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Monday, November 20, 2006

Merger Arbitrage

I think an interesting phenomenon in investing is the concept of merger arbitrage. The idea is that there's essentially an inefficiency in the market when two companies are merging. If I know more than you, I can exploit that inefficiency. Unfortunately, I don't know more than big investment banks. Thus, to me, mergers are limited risk/reward opportunities. When I invest in stocks, I am buying risk. The fact that markets have tended to go up :) and the stock market especially so at rates of about 13% at times has made this trade off worthwhile. Since I can't judge the risk of a merger, and thus can't arbitrage that opportunity against similar risk structures, I tend to sell my position in companies that are about to be bought out by private equity shops or merge.

Thus, today I sold out of Cotherix, ticker symbol CTRX. The stock has essentially driven the resurgence of my portfolio in the last couple of months. Though it's still in the red, it is closing in on returning to profitability. I bought CTRX at about 6.50 and it has essentially doubled.

Tuesday, November 07, 2006

The Right Time

An issue in investing is when to get in and when to get out. I've recently had some trouble trying to find the appropriate time to get out. I purchased IINT at ~3.00/share a few months back. It ballooned to 3.20 and then steadily lost value until it was at about 2.45. At this point, I finally sold. The shares of IINT continued to plummet until they reached 2.10. Clearly, I was rather happy that I sold out of IINT. A week or two later IINT was bought out by a private equity company at 3.70 a share. This indicates a few things: if you're sure about the fundamentals of a company, any fluctuations in the value of its stock are just allowing one to capitalize on faulty perceptions. For instance, when I bought "Pride International" at the point of some financial troubles it lost value initially (this is a reflection of the common axiom don't buy on bad news, which is in itself faulty.) However, I took this loss as a chance to buy more stock, which resulted in good gains.

With the absence of information, however, the issue is much harder.
A non-institutional investor often lacks an understanding of the dynamics of a market. Thus, I am often left to second guess myself and my fundamental valuations. In some cases, second guessing is a good thing; in others, like that of IINT, your initial instinct is correct.

Anyways, a tactic for adding value to my portfolio that I am considering is looking at small companies that have good fundamentals and are essentially undervalued. With the boom of private equity a large mover in markets is companies buying and institutional investors investing in companies.


So I haven't had time to write about my investment strategy in a long while. However, my background in investments has definitely become stronger in the past half a year as a result of course work and work experience. In the future, I plan to spend some time reworking my portfolio and providing some insight into what I have learned recently.

Thursday, April 06, 2006

My Watch List

I believe it's almost time for me to take an exit position on Michael's. Currently, the stock is at resistance. Moreover, a good percentage of the effect I had hoped to reap from Michael's has already been achieved. When I purchased Michael's I was looking for significant growth over a year, reflecting the value I believed the store had. It turned out Michael's achieved that growth in less than a month. Michael's has, thus, been driving my portfolio gains for a while.

Some stocks that I am considering as replacements to Michael's are IINT, MRH, TNB, FMC, CTV, CAL, and COHR. If you are interested in how I picked these stocks, I took a list of Schwab Stocks with "A" ratings, which generally means that Schwab believes they have upwards potential. I looked over Reuters and S&P's ratings of the stocks, where available, and picked those stocks that had the best "eye test" ratings. After I have completed my due diligence and proper research (an analysis of the stock's financial is pretty critical to my decision) on each stock, I will publish my analysis. Hopefully, I will find an exit point for MIK, and an entry point for my new purchase soon.

Sunday, April 02, 2006


I have begun messing around with charting my stock returns. To begin, I wish to claim that charting stocks is considered an art and as such is completely under scrutiny. There are many who claim that charting stocks has no mathematical validity, while others using their empirical success make contrary claims. Interesting background reading, which I must admit I have not finished, includes Eugene Fama's famous article entitled "Random Walks in Stock-Market Prices." Stock charting is not the be-all-end-all of investing. Thus, I have not spent all that much time highlighting charts on this blog.

