Jerry's Roth IRA Blog

Books

In my post yesterday about resources I meant to suggest some books.

I recently read A Random Walk Down Wall Street and am currently reading One Up on Wall Street. I've also got IBD's Guide to the Markets -- I got it a long time ago but it's probably a good time to re-read it. I will probably be reading The Intelligent Asset Allocator in the near future.

After reading Random Walk I wanted to sell all my stocks and put it all my money into a Wilshire 5000 index fund. If you don't want to read it, here's a summary: The stock market is mostly random. Diversification is good. Stock picking is really hard. Fees will kill you. Due to these factors, individual investors probably can't consistently beat a broad no-load index fund by trying to pick their own stocks. However, if you want to try, the author gives you some suggestions.

One Up on Wall Street is much more optimistic and better matches what I want to do with my IRA: find inefficiencies in the market (i.e. undervalued stocks) and exploit them. It's also quite well written -- I mean, it has a real, enjoyable human voice.

Another one I want to read, but which I'll probably get at the library, is How to Make Money in Stocks. The book's certerpiece is CAN SLIM, which looks like a rather complicated momentum technique involving technical analysis. Probably worth a look but it doesn't seem like my style.

Where next?

After selling my Neenah Paper today, I have $1026 and change in cash. I'll be putting another thousand into the account after the holiday and will probably sell my LEN soon. Where to go next? Possibilities include:

Sears Holdings (SHLD). This is the combined Sears/K-Mart entity run by Eddie Lampert. Cramer likes it a lot because (IIRC) the company has a lot of store locations they may no longer need and which may be sold at a tremendous profit over book value. Also, Lampert is earning a reputation as the next Warren Buffett and if he's running the show, many people think things are looking up just by definition. I worked for Sears when I was in college, and I know firsthand how screwed-up that company was. K-Mart from all accounts was in an even worse situation. If Lampert can do an even modest turnaround of the company, the stock may do quite well. If I get into this stock at all, I'll hold it for a year or even more, probably.

Paxar (PXR). This is a July Hidden Gems pick. I'm not too impressed with their other one (Columbia Sports, COLM), but I kinda like this one. They make tags. Yes, tags. For clothes. The ones with the brand, the ones with the care instructions, and other stuff. They design tags, they manufacture them. I had no idea clothing companies outsourced this kind of thing and I bet most other people don't either. They're moving into RFID. This might well be a great pick. It's already up 3.5% since the recommendation -- I might wait for a pullback before buying.

Sector Plays. Cramer's calling for a summer tech rally; PalmOne's earnings report today (up 26% year-over-year; annual earnings up 34%) may be the first volley, though it doesn't seem to have moved their stock (PLMO) much. Energy (oil/gas) and biotech are also places I might go speculating. I think buying one stock in each sector is probably a little too risky for me, but maybe an ETF in each?

I'd also like to own some Cheesecake Factory (CAKE). If I can't eat it anymore, and I really shouldn't, at least I can earn money on it! Plus it's a well-run company with a lot of growth potential that has achieved its success with no advertising. Haven't looked at its valuation, but I love eating there. Other stocks I'll be investigating are TurboChef (OVEN) and Treehouse Foods (THS). The former is a company that makes high-speed ovens for restaurants; Subway and Starbucks are doing trials. The latter is a new Dean Foods spinoff helmed by the guy who turned around Keebler. Both are Cramer suggestions and thus require more research before I actually buy.

I'm in no real hurry, though; I can sleep on it for a week or two.

Sold my NP

Sold my Neenah Paper today at $31.17 a share for a profit of $21.97 after commission. It fell to $30.97 by the close. I made a little over 2% on the trade -- better than a poke in the eye with a sharp stick, to be sure, though I could have done much better had I sold it a couple weeks ago. There's still a chance that it'll take off like a rocket in the coming months (in fact, now that I've sold it, it's probably certain to), but I'd like to try something else.

