Anatomy of a bad trade

I want to dissect a bad trade I made this week. What I hope most of all is that by posting this, I will learn from it. If someone else does too, that's great, but my reason for doing this blog has been to help my own trading; my results would suggest that it has, but I still have a lot of room for improvement. In the words of Alexander Elder "I reserve the right to be smarter tomorrow than I am today." Alright, enough bloviating, on to the trade.
On my Loser List for March 3, I said BZH might be a long, if it showed some strength, with a stop about 170. On the 4th, I bought after it had risen above 171. I looked at the chart a little more, and got a little spooked by the daily ATR, or average true range of 5, which basically means that 50% of the time, the stock's movement from high to low is >5 points. I thought, jeez, if I put my stop at 170, I'm gonna get stopped out for sure--so I put my stop at 168. Well, you know what happened--BZH went down to just below 168, stopping me out just above the low of the day, and then on Friday climbed to over 175.
Now, this is NOT a bad trade because it was a losing trade. It's not a bad trade because I essentially bought near the high and sold at the low. It's not even a bad trade because it ran down to my stop, then turned around and rose above my buy point. No, it's a bad trade because 1) I had a sound plan based on a sound methodology, but 2) I didn't follow my plan. Let's look at the hourly chart below, mostly because that shows the support best. Remember that I was looking at the chart on March 2 and buying on March 3. (Note also that the ATR on this chart is the hourly ATR, not the daily)

courtesy of stockcharts.com
Based on the chart, I think you can make a pretty good case that about 170, or maybe 169.5, depending on how precise you want to make these numbers, was resistance, based on 2 prior highs, and then had become support after the resistance had broken. There are good reasons to be respectful of the ATR; certainly, if you consistently set stops within the daily ATR, and hold for a couple days or more, you have a good chance of being stopped out just by daily fluctuations. However, if that's the case, then a realistic stop outside the ATR might have been 165, or even 160, but 168 was just pulled out of the air--in fact, it was still within the ATR.
In retrospect, if I had stuck with 170, I would have still be stopped out, but at a loss of 1 point rather than 3. And if I really thought ATR was an issue, the stop should have gone lower, probably 160--although that would significantly change the risk/return on the trade.
The lesson: Plan your trade, then trade your plan.

Berkshire chairman's letter

The letter is out.
I'm going to post something more comprehensive when I've had a chance to review it, but I did glance at Buffett's valuation. He states that book value of BRK grew by about 10% in the past year. He repeated his previous general statement that book value is useful as a slightly understated estimate of growth in intrinsic value. He made no specific statement about this past year. So, once again I'll adjust my previous estimate of valuation. I'll say that if book grew 10%, I'll use 11-13% as a range for increase in IV. Thus, I'll take my previous estimate of $59633 to $64120/A and $1988 to $2137 /B for March 2004 and increase it by 11 to 13%. This gives a new March 2005 estimate of $66192.63 to $72455.60/A and $2206.42 to $2415.19/B.
I'll also adjust my previous statement to say that I'll look seriously at buying more Berkshire below $84000 A/$2800 B, and I'll be jumping in with both feet below $72500 A/2417 B.

Fox Saturday Morning "Business Bloc" for March 5, 2005

Fox News Channel' s "Cost of Freedom" Saturday Morning shows--
All four shows can be summed up in three words-Martha, Martha, Martha. Who cares, and how does this make me any money?
Bulls and Bears started with some macro talk about social security reform. I think this is one of the few macro issues worth listening to, simply because what happens will likely have a significant effect on the markets over the medium to long term. Very few new points were made, and unfortunately things pretty much broke down along partisan lines.
Bob Olstein recommended several beaten down stocks: TAP presently at 71, he says is worth 90, DBD presently at 53, he says worth 65-70 (because they are going to upgrade all ATMs--everybody else liked it as well), RSH presently at 29, he says worth 38-39; DLM presently 11.30 and he says worth 15.
Gary B. Smith showed some charts (of course). PFE --broke a downtrend line, says it's going up. Next was WAG --broke above a resistance line, and became a buy. CLX is in a beautiful uptrend. SYMC is in a clear downtrend, maybe a short at the top of the channel. Strangely he was asked for a dividend chart, and he came up with INTC, which broke a downtrend and is about to break resistance.
Pat Dorsey says the BIIB sell off is overdone. Scott Bleier says sell AAPL.

