Warren Buffett’s Secret to Making 100% a Year
by Phil - February 26th, 2011 10:51 am
I love the Berkshire Hathaway annual report!
Especially Warren Buffett’s letter to shareholders. The report gives us a great view of the overall economy from a man who has his finger in every pot and his letter to investors gives us a very good insight as to how things are going in the various sectors his operations cover. Most importantly, what I have learned in my own 40 years or reading Mr. Buffett’s reports (my Grandfather was a shareholder) is what should shape any long-term investing strategy: Patience and performance.
I often preach to members the joys of letting gains compound and our $25,000-$100,000 Portfolio, which is currently at $27,531 (up 10%) after 4 weeks, is an exercise in how to quickly compound small gains over the course of a year. Primarily, we try to follow Warren Buffett’s Number One Rule of Investing, which is: Don’t Lose Money. Buffett’s Rule #2 is: See Rule #1 and like us, it’s not that nothing Warren Buffett ever buys loses money – it’s just that he doesn’t ever buy things he isn’t willing to stick with UNTIL they make money. Sure we take a few losses along the road but, by being selective in our entries, we don’t discard stocks that we carefully selected just because the market temporarily disagrees with our valuations.
In our $25,000 Portfolio, it’s only been a month so we’ve only closed our winners so far and they were SPWRA with a 100% gain (these are option trades), INTC with a 40% gain, NFLX with a 42% gain, EDZ with a 75% gain, XLF with a 15% gain, VIX with a 50% gain, USO with a 53% gain and XLE with a 5% gain. In 19 trading day we have made 28 virtual portfolio moves (counting each leg) and, as I said, netted a 10% return to date. Interestingly, we’ve been playing it very cautious as we still have over $18,000 of virtual cash on the sidelines, hoping for a sign to get a little more aggressive next week.
How, you may wonder, are we going to get to $100,000 by December with just $27,531 in February? THAT is the lesson Warren Buffett has to give us and that lesson is COMPOUNDING RETURNS! Since 1965, Berkshire Hathaway has returned an overall gain of 490,409% to it’s shareholders. $10,000 handed to Mr. Buffett…
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Technical Thursday – The Needle and the Damage Done
by Phil - February 24th, 2011 6:33 am
I’ve seen the needle
and the damage done
A little part of it in everyone
But every junkie’s
like a settin’ sun. - Neil Young
Come on Bennie, give us another hit!
We’re hurting man, we need the good stuff. The markets love to get high and, just when we thought the trip was never going to end – we crash hard! Big Ben and his Central Banking buddies fed our commodity addiction with a flow of easy money and the speculators got so hooked that they have now overdosed and the price of commodities is now killing the host (the Global Economy).
Gee, who could have ever seen that coming?
Oh yeah, right, it was me. Well, very good then… I guess. There’s nothing like a good correction to make some fast money. In yesterday’s post (and Tuesday’s) I mentioned our TZA and EDZ hedges and thank goodness we dumped XLE as they flew back to $78 on the oil madness (more on that later). In yesterday morning’s Alert to Members we added IWM $83 puts at $3 and they finished the day at $3.93 (up 31%) but we were done with them earlier as we flipped bullish when they pulled back to $3.75 and grabbed the IWM weekly $80 calls at 1:03 at .66 and we flipped out of those at .93 (up 40%) for a nice, quick gain.
We also lost .20 on an SSO trade, trying to catch one more bear wave that didn’t come but, on the whole – Wheeeeeeeeeeeeeee! This is the best ride EVER!!! We love a volatile market, especially when it gooses the VIX (something we were also long on) as that gives us better and better prices for the options we sell to suckers who think they are smarter than the market. Yes, we buy them too – but look how fast we dump them. Options are great for momentum trading and for controlled leverage but the REAL MONEY is made BEING THE HOUSE – not the gambler and what we really love to do is SELL options, not buy them.
When the VIX is low, selling options is much less fun but, when the VIX goes up, so does the amount of money people will pay us…
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Monday – Mubarak’s Mood May Move Morning Markets
by Phil - January 31st, 2011 8:21 am
Is it safe?