Here's a fun little chart:

That's today's Toll Brothers (TOL) chart. See that dip right about 2:30? That's when the Fed announced another quarter-percent rate hike. Heh. Lennar (LEN) had the same thing, as did HOV and KBH. May sell the LEN tomorrow, but I still intend to hold TOL at least until their late-August earnings announcement.

My IRA's value today at closing was $5557.96, which is a total gain of 10.58% on my original contributions. It was up above $5600 during the day, which was fun to watch. Much of that was due to New York & Co. (NWY) which made it up around $22 at one point but closed at $21.06. Blackboard (BBBB) continued to gain steadily.

Current holdings

Here's what I have in my Roth IRA right now:

Blackboard (BBBB). This is a software business that provides a hosted Web application for higher education. College students log on to their university's Blackboard system for assignments, course materials, etc. This is a June 2005 recommendation from the MF Hidden Gems newsletter. I liked their earlier pick Quality Systems (QSII), which produces medical billing software and is up 60%, and Blackboard has the same "feel." I got in at $19.94 on May 26, and today's closing price was $23.53. It moved up nicely when they announced an expansion into the UK. I think this one has the potential to really take off, so I'll probably hold it for several months.

Lennar Corporation (LEN). This is a homebuilder and I bought it primarily because Jim Cramer made a pretty compelling case for the homebuilders a few weeks back, and Lennar was one of the ones he mentioned prominently. I looked at the numbers and liked it. I got in at $58.30 on May 26, and it closed today at $62.23. If I'd had more free "chunks" I would have bought a "basket" of homebuilder stocks, probably including Hovanian (HOV) and KB Home (KBH), but I had to settle for two, so I picked Lennar and Toll Brothers (see below). Toll Brothers is up much more than Lennar, and I'm uncomfortable being overweight in a sector for very long, so I'm tempted to sell the Lennar soon.

Neenah Paper (NP). This is a specialty paper manufacturer spun off from Kimberly-Clark and is a Hidden Gems recommendation from last January that was a few percent under its recommended price when I joined Hidden Gems. I bought in at $30.29 on May 25, and it closed at $31.35 today. It was up above $33 earlier this month on news that a Finnish paper strike looked like it would last longer than usual, but it's come back down significantly from that peak. I don't know, I just don't see this one taking off; this chunk could probably be better put to work elsewhere.

New York & Co. (NWY). A clothing retailer, formerly Lerner's, spun off from the Limited Companies in 2002, focusing on professional women aged 25-45. This was a Hidden Gems recommendation in May. I got in at $18.96 on May 26; today it closed at $20.70. I'm pretty happy with this one's performance so far and will probably keep it for a while.

Toll Brothers (TOL). Another homebuilder (see Lennar Corp. above) recommended by Cramer. Got in at $91.52 on May 26; it closed today at $101.48. Remember, this is a sector play -- with interest rates almost certain to go up further, I don't think I'll hold TOL for more than a few more months. They announce earnings for the current quarter twoard the end of August; I'll probably wait for that and re-evaluate then.

Overall my portfolio is up 9.69% since the end of May for a total dollar value of $5505.87.

Note: Purchase prices include commission spread over the number of shares I bought. For example, Neenah Paper was actually executed at $30.08, but $7 over 33 shares raised the price a little over 21 cents a share. Closing prices do not include the commissions I'd pay if I were to sell. This is the way Scottrade's Gainskeeper page does it so it's easist to do it that way here.

Resources

Here are some resources I'm using for guidance in my investing:

Toward the end of 2004 I received a free report from The Motley Fool touting three stocks they'd recently featured in their Hidden Gems newsletter ("3 Hidden Gems Ready to Run"). Of those three stocks (IART, PRAA, and QSII), the first is now up 12%, the second is down 16%, and the last is up 60% in six months. Hmmmm. After thinking about it for a while, in May I finally signed up for Hidden Gems. So far I haven't liked all of their picks, but I haven't lost any money on any of the ones I bought either, and one so far has been a nice winner. (There'll be more on my holdings in the next post.) I've found the Motley Fool discussion boards useful.