Cavuto had the usual cast of characters. Gregg Hymowitz recommended GE as a buy, but Jim Rogers said its balance sheet is a sham that "nobody understands". Gary Kaltbaum said YUM is looking tasty. Jim Rogers liked VWSYF(windmills), but Hymowitz slammed it. Ben Stein mentioned EEM (emerging markets fund) as a good play.
More Martha.
Jon Najarian predicted a big fall in crude oil prices but Jim Rogers said that's "balderdash"(I appreciate it when he talks like Daddy Warbucks) and oil will be over $100 in five years.

Forbes on Fox had, as usual, a lot of pointless macro talk. Bring back Random Roger!
The group talked about whether it's time to invest in China. Mentioned were SNDA because of online gaming, which is apparently big in China, and its purchasing of SINA; NTES, and PRU because of insurance, even though it isn't in China yet. Also mentioned was the China ETF FXI.
Chris Russo from "The Apprentice" and Glen Allen Financial recommended ENR and BTU.
And there was, of course, more Martha.
Cashin' In had Charles Payne giving some picks: MXIM, (Wayne Rogers liked it and owns TSRA in this sector), FDX--(break out thru a double top), and ODFL (Wayne and Jonathan Hoenig also mentioned TP, SWFT, KNX, YELL saying trucking is strong, and protected from fuel price increases because of surcharges). Dave Nelson recommended LGF, saying in part its a takeover target.
Still yet MORE Martha!

Christmas Eve

The Berkshire Hathaway annual report/chairman's letter will be posted at the website tomorrow, typically about 8 AM eastern. This makes tonight like Christmas Eve for people like me.
Yeah, I know supposedly I'm a trader and he's in it for the "long term." But make no mistake, he's traded with the best of them.
And me, I'll make money any way that I can.
Even by buying and holding Berkshire Hathaway :>)
If you haven't already, check out my BRK valuation. I'll update it tomorrow after the AR is out.

Loser List for March 4, 2005

BZH mea culpa--I set the stop too tight, talking myself into support at 170 . 165-166 would have been better, and may still be, if it bounces from here.
KBH bounce from here?
CEDC looks like it found support at 35
MDTL a breakout, gotta stay above 20
QSII long, stop at 82?
RICK if it can stay above 3.4, might go a bit. Of course, there's always the table dances.
RMI a breakout above 4.5
ROV does range contraction lead to . . . stop at 41
TIN pullback, long stop at 80
X still might be a look above 58 WWLD? (what would Livermore do?)

How to use this list. And don't forget the disclaimer . . .

Open Source Equity Research

Check out Stephen Castellano's Reflections on Equity Research. He has a very intriguing proposal for an open source equity research project. I think anybody with any equity analysis or industry specific "skillz" as he describes in the post ought to think about it.

Loser List for March 3, 2005

ASTM-- a lot of people stuck at 4 on this one--I wouldn't touch it till its above 4.4--i.e. the fork comes out
BZH a buyable pullback if it shows a little strength, stop at 170
CEDC a gap down, but came up off the lows, to above a previous swing high. Might be a buy, stop at 35
DSTI might be a second chance, long above 6.1
GSOL ditto, long above 13.39
SNHY a breakout above 19
X buy it like Livermore and Wyckoff, long stop at 58.5
ASA a trabable pullback stop at 40?
SSRI bounced off the 200d, long stop at 13
SU long stop at 37.5

Pennies
MUCL, long stop at 0.40
CTCHC stop at 0.55
CGREF long if it can stay above 1.5

and keep an eye on BGT and WILCF

How to use this list(other than just fading me). And don't forget the disclaimer . . .