I asked that question at the end of November in "Timid Tuesday – Is It Safe" and here we are, 60 days later and up 7.5% and, on the whole, feeling less safe than we did back then, when the Market Oracle and I seemed to be the only people concerned global inflation and sovereign default risks rising rapidly. Although we were playing the market bullishly, with our aggressive $10,000 Portfolio (and make sure you check out our brand new $25,000 Virtual Portfolio that begins today with a $100,000 goal by December 31st) we decided to try to take from $26,000 to $50,000 by Jan 21st (we only made $35,000), our Breakout Defense Plays (5,000% in 5 Trades or Less) and our Secret Santa’s Inflation Hedges – it was with one hand on the exit door at all times. As I said at the close of Timid Tuesday’s article: "This house of cards is teetering folks – please be careful out there!"
That was 60 days ago. We’re a lot older now and have learned a lot about the World since then. We learned that China, Japan and the IMF are all ready, willing and able to buy the bonds of various EU nations. We learned that the Dollar can still fall 5% (was 81.44 on November 30th) further down despite Europe’s very obvious problems and Japan’s MASSIVE 200% Debt to GDP ratio. We learned that Uncle Ben will never stop printing money (until forced) and we learned that commodities can rise much faster than even our aggressive "Secret Santa" plays anticipated, with every one of our hedges (XHB, XLE, DBA and XLF) already over our year-end targets, all on track for gains well over 100%.
After watching our Alpha 2 pattern break (as I predicted it would on Monday morning) for the week, we went a lot more bearish on Thursday when I said in that morning post:
Keep in mind that gold and silver are our defensive plays. In Member Chat yesterday, Jromeha mentioned he’s 80% in cash and 85% short the market on the 20% in play and I said I thought that was an excellent way to play what I felt was a blow-off top after the Fed. We added 2 disaster hedges yesterday, a TZA spread that pays 500% if we get to $17 by April and
…
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Monday Market Movement – Do or Dive!
by Phil - January 24th, 2011 8:14 am
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Big week ahead!
$30Bn in POMO from the Fed runs headlong into earnings reports from 15 of the 30 Dow components along with MoMo darlings like VMW (tonight), BLK (tomorrow morning), POT (Thursday morning) and AMZN (Thursday night). I already sent out an Alert to Members this morning outlining our strategy and Stock World Weekly did it’s usual amazing job of wrapping up last week’s action and laying out the week ahead so I won’t be too redundant here. The key driver for the markets continues to be the dollar, which is making more sense now as it saved the Dow and the S&P last week (50% of revenues come from overseas) but not the Russell (only 10% of revs from overseas) or the Nasdaq (30%).
The Dollar was relentlessly driven down last week, bottoming out at 78 on Friday evening, back to November lows, where they ditched the Dollar all the way down to 75.63 in early November before it broke back up and ran to 81.44 on the last day of the month. Now we’re back down 4.2% from the Thanksgiving highs for the Dollar and the Dow and S&P are up 8%, which is our usual 2:1 correlation yet Uncle Rupert’s Journal would have you believe that the Dollar no longer matters and that this rally is about (please sit down, PSW cannot be responsible for any beverages you are about to spit on your keyboad) – wait for it – Fundamentals!
According to the Journal: In recent weeks, for example, moves in stocks and the U.S. dollar have had little connection—a breakdown of the trend during much of 2010, when they were virtual mirror images of each other. Stocks were considered risky and would rise when investors were feeling confident, while the dollar was a haven, benefiting when investors were worried. Commodities, too, have broken away from rising and falling with risk perceptions. Now more old-fashioned concerns, like the weather, are having an impact. Corn, soybean and wheat prices jumped this month after supply estimates were cut due to dry weather in South America and floods in Australia.
Really? So the run in DBA from 22.85 in June of last year to 31.65 (38.5%) in early November was speculation but the run from 31.65 to 33.50 (6%) since then has been based on solid fundamentals. ROFL!!! That…
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Weekend Reading – Reviewing the Reviews
by Phil - January 1st, 2011 8:28 am
I am still trying to get more bullish.
I was thinking about writing something cute like I resolve to get more bullish but that would be wrong. I try, in my own humble way, to "get" the market right. That means I am not bullish or bearish but Truthish (to further botch Stephen Colbert’s use of the word) and, as Buddah says: "There are only two mistakes one can make along the road to truth; not going all the way, and not starting." Confucious reminds us that there are three methods by which we may learn wisdom: "First, by reflection, which is noblest; Second, by imitation, which is easiest; and third by experience, which is the bitterest."
In that spirit, we will spend the day in reflection so that we are better able to start on that long road to the truth so that we will be better able to imitate the things that will work in the year to come while trying to avoid making mistakes that will give us bitter experiences.
