Jerry's Roth IRA Blog

Bought Blackboard Back

As I expected, Blackboard (BBBB), after being up nearly 20% in a single day last week, has fallen to $30, more than $2 under where I sold. I bought half my former position back. With commissions this essentially puts me $40 ahead of where I was. Not much, I know, but it was fun to give it a try. I'll be watching to see if BBBB drops further; if it does, I'll certainly consider re-establishing my full original position, maybe a few shares bigger.

In retrospect I should have sold all my shares of everything, though. From the peak of around $12,600 my portfolio has lost more than $600 in a week. Selling everything and then re-buying it a week later would have cost me $154 in commissions, but that still would have left me $450 ahead. I expect something of a rebound soon, though.

Sold the Blackboard

Today, Blackboard (BBBB) closed at $32.42, a one-day gain of $5.34 or 19.72%. I sold (using a limit order) at $32.10 about half an hour before closing. While I actually want to continue to own this stock, my feeling that a gain that large is bound to be followed by profit-taking within a few days, and I'm hoping that I'll have an opportunity to get back into it at $30 or so. Since I owned 51 shares, this'll mean I'll either end up with an additional hundred bucks or so in cash, or an extra few shares, all for $14 in commissions.

Timing the market is reportedly a very hard thing to do successfully. I am by no means an expert here, but nearly 20% in a single day seems like a pretty clear sign to me. Still, it's entirely possible that the price of BBBB will keep going up and we'll never see it below $32 again. In which case, I still made 60% on the stock in under a year! This, in other words, seems like a win-win situation to me.

Books on investing

Been doing some reading lately and thought I'd share my impressions of three investing books over the next few days.

The first is Joel Greenblatt's The Little Book that Beats the Market, which has been generating a lot of buzz recently.

If you know anything about investing, much of the "Little Book" is pretty basic, but the meat is really in what Greenblatt calls his "Magic Formula" for picking stocks. The basic idea is that you rank every stock (excluding a couple of types of companies for which the formula doesn't work) based on a combination of two factors: return on capital and earnings yield (i.e. the inverse of P/E). Then you simply buy a basket of 20-30 stocks from the top 10% of the rankings (for diversification) and hold them for a year. Greenblatt has backtested this method and says it yields more than 30% annual returns when averaged over multiple years, although it does have occasional down years. He even has a Web site that screens companies for you.

There's a bit more to the book than that, such as how to time your sales to minimize tax impact and why he thinks the formula will keep working even if everyone uses it (a real pitfall of past winning strategies like "Dogs of the Dow").

Greenblatt's "Magic Formula" is basically a pretty standard value screen that leads you, in theory, to buy good companies that the market has put on sale. Sometimes the market puts companies on sale for good reason, but even bad companies can turn around, and that's usually huge for the share price.

What struck me about the "Little Book" is how much I longed to complicate Greenblatt's method. I mean, it can't be that simple, can it? Suppose you ranked the Magic Formula stocks by market cap -- do small companies tend to do better? Well, as it turns out, the Web site lets you specify a maximum market cap for the stocks it picks, so if you want to concentrate on companies of a particular size it's easy to do, but Greenblatt doesn't address what size of company does better. I wished he had done so at first, and perhaps compared stocks based on their dividend yields as well, and maybe addressed timing, but then I realized: he's already promising north of 30%! What more do you want? More importantly, how much better do you think it's possible to do? Some value investors are suggesting applying some additional due dilligence to the companies the automated picker finds, but I have to wonder how much return on your time investment you're going to get by doing extra work. You're already talking about doubling your money every 2-3 years! And I wouldn't be surprised to discover that second-guessing the formula has risks of its own that lead to a lower return.

Overall, the book and the strategy it describes do make sense to me, enough so that I'm thinking about putting part of my IRA into it next year as an experiment. And I've also ordered his previous book. Thumbs up, in other words.

ING Direct

"Your Orange savings account rate went up" trumpets the e-mail from ING Direct. And indeed, they did just bump the basic rate from 3.75% to 4.0%. Of course, that fails to take into account the special 4.75% rate that's expiring soon (April 15 if I remember correctly) -- which is no longer mentioned on their site. What's being touted as a 0.25% increase is actually a 0.75% rate decrease on funds deposited during the promotional period. I find this borderline deceptive.

Emigrant's at 4.5% and GMAC's at 4.70%... HSBC's at 4.80% through the end of April, and I expect them to at least match GMAC after that... so there's really no reason for ING to brag about their 4.0%.

What a nice week

What a nice week for the Roth portfolio. I was up more than $400 in the first four days and was dinged only somewhat by a $20 loss today.

What a sucky week

What a sucky week for the Roth portfolio. I was down more than $500 in the first four days and was rescued only somewhat by a $100 rebound today.

Wish I had more funds to put into some of these.

The perils of being fully invested

I've mentioned more than once that I wish I had some cash sitting in my IRA so I could pick up something the market has thrown a sale on. Basically I've seen an opportunity to make a quick trade but am already fully invested in stocks and don't have anything I want to sell right at the moment.

Here's a case in point. Last Friday a jury found Sherwin-Williams (SHW) liable in a lead paint class-action suit and the stock simply fell off a cliff: from above $52 to under $38 in a single day. This is almost certainly an overreaction.

I hate to keep talking about Jim Cramer, since I believe that blindly following him or any other "guru" is a good way to lose money. You really have to read between the lines a lot with Cramer since he's always saying things like "you need to own FOO" and he assumes you know not to buy it just because he said so but to check it out for yourself. Anyway, he pointed out this past Monday out that it's extremely unlikely SHW will actually have to pay out, and if they do, it'll cost 'em more like fifty cents a share, not $14 a share. And sure enough, on Tuesday the judge in the case basically threw out the fine. The stock has recovered some since last Wednesday (it closed at $45.50 today) but it looks like there's about $7 worth of recovery still to come, which would represent a respectable 15% gain. Let's see if Cramer's right.

Last year I missed out on an opportunity to make a quick 15% on Merck (MRK) under much the same circumstances: a lawsuit, an overreaction by the market, followed by a recovery in just a couple of weeks. I had some money, but was new to investing then and didn't really have the confidence to jump in. But if I had, I'd have made that 15%.

Next time I sell something, or perhaps I'll wait until 2007 when I make my next contribution to the Roth, I'm seriously considering keeping a "chunk" aside just for quick trades like this. I still want to hold most of my stocks for a year or more, but it's just too painful watching obvious trading opportunities like MRK and SHW float by.