Loser List for March 2, 2005

KO looks like it might be a good time to pick this one up "for the long term"
ditto for MRK???
ISCA long, stop at 53
NAT--definitely a pullback, to about the prior high, might think about going long again, but only if it shows some strength, stop at 53
RIG--same deal as NAT--if strength, long with a stop about 46
SYMC-maybe a short, if you have to short something, stop about 22.5
X-if it bounces, might be a long
ASA might be a buy if it stays above 40
LAB long above 9
SU pullback, long with a stop about 36.5-37
PVX--a buyable pullback at 9.5 ?
PWI--ditto at 24 ?--of course they are canroys
CNR--impressive recovery. Not really sure where to stop this one--probably best not to chase

pennys
MRKL support at 0.50
MUCL the buyers come in at 0.4

How to use this list(besides just ignoring it). And don't forget the disclaimer . . .

Check out Stockcoach

Check out Stockcoach. He says he eschews technical analysis, but I like him anyway.
He's got his portfolio (long and short) out there for the whole world to see--its worth looking at, who knows, one or two of them might have a good-looking chart ;>)

CNBC, real estate, retailers, and Ben Graham

I caught a little bit of CNBC this AM--somebody was on talking about valuations of retailers. I didn't catch who it was. He cited three specific examples--Dillards(DDS), Shopko(SKO), and Winn-Dixie(WNDXQ), of retailers in which the value of the real estate owned by the companies alone was supposedly worth 2-3x or more times the present value of the stock in the marketplace. This is a repeat of the Kmart story. There are several names I've accumulated over the past couple years at least in part on a variation of this story as well. (TRC, JOE, ALEX, TPL, PCL--but in these cases the land is mostly undeveloped)
I got to thinking a little more "big picture" and maybe I'm off base. Maybe somebody can point out where I'm wrong, or where I don't get it. It seems strange that there could be a whole group of large companies like this, where their real estate holdings alone are more worth to somebody else for something else than the value of their business as a going concern. That's Ben Graham cigar butt stuff, but writ very large. And typically that scenario, of companies selling for less than their breakup value is something you see in either 1) the occasional small- or micro-cap, or 2) at the bottom of a bear market--think 1937 or 1977.
I can think of only a handful of explanations for this--1) the info is flat out wrong. Somebody is screwing up their estimates of the value of the land, or this inefficiency is not nearly as widespread as it is being made to seem, etc. 2) there is some sort of "barrier" to using the land for something other than the present retail store--legal, regulatory, administrative, environmental, etc. or 3) the stocks are not undervalued, but the land is overvalued because we are in a real estate bubble, and if all that property really came on the market the prices would tank. I guess that's the one I'm leaning toward. What am I missing?

Loser List for March 1, 2005

Just an anecdote--I go thru 250-300 charts to make the loser list every day, and going through these I saw a bunch of overextended/overbought/parabolic/whatever you want to call them. Time to tighten up the stops, and don't chase anything. (That's mainly directed at me, not you.)
ADAM still looking to go long on this, stop at 5.3 or so
FRO--do you buy breakouts? cause this is a breakout, stop at 57
GTRC here's another breakout, stop at 60
GLOW--keep watching this one, cause its not just a pullback, its range contraction. Long, stop at 2
OCR--failed breakout, if you can short it in the 34.5 range, stop at 35, can probably get to at least the 200d at 33.
PENN, uptrend, pullback, buy, stop at 59
TGA--pullback to support?? maybe, be careful with this one
a penny
CTCHC--still looks to me like its going to pop one of these days.

How to use this list. And what would it be without the disclaimer?

Haiku Non Sequitor

Apple plus Tivo
Tysabri kills somebody
I value Berkshire

OT-Hunter S. Thompson

I suppose I'm probably kinda late to the party on this one, and I'm not sure it has much too with money or markets, but I read this article today on the suicide of Hunter S. Thompson, and I can't help it.
The Money Quote:
Anita Thompson, 32, said her husband had discussed killing himself in recent months . . .His suicidal talk put a strain on their relationship, she said.
"He wanted to leave on top of his game. I wish I could have been more supportive of his decision," she said. "It was a problem for us."