This post is not about me – We had a fantastic year and I’ve already given some outlook for 2011 back on the 19th in that weekend’s "It’s Never too Early to Predict the Future" and our current position is short-term bearish in the Jan-April time-frame, looking for a pullback to at least 1,200 on the S&P and possibly back to 1,150.
After that, we are expecting a return to steady gains but without the irrational exuberance we’re currently experiencing. So no, I am not bearish – I simply think we’ve gotten ahead of ourselves. Since we don’t know where the rally train will stop, we have our "Breakout Defense – 5,000% in 5 Trades or Less" from Dec 11th, which were a set of very bullish, highly levered plays where a little bet can pay off a lot if we simply hold our long-established breakout levels.
How much is "a lot"? Well my GE trade idea, for example, was to sell the 2013 $12.50 puts for $1.10 (net $1.15 in ordinary margin according to TOS) and to use that money to buy the 2012 $17.50/20 bull call spread for .95, which was a net .15 credit on a $2.50 spread that was on the money at the time. GE has gained about .75 since the 11th and…
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Tinsel Tuesday – Market Decorations Make Us Merry
by Phil - December 21st, 2010 8:24 am
I figured out how to get bullish!
Just read the Wall Street Journal. On the front page we have "Nuclear Pact Adds Backers" above the fold along with a fluff piece on the weather in Europe. There are 3 other featured articles on the front page of the World’s most widely-read financial paper and one is a fluff piece on the Jimmy Stewart museum, one is on the obscure concept of betting people are going to die (very fun and interesting but "The World’s biggest financial paper"?) and the last is on the SEC looking into Mark Hurd’s exit from HP. On the left is "What’s News" with about 30 summaries of articles in the paper so one would think you could look this over and have a really good idea of what’s going on in the World.
I see that "Spain said its regional governments are on track to meet their budget targets" and Dow component Boeing (who fell off yesterday) announced a "$1 Billion commercial satellite deal with the Mexican Government" and Blackstone is starting a $15Bn fund and TD is buying Chrysler Financial for $6.3Bn and (and this is a real XMas gift to Wall Street) "A Senate deal to fund the federal government until early March doesn’t include money to enact the health-care overhaul or stepped up regulation of Wall Street" and also that North Korea held their fire during a South Korean artillery drill. Wow! All seems right with the World, doesn’t it?
If I just read the WSJ, I find no reason to be bearish at all. Certainly there is no mention of Spanish Bond Yields rising 37% in a month to 5.5% at today’s $4Bn bond auction. There is no mention of China’s Vice Chairman of National Development saying that China "needs to prepare for a long- term fight against inflation" or that oil imports into China are expected to fall off next year as their economy cools down. You would think the fact that BAC, JPM and four other lenders facing a suspension of foreclosure activity under court order in New Jersey would be a news story or perhaps some mention of the 29-year high in sugar prices would be of interest to investors along with the limit-up trading in cotton to record highs for no particular reason other than…
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Merry Monday – Will Santa Deliver Dow 11,500?
by Phil - December 20th, 2010 8:28 am
I’m still worried about Europe.
Everyone else seems to have forgotten, including the Europeans. The Stoxx EU 600 Index hit its highest point since September 2008 this morning as commodities continued to climb (another chance to short oil futures below the $89 line). The Stoxx 600 is up 6.5% for the month and up 9.9% for the year. We had talked about gold, oil and the S&P in my Weekend Post; all are up about 10% in the second half of the year as the dollar fell 3.5%. This morning, the dollar is hugging that 80.75 line, still 10% off it’s June high. If Europe really is "fixed" then the dollar is free to drop back to it’s lows, which could provide tremendous rally fuel for stocks and commodities.
Moody’s warned it may lower Spain’s rating, citing "substantial funding requirements" and France is on Credit Watch and Belgium faces a rate cut at Moody’s as well while Standard and Poor’s is reviewing its assessments of Ireland, Portugal and Greece. The credit default swaps tied to the French bonds imply a rating of Baa1, seven steps below its actual top ranking of Aaa at Moody’s but, if it doesn’t bother the Europeans – why should it bother us?