My personal opinion on stock charts is that they have value for short-term investors, and can highlight trends that may not be so apparent otherwise. Short-term investors, often are looking for stocks that are near their support or resistance lines (I blogged a post on the meaning of these terms earlier.) By finding these stocks, I claimed, "we can minimize risk on a stock by ascertaining these lines." Mathematically, traders try to model support and resistance lines. If one was to find a sure fire mathematic method to do so, he or she would become a millionaire (a digression: though there does not exist a sure fire way to model pivot points, some people have been more successful than others at doing so. I have been told that in the world of investing, hedge funds are a prime example, "protecting information" is all important. Investors spend years developing their own methodologies and formulas. Those years are wasted if the formulas become public domain.) One method for doing so, however, may be to use charts. This is a subject I am interested in and after some research will hopefully get to write about.

In terms of highlighting trends, I can give you an example from my own portfolio. Here is a chart of my portfolio for the past two hundred days. Note that I have only been investing for a about a month, so my returns are not highlighted on this chart:

What I have noticed is that, in general, I have picked stocks that have a recent history of underperforming. Notably, DELL has been unable to generate any type of growth in the market for a long while. In hindsight, negative momentum is never a good thing for a stock. On Charles Schwabb's website, an article "Buy High and Sell Higher" by Greg Forsythe claims, "An article in the October 2004 Journal of Finance showed that the closer a stock's current price is to its 52-week high, the stronger that stock's performance in the subsequent year." Now, I am not going to argue the validity of that claim, but I will say this: diversification is an important element of any portfolio. My portfolio, as evidenced by this chart has followed a "contrarian" strategy. One element of diversification is the diversification of investing strategies. A failure of my portfolio, then, is that I am not properly diversified.

As you can see, investing truly is a learning process.

Wednesday, March 29, 2006

Undervalued Stock Study

I have picked a group of stocks that have gapped down recently. I plan to take that group, let it site for a month, and then analyze its change in value. Hopefully, this will give me a sense of whether picking undervalued stocks using this method is at all useful.

I will differentiate between stocks that are undervalued because of a fundemental change and stocks that are undervalued because of a 'temporal' change.

Sunday, March 26, 2006

New Link

I have added a link to a site called "stock consultant." This site is interesting because it provides a more detailed analysis of a stock based on "chartist" philosophies. The basic technical concept is that stocks have support and resistance lines. Support and resistance lines appear as thresholds to price patterns. They are the respective lines where prices stop going down or up. By knowing these lines, we can ascertain whether a stock is primed to move or whether is will stay constant for a longer period. Moreover, we can minimize risk on a stock by ascertaining these lines. For instance, if a stock is near its support line, that means that unless the bears win out you have a limited risk of loosing stock value below that line. If it's farther away from its resistance line, that means you have a greater prospect of growth before the bears tend to impede further growth. Thus, by determining support and resistance lines we can make better stock decisions.

I'm not sure if it works, but that's my understanding of the logic behind support and resistance lines. The question is how to calculate pivot points (places of support and resistance). As of now, I will be trying to use my anecdotal "eye sight" test (instinct). I may use some basic charting software and draw lines between points to see how my hypothesis tests. As my trading arsenal continues to progress I will hopefully be able to develop a more accurate method of calculating them. Any recommendations on software to chart stock prices? I could use yahoo or google to do this, I guess? Any recommendation on software to work with these prices and add my own lines hypothesizing support and resistance levels? If I get the hang of this, expect to see an occasional chart on my blog, as well :)

Saturday, March 25, 2006

Picking Undervalued Stocks

A week or so ago I picked up CMVT, or Comverse Telecommunications. What is interesting about Comverse is that I bought it after it fell about 15%, because of accounting worries. Unfortunately, since then it dropped another 5% before beginning a recent rebound. Thus, I bought Comverse at 24.89 and it has actually fallen to 24. If I had simply watched the stock when it reached 24.89 and purchased after the 5% drop, I would have been much better off.

Still, the technique I used to pick up on Comverse is an interesting one--one that may be useful for novice value investors, like myself. Using MSN Money's Stock Screener, available here to pick up on stocks gapping down. This is an automated search available here. One possible technique for investing is to pick up on stocks whose prices have been irrationally depressed, though a lot of stocks gapping down have rational reasons for their depressions, you can make the appropriate judgment call, research those stocks on a site like yahoo or google (read the news that lowered their value, look over the stock's P/E ratio and balance sheet) and buy stocks that you think will gain value. Hopefully, you will make a better pick than I made with Comverse (though the major loss I have suffered was because it was later revealed that it may take a year or more for Comverse to successfully complete its audit.)