"I wish could have been more supportive of his decision"?????!!!!!?????
I truly don't know whether to laugh or cry at this one. A spouse's suicidal ideation is a "problem" for the relationship? The other spouse doesn't think it's a good idea, but is actually regretful that she can't be more "supportive" of his pathology?
"It's not you, dear, it's me; I wish I could support you in your misguided desire, but I can't, and I hate myself for it. I'm not really sure how our relationship is going to survive your wish to kill yourself."

I guess all I can say is that if you or someone you love needs help please seek it.

Valuing Berkshire Hathaway

Warren Buffett is one of the great value investors, and his Berkshire Hathaway company is a great company. But is it always a great stock? Over the past 5 years, buyers of BRK have done well or badly depending on when they bought—at 45,000 or 95,000. Valuing this company is tricky—although its main business is insurance, it owns furniture stores, gas pipelines, jewelers, World Book Encylopedia, and has major stockholdings including American Express, Coke, etc. I'm not nearly smart enough to value this company, but I know one guy who is--Warren Buffett himself. Buffett talks a great deal about intrinsic value (IV) of Berkshire, or what the company is really worth based on the net present value of future cash flows.
At the 1998 Berkshire Hathaway annual meeting, Mr. Buffett defined intrinsic value as follows: "In order to calculate intrinsic value, you take those cash flows that you expect to be generated and you discount them back to their present value - in our case, at the long-term Treasury rate. And that discount rate doesn't pay you as high a rate as it needs to. But you can use the resulting present value figure that you get by discounting your cash flows back at the long-term Treasury rate as a common yardstick just to have a standard of measurement across all businesses."
A value investor like Buffett would want to buy companies, even a great company like Berkshire, at some discount, a margin of safety (MOS) to intrinsic value.
Though he's never publicly stated what he thought Berkshire's IV was, at one point in the recent past, however, Buffett telegraphed, with a big wink and nudge, just what he thought IV-MOS was.From the 1999 Chairman's letter (March 2000), "Recently, when the A shares fell below $45,000, we considered making repurchases. . . we will make them if and when we believe that they represent an attractive use of the Company's money."I believe one can safely infer that Buffett believed IV-MOS in March 2000 was $45,000 per A share and thus $1500 per B share(the shares are convertible at a rate of 30:1). What is it now? Assuming MOS is a constant percentage of IV, the question becomes how much has IV changed since then. As always, we return to scripture for the answer. From the 2000 Chairman's letter (March 2001), "we believe Berkshire's gain in per-share intrinsic value moderately exceeded its gain in book value"--and book value gain was 6.5%. Moderately exceeded means 7%, 8%? This gives a range of $48,150 to $48,600 per A share and $1605 to $1620 per B share in March 2001.
From the 2001 Chairman's letter (March 2002), "Per-share intrinsic grew somewhat faster than book value during these 37 years, and in 2001 it probably decreased a bit less"--and book value decrease was 6.2%. Is decreased a bit less 6%, 5%? This results in a range of $45260 to $46170 per A share and $1508 B to $1539 per B share in March 2002.
From the 2002 Chairman's letter (March 2003) no statement regarding increase in intrinsic value is found, but book value grew by 10%. Using 8% to 12% as upper and lower estimates results in $48880 to $51710/A share and $1629 to $1723 /B in March 2003.
From the 2003 Chairman's letter (March 2004) the more generic statement "Despite their shortcomings, book value calculations are useful at Berkshire as a slightly understated gauge for measuring the long-term rate of increase in our intrinsic value." Book value increased by 21%. Using 22-24% for increase in intrinsic value gives an IV-MOS estimate of $59633 to $64120/A and $1988 to $2137 /B for March 2004.
What about since then? As a WAG, I'll add 0.25%-0.5% per month to estimate IV gains till the next chairman's letter. This is roughly $150 to $300/month for A's and $5 to $10/month for B's. Thus, for February 2005, I get a range of $61283 to $67420/A and $2043 to $2247 /B. Remember this is a "fire sale" price that is so much below IV that even a tightwad like Buffett would spend shareholders' cash to buy back stock. It would represent a "back up the truck" opportunity.
For me, I'll look at buying more BRK below $75000 A/$2500 B; below $67500A/ $2250 B that beep-beep-beep is my truck in reverse; below $63000A/ $2100 B, its margin, home equity loans, hock the kids, put it all down on Buffett. Will we see these prices again? My view is that if other great companies can get put on sale in a market decline, so can BRK--I don't think it is any more immune to the vagaries of Mr. Market than any other publicly traded entity. I think the opportunity will present itself.
This Saturday, March 5 will be the release date of the 2004 Berkshire Annual Report and Chairman's letter. In all likelihood, some statement about intrinsic value/book value will be made, and I will update my assessment accordingly.