I also got a free report recently from Fallen Angel Stocks (haven't bought their subscription service) and am on Russ Towne's Investment Thoughts and Chuck's Angels. I also watch Mad Money every day but usually TiVo-skip past the "Lightning Round." (Recaps of "Mad Money" can be found at Reasoned Investing).

I'm still finding new sites for research, but so far I like MarketWatch and MSN MoneyCentral. MoneyCentral in particular has a StockScouter rating, which I find useful to double-check my assessment of a company's financials. If I'm looking at getting into a stock, I will sometimes look at American Bulls, a candlestick analysis site. I'm looking for other good technical analysis sites. Trying to time the market is considered largely futile, I realize, but I haven't quite decided it's totally useless. American Bulls's system in particular seems to do a pretty good job predicting the trends of certain stocks, though not all of them. If they tell me to wait on a purchase, and they've been right often in the past, I'll probably wait a few days and see.

Of course my broker, Scottrade, also has a lot of good stuff, like analyst reports and S&P STARS ratings, and I use all that, but I can't link to it here.

Oh, and BoardCentral is a site I found recently that makes it easy to get an overview of what various stock discussion boards are saying about a stock.

Introduction

Welcome to my Roth IRA blog. This is where I talk about what investments I'm holding in my Roth IRA. I started the IRA in 2004 and have contributed $5,000 ($3,000 last year and $2,000 so far this year). Since I opened the account, I've made some good short-term trades (Taiwan Semiconductor [TSM], Merck [MRK], and Apple Computer [AAPL]) and some bad ones (basically in some iShares ETFs that took back everything I'd made in TSM and AAPL). This past spring I found myself basically even. I chalked it up to experience -- and was grateful I hadn't actually lost any money -- and figured I should learn more about the market before playing around anymore. I've done a fair bit of reading since then. I started this blog to chart my progress and to help others learn from my mistakes.

I chose to trade stocks in my Roth IRA because, first, I have a 401(k) that (in combination with my Social Security) will be adequate for my retirement, at least according to John Hancock. The 401(k) is in mutual funds (40% in the S&P 500, the rest in various sector funds) and I plan to continue contributing and not think about it more than once a quarter or so. The IRA is thus "mad money," and I can take more risks with it. No, I wouldn't want to lose a big chunk of that money, but if I did, it wouldn't kill me.

Since earnings in a Roth IRA are never taxed, I don't have to worry about the tax consequences of my trades, which makes things rather simpler, and because Scottrade won't let me short stocks, buy options, or trade on margin in an IRA, I'm forced to focus on the most basic form of trading until I get the hang of it.

I intend to do medium-term trading. That is, buy a stock, hold it for a few weeks to a year, then sell it. Rarely I may hold a stock only a few days, but I don't intend to day-trade. I may buy ETFs or mutual funds if I think I see a good sector play. I'll try to retain a some semblance of diversification, though I reserve the right to overweight in a sector I like.

My basic "chunk" (i.e. what I invest in a single stock) is $1,000; thus getting in and out of a stock will cost me 1.4% ($7 each for the buy and the sell). In the future I may occasionally buy an additional chunk of a stock if I think its prospects are particularly good, usually after I've held it for at least a month (regardless of whether it's up or down, but more likely if it's down). Ideally I'd want to take a position in stages (the Motley Fool recommends three), but since I only have $1000 total to put in each stock, I think I'd be overpaying commissions if I did that, so I'm just going to put each chunk all in at once. That means five stocks for now. For the next year or two, I plan to keep the chunk size at $1000 and add more stocks; in 2007, perhaps, I'll look at increasing the chunk.

My goal is to consistently make 20% each year after brokerage commissions. I'll be happy, though, to just beat the market.