The Worden Report (Tuesday, December 9, 2003)
We Dub Thee Sir Fundamentalist
Sir Fundamentalist, in answering Mark's query about long-term investing on March 24, tells how he uses TC2000 from the standpoint of an almost pure fundamentalist. It is a thoughtful contribution, clearly the work of a person who abounds with the qualities we seek for admission to The Roundtable of Knights Who Think for Themselves. He has a free website that I think many Users will find helpful. shell.dimensional.com. Although he admittedly carries technical lifeboats on his ship, he prefers to think of himself as a fundamentalist. But he is a Knight, and any User who dares try to rough him up in the castle hallways, can look forward to a good stretching on the dungeon rack. Treat him well and Sir Fundamentalist may even be willing to share a sip of his Veuve Clicquot Ponsardin. -DW
I am responding to Mark's letter in the Monday November 24, 2003 Worden report and DW's invitation to those of us who have longer term trading horizons.
I began my trading career more than 42 years ago as a pure technician. Today there are scant few remnants of technical analysis in my work and I use TC2000 v4.7 mostly as a note taking device which has nice charts next to my fundamental and corporate governance notes; also for (1) when the fundamentals won't answer questions I need answered, (2) for the few remaining technical measures that I use, and (3) as a sorting device to bring those movers, whose note sets I most need to update, to my attention in a work load prioritizing manner.
Keep in mind when reading this that I am not after trivial point changes in price but always seeking the doubles and triples and ten baggers that make the risk of owning stocks worth while.
Rather than worrying unduly about a "dead period," which may or may not exist, the thing that value investors need to do is to properly discount for it when *pricing* buys in the first place. A key element that flows out of my own value analyses for any stock is an estimated full value 3-5 years hence. Discount that by my minimum ROI threshold (I use 25% p.a.) for the hypothetical but typical four year holding period, and I arrive at one estimate of the maximum amount that I may pay for the shares. All the technical squiggles in the world won't adequately compensate an investor who overpays for a stock in the first place.
In fact, using technical entry points, such as moving average crossovers, typically results in paying too much with nowhere near the benefit DW suggested. Instead, what results is an excessive number of "false starts" followed by major deterioration in the underlying fundamentals. Even worse, if you allow such moving average crossovers to take over your thinking, you will be subjected to "prophet taking" which occurs well short of estimated full value, regularly dispossessing those who correctly evaluated the fundamentals but then allowed themselves to become confused by the inevitable and irrelevant short term fluctuations.
Another means of avoiding dead periods is to avoid stocks which may look fine through the perspective of Ben Graham's fundamental analyses but which have been jimmied and jiggered to such an extent as to have developed too many enemies, people hoping against hope of getting back some of what they overpaid for the stock during a previous blowoff. It takes literally years to unwind all of the enemies developed during a blowoff, until which time every breakout or effort at rally tends to be met by liquidation.
Although TC2000 PCFs don't allow the hinge point analysis that I use for identifying blown off stocks, the charts themselves do. So I locate the usually obvious mountaintop high on the long term chart, look back 24 months prior to find the lowest at which it traded leading up to that high, and if the result exceeds 3.00x (mountaintop high divided by lookback low), the stock suffers from Blowoff Danger. Such dangerous stocks, I will buy only when I can get them below net tangible equity. In this technical forum, I need to mention that is claimed equity minus empty accounts such as Goodwill, Other Intangibles, Prepaid Expenses, and things so useless that munchiments refuse to disclose what they are and call them only "Other Assets".
I suggest to Mark that the key is not to worry so much about time but instead to properly discount for it and any other bothersome realities before purchasing. On the other hand, there are situations when too many key elements of fundamental information are missing to arrive at a suitable selling price for an existing holding. At those times only (sell side), my early learning about locating overhead resistance levels on long term charts (what TC2000 provides) proves invaluable for getting workable decisions made.
-Bob
Good News
Yes, it was mostly a good news day. And the market used it to sell into. Maybe the most concrete example was TXN, which raised revenue and EPS guidance for Q4, only to break out on the downside, severing the level of the November low. INTC has a similar pattern though I don't find any news as heartening as raised revenue and EPs guidance. Recall, these are two key stocks I have had my eye on because of recent weakness in semiconductors. Both stocks hit bottom in October of 2002 and have since better than doubled.
These and the enlisted men under them have been the soul of the bull market in tech stocks this year. They deserve a rest and they're getting it, but just how much rest they require is important. It may be the key to assessing the importance of the market correction that could be starting in the Nasdaq Composite and SP-500. So far the setback is only minor in scope. If these averages pierce the November low, it will become intermediate.
INTC and TXN broke through their November lows today. INTC broke fairly decisively through its 50-day moving average. This is the sixth time it retreated to this average since last April. On each of the first five times, it stopped and reversed to the upside at or slightly above the moving average. MoneyStream has not been more than a hair's width below its own 50-day moving average since before April. It now went through it like a bowling ball dropped into the ocean from a 747.
All 17 broadband semiconductors were down today. However, with few exceptions, the major uptrends of most have remained intact.
It was a weak day, but breadth was generally no weaker than the declines in the averages would suggest. The key points today were 1) the propensity to ignore good news and 2) some key downside breakouts by key stocks. -DW |