Warren Buffett, Richard Russell, and the Web

Chairman MaoXian had a great link the other day to notes from a Warren Buffett q and a with some Vanderbilt business students. These notes are all over the web--here, here and here. There's great stuff in there, everyone should read them and cogitate on them, and that's the way the web should work.
What's also interesting to me is that apparently, they also appeared here, in Richard Russell's $250/year newsletter. Now, Russell is a smart old guy who's been around forever and forgotten more about markets than Jaloti is likely to ever know. However, Russell lamented (and I quoted, here, back when only Trader Mike was reading me) that with the Internet giving stuff away for free, how could fee based newsletters survive? Again, with him putting non-origianl non-proprietary content in his newsletter that other people are giving away for free, the question is still relevant.
How, indeed?

Going from 90 to 100, and confirmation bias

There has been a very nice multi-blog discussion, started here by Random Roger, and advanced by Michael Taylor of Taylor Tree, as well as Anumati, about the Tom Dorsey idea that once a stock gets to 90, its a buy because it will continue to 100. (Arguably, Ugly foreshadowed this idea here.)
To recap, Roger put the idea on the table, quoting Dorsey. Michael looked at the numbers, and said, while it's a little difficult to get comprehensive data because of splits, etc, it appears to happen "only" 55-60% of the time. Anumati then said this makes it an example of confirmation bias. All true, but let me put the Jaloti spin on it.
If this were a simple 50/50 bet, i.e. goes to 100/doesn't go to 100, and the odds were 55-45, you'd take that bet all day long--right? The casinos make billions on tighter odds than that. What is really be asked with this one, is how long does it take to get from 90 to 100, AND what are the chances it goes to 0 first? The way to make money off of this one is to ask, once a stock hits 90, how often does it get to 100, before it gets to 80 (or 85, or whatever margin of safety you want, to pervert the value investors' catchphrase). If, for instance, there was good data over time that after 90, 55% go to 100 before they go to 85, I'd take that one in a heartbeat.
Cut your losers short, and let your winners run, right?

Random Roger makes me think

I find Random Roger to be one of the more provocative bloggers out there. I don't always agree with him, but he makes me think. He had a very interesting post here on "individual stocks" and "trading sideways", and I commented on it here.

Loser List for February 28, 2005

ADAM-- nice chart, pullback in an uptrend, stop about 5.3, though volume is marginal.
BOOM-exploded out(sorry). If you're into breakouts, this is one, stop at the breakout--17.5
CALM--a short if it stays below 10.
DDDC--might be a buyable pullback above 4.2 or so.
EENC--breakout and pullback--long above 20.
IINT--long above 2.25
BGO--if gold's running, this one might, stop at 3
LAB might be a buyable pullback above 9.2

the Pennies--
MUCL--ok, that's it, the last time for this one--if it bounces off 0.40 its a buy with a stop at 0.38
CTCHC--if you have to buy a penny, this is as good as any--stop at 0.6
PMU--another on the penny list--long stop at 0.6

How to use this list. And what would it be without the disclaimer?

Sunday Night Charts for February 27, 2005

I'm gonna mix it up a little bit.
But first let's start with an old favorite.
The US Dollar Index. Weekly chart.

Courtesy of stockcharts.com
Still a downtrend. Interestingly, it broke my trendline, and is sitting just above it, but then it has done this before.

Next is the XOI oil index

Courtesy of stockcharts.com
Bill Cara is calling this a melt-up top in the oils. Sure looks like it will come down, but when? Bill's a lot smarter at this stuff than I am, and he may well be right--but timing is everything--it may drop on Monday, or it may run another 15% and 15 days before it drops. "Markets can remain irrational longer than you can remain solvent." (John Maynard Keynes).

