! This is the kind of unconventional thinking that I love.
Dan: But, why should a company be valued according to the number of links they put on their home page?
Rearvu: Because a person is more likely to find a link that they would like to follow with more links present.
Hugel: Exactly right. Dan, why are you getting so flustered?
Dan: Because you guys are idiots! If you want to own Travelzoo, fine. But don't buy it expecting them to have 7 billion subscribers and don't expect each of their links to be valued similarly to Google's.
Rearvu: Look at the stock price on the chart. This stock just goes up and up. This is a wonderful trend to follow. The trend, combined with the fundamental picture make this a no-brainer.
Dan: "No-brainer" seems like the perfect description of your argument.
Hugel: It's not our fault if you can't even understand your own analysis.
Rearvu: We have given Travelzoo our highest rating of "Buy with both fists."
Dan: That's an interesting rating. Why not just strong buy.
Rearvu: We revamped our ratings system last year. We wanted to make it more clear for average people.
Dan: So what are your other ratings?
Rearvu: In order, they are "buy with both fists," "buy with trepidation," "hold until the stock drops," "shoulda sold yesterday," and "sell, the stock has likely bottomed."
Dan: Does it help people to tell them that they should have sold yesterday? Wait. Forget I asked that. I don't want to hear the answer. Cheep, what are you looking at?
Cheep: We're really excited about Huffy.
Dan: Aren't they in bankruptcy?
Cheep: Yes, but we view them as a commodity play.
Cheep: Have you ever picked up a Huffy bike? It's not something you should do on a full stomach.
Dan: They weigh a ton.
Cheep: Exactly. A Huffy bike is only worth about $100, but all the steel in a Huffy bike is worth far more. By buying Huffy you own a tremendous amount of steel. Did you know that 10 Huffy bikes have as much steel as one Hummer H2?
Dan: Really? That seems a little unbelievable. Where did you get that number?
Cheep: Well, during a tour at the factory I tried to lift a palette holding 10 Huffy bikes.
Dan: They stack them on pallets?
Cheep: Yes. You know I couldn't lift them. My neighbor owns an H2 and I can't lift that either, so I drew the obvious conclusion.
Dan: The obvious conclusion being that the amount of steel is the same in 10 Huffy bikes as it is in the Hummer H2?
Cheep: Congratulations! You understand the obvious conclusion.
Rearvu: How can you own this stock? I mean, look at this chart. [He shows the chart on his computer.] It is selling for about 10 cents per share, down from around $6 a year ago. At this rate I predict it will sell for about negative $5.90 per share a year from now.
Cheep: Rearvu, the steel is worth a lot of money.
Rearvu: But look at this trend. It is going to be a disaster.
Char: I have to agree with Rearvu. The technicals on this stock look terrible. It has just broken downward out of an inverted cup with handle base. This is extremely bearish.
[Suddenly, Dayt lunges for the computer. He grabs it and starts typing furiously.]
Rearvu: Give my computer back!
Dayt: I need to trade now! I can make a fortune by going long on Huffy, but this opportunity won't last long.
Rearvu: Negative $5.90; that is the price target. [He yanks his computer out of Dayt's hands.]
Dayt: Please. I haven't traded all day. Look at how shaky my hands are. And I'm starting to get a headache.
Dan: Dayt, how successful have you been with your daytrading?
Dayt: Oh, it has been great fun. I've been at it for 3 years and still have almost $100k left. That should last me another year before I have to find a real job.
Dan: Hmm, I don't think you'll be invited back next year. We're about done here, so I was wondering if any of you have any predictions for some really surprising event that will happen this year. You know; something none of us expect.
Hugel: I have a prediction. I have been following the oil market and have read that there is a shortage of light sweet crude available. Most of the Middle East crude is heavy and sour. This causes a problem for refiners who are not able to refine the heavy, sour stuff. I expect that one of the major oil companies will buy Krispy Kreme. By mixing doughnuts with the crude they will be able to make it much sweeter and easier to refine, I imagine.
Dan: All right. Let's end this right now without another word, please.
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The start of a new year is always a good time for reflection about one's life and goals... and investing, as well. I decided this year to get a number of my acquaintances together to have a sort of a roundtable discussion about the stock market. They all work in the securities industry or follow the markets closely and I thought that this might be interesting to some of you here on FC. A short summary of the people who participated follows:
Become a Complete Fool