There is no (ZERO) logic to global markets racing back to all-time highs with the VIX running back to it’s lows as if there is not a care in the World and I don’t say that because I’m a bitter short – we had 16 bullish trade ideas last week and just 8 bearish ones as we simply threw up our hands and played the technicals in Member Chat as the Dow tested that magical 11,500 line. Europe reads the same news we do and markets over there are up 1% this morning despite a pretty poor performance turned in by China, where the Shanghai fell 1.4% (and that was AFTER a 50% recovery into the close) and the Hang Seng fell 0.3% (also big recovery into the close) and the Nikkei fell 0.85% (small afternoon recovery) and the BSE, our global leader into November, weakly flat-lined 5% off its highs.
We’re watching 11,500 on the Dow as well as the 1,225 line on the S&P, which is its "must hold" line that we’ve been tracking on the breakout. Will the Dow break higher or the S&P…
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Fake-Out Thursday – Oil Scam Continues Unabated
by Phil - December 16th, 2010 8:27 am
What a joke the oil market is!
First of all, the NYMEX contracts for January delivery close on Tuesday and there are still 132,168 open contracts or 1,000 barrels each (132M) scheduled for delivery to Cushing, OK, a facility that can handle at most, 45Mb of crude and is, at the moment, full. The price of those barrels surged from $86.82 all the way back to our shorting target of $89 yesterday, where we once again had a nice ride down. Now, in pre markets, it is back over $89 again and we’ll short it again so I’m not complaining about the action but I am upset that this blatant rip-off of the American consumer can go on right under our "leadership’s" noses.
Logic alone dictates that if 132M barrels are on order for delivery to a storage facility that can only handle 45M barrels that the orders are mostly bogus. You can track the open interest every day right here so don’t take my word for it, watch what happens over the next few days as the people who are currently pretending to demand oil in January, roll their contracts to pretend demand for February (already at a ridiculous 268M barrels), March (172Mb) and April (60Mb). Like the great Carnac, I will put the envelope to my head and predict that, by Tuesday, the January barrel count will fall to under 30,000 contracts, while the new front three months will rise by close to 100,000 contacts.
This is scam #1 in the energy market and it goes on every month since the "Commodity Futures Modernization Act" of 2000 made it possible for thieves to run the energy markets with virtually no regulations. I’ve been speaking out on this for years and just this weekend, the NYTimes picked up the ball I tossed up over a year ago (better late than never!), when I pointed out that the Global oil scam was costing us 50 times more than the Madoff scandal EVERY YEAR! We’re not going to go into all that again as I want to highlight scam #2 in the energy markets and that is the weekly manipulation of the oil inventory reports.
Yesterday, Criminal Narrators Boosting Crude were very excited to report…
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Monday Market Movement – Pulling on Global Threads and the SEP
by Phil - December 6th, 2010 8:28 am
"We think the global (and overall European) outlook remains robust."
That’s the word from Goldman Sachs’ Erik Nielson this weekend, who also observes that he was "Possibly deluded by the wonderful vibrancy of California." Deluded indeed seems to be an excellent choice of words with a new report out showing that California leads the nation in a local government pension crisis that has a $3.5Tn hole to fill and will not be sufficient to pay benefits through 2020 along with 5 other states while another 20 states will run out of funding by 2025. Is Nielson just saying anything to herd more suckers into the market by telling the sidelined cash that it’s safe to go back in the water or is he cleverly employing an SEP Field to bamboozle the public?
An SEP (Somebody Else’s Problem) Field s an effect that causes people to ignore matters which are generally important to a group but may not seem specifically important to the individual. As Douglas Adams put it:
An SEP is something we can’t see, or don’t see, or our brain doesn’t let us see, because we think that it’s somebody else’s problem… The brain just edits it out, it’s like a blind spot. If you look at it directly you won’t see it unless you know precisely what it is. Your only hope is to catch it by surprise out of the corner of your eye. It relies on people’s natural predisposition not to see anything they don’t want to, were not expecting, or can’t explain.
SEP’s are commonly used by politicians to justify ridiculous policies like kicking crises down the road, ignoring pension and other unfunded obligations (that’s going to be your children’s problem), massive deficits (grandchildren’s problem), unemployment (lazy people’s problem), global warming (someone living south of you’s problem) and, of course unfair tax policies (poor people’s problem). They are also used by analysts, CEOs, their lobbyists and journalists (especially TV ones) to distract the "beautiful sheeple" from focusing on what’s really happening.
Not at all our problem is the price of vegetables in China and that’s a good thing for us because they have risen 20% in 30 days. Officially, China’s inflation rate was 4.4% in October but even that is expected to jump 14% to 5% in November. "Many see China’s monetary tightening as a pre-emptive tap on…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
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