Next, a new one--the IYR (REIT iShares) Weekly

Courtesy of stockcharts.com
To me, looks like support at 110 from the previous high, and a lot of volume in the low 110s. (Although I'm less sure of what volume means in ETFs.) This makes it look like a buyable pullback in REITs.
But let's look at the monthly IYR chart.

Courtesy of stockcharts.com
REITs have been running for a long time, is this Elliot's 5th wave? Perhaps not, if we can stay above 110? What's that saying, "A man with a watch knows what time it is, a man with two watches is never sure". Substitute "chart" for "watch" and that's me!
Have a great week everyone!

Roundtable stock--CMCSA

This weeks roundtable stock is CMCSA. Other roundtable members are Levi Bauer, Tom at Sixth World, Ron Sen, Bill Cara, and Kaushik Gala.
CMCSA has drawn a lot of interest lately with the news that Warren Buffett's Berkshire Hathaway has doubled its stake in the cable provider. A lot of people have been sort of scratching their heads, trying to figure out what the value angle is that the Sage of Omaha sees in Comcast. Let me end the suspense and give the answer at the end of this post;>).
First, I will offer a couple observations--1) A big chunk of Berkshire's equity portfolio is actually managed by Lou Simpson at Geico, with little/no input from Buffett. Simpson is no slouch himself as a stock picker, but the point is this may not be a Buffett pick per se. 2) Whether it is a Buffett pick or not, Buffett and Berkshire in the past have done very well with local newspapers and television stations--the Buffalo News, Washington Post, and Cap Cities/ABC. The thinking has been that these local media represent businesses with some sort of a "moat" --Buffett-speak for some sort of barrier, be it regulatory or whatever, to entry of competitors in the space. Cable television providers certainly fit into that category.
That having been said, Buffett has always maintained that you can't just buy a great business, you have to pay a good-to-great price for it. This is where the head scratching comes in, because any way you slice it, its hard to find the great valuation on CMCSA. The comparisons are a little difficult, since a lot of the broadcast/cable TV entities are privately held, but a quick review of the yahoo!finance stats shows a PE of 75 (!) compared to Echostar's 91 and the industry's 35, a P/Sales of 3.6 compared to Echostar's 2 and the industry's 1.7, and a PEG of 4, compared to Echostar's 2 and the industry's 2.5.
My summary of the fundies is that I don't see the screaming value here, but apparently somebody (Buffett and/or Simpson) a lot smarter than me does.
Now, let's look at the charts. As always, it depends on your time frame.
First, the daily charts, if you're looking for a swing trade of a few days duration.


courtesy of stockcharts.com
Well, its a nice uptrend, I guess you could look for a swing trade a couple different ways. There is pretty good support at 32, from prior lows and the uptrend line, but there is resistance from the old highs at 33. I guess if it dropped to 32 and bounced, you could buy it on a tight stop, with an expected run to 33, so maybe you could squeeze a risk return of 3/1 out of it, but you'd have to be pretty nimble--that's really more of a day trade than a swing trade, frankly.
The other way to play this is to buy a breakout of the old high at 33.6. I think if you have to swing trade this one that's what I'd do. There are probably better plays out there.

Next let's look at the weekly chart.


courtesy of stockcharts.com
Again, nothing terribly exciting. I think if you have to play it, the Gary B. Smith call would be to buy the breakout of the old high at 36.5, although there is a lot of resistance above that. Looking at the price by volume bars along the left side, you can see however that a lot of the outstanding volume traded around 30, so maybe there isn't a lot of supply in the high 30's. Still, nothing here that makes me eager to take a position.

Finally, the monthly chart, the one that Buffet and Simpson should be looking at :>)

courtesy of stockcharts.com
Aha!! Now we have our answer! Clearly, Buffett and Simpson looked at this chart, saw the wedge and all the volume right around 30, and concluded when this one pops to the upside, it'll really run!
Isn't great to solve a mystery??!!???
(Uh, where's the sarcasm button on this thing?)