Newsletter

June 2, 2007

Goal Setting Enhances Motivation

Market & Sector Review
The New Contrarian Investment Strategy

Largest Changes In Raw Numbers (21 Days)

This Week's Economic Reports

Goal Setting Enhances Motivation

The goals we set often dictate our motivation level. In his book, "The Mentally Tough Online Trader," Robert Koppel (2000) argues, "Setting goals is imperative for the trader to enhance motivation and optimize performance. Goals should be realistic and measurable, within one's control, and realized within a specific time frame."

While setting high goals is most often the hallmark of success, be very cautious not to set your goals too high. Goals should be realistically attainable, if you set your goals at an unrealistic level you will end up failing. Repeated failures can damage your ego to the point you just give up. You must find the right balance between being unrealistically ambitious and being too modest. It's important for your emotional well being to hold realistic expectations.

Somewhere, you can't remember where you read about some super trader who took a small stake and turned into a huge fortune. Well if that someone can do it, then I can too! Or can you? Trading an insufficiently funded account makes it extremely difficult at best to cover draw-downs and other expenses. Trading beyond one's skill set in order to attain these lofty goals will only lead to frustration and failure. Unrealistic goals can lead to unrealistic strategies as well and it will create a good deal of stress. Setting more realistic expectations eases some of the pressure and helps you build up sound trading skills. As you achieve each goal, you feel a sense of satisfaction. You feel empowered and ready to achieve your next goal.

In addition to setting realistic goals, it's also important to set specific goals. Many people make the mistake of setting vague, non-specific goals. Set specific goals and reward yourself as you make progress. For instance should you make a nice score withdraw half of the profits and buy a getaway weekend with your spouse or significant other.

Goals don't necessarily need to focus on profits. You may want to initially set goals regarding the development of skills. You can decide to study charts for three hours a day, or read one new trading book a week. As you complete each goal, you'll naturally feel a sense of satisfaction for your progress. The key is to avoid trying to do too much. Take it slow. Work at your own speed and according to your own timeline. It's not a race. If you set goals realistically and strive to achieve them with resolution, you'll master the markets, and achieve enduring financial success.

Pick battles big enough to matter, small enough to win. - - Johnathon Kozol -
Market & Sector Review
The New Contrarian Investment Strategy

Another of our watch list methodologies comes from David Dreman, through his books and his companies' web site. This is a value approach similar to that of last week's newsletter; the Joseph Piotroski approach, and passing companies appear in our value section.

David Dreman is one of those most associated with contrarian investing; through his books and long-running Forbes column. He began writing about stock market psychology in the early 1970s through his first book, "Psychology and the Stock Market." Dreman followed up this work in 1979 with "Contrarian Investment Strategy-The Psychology of Stock Market Success" (revised in 1982 under the title "The New Contrarian Investment Strategy", which examined the range of possible contrarian investment strategies in greater detail.

At his firm (Dreman Value Management), the stock selection process begins with a number of quantitative screens to determine the Large Cap Value "Contrarian" stocks that fit his investment philosophy. The first screen yields only companies with market capitalizations above $2 billion. After identifying these Mid-Large cap equities, we then look for stocks with below market P/E multiples. Our research has consistently shown that stocks with the lowest P/E valuations have historically outperformed the rest of the market.

The screening used is as follows:
  1. Screen for stocks with below market P/E ratios.
  2. Further refine candidates by applying additional value screens.
  • Low Price/Book
  • Low Price / Cash Flow
  • High Dividend Yield
This results in a Contrarian Universe

   3. Fundamental analysis is applied to remaining candidates.
  • Bottom-up analysis of individual stocks
  • Avoid problematic companies
  • Focus on financial strength and value metrics including:
  • Sustainable earnings growth.
  • Dividend yield.
  • Liquidity ratios.
  • Debt management.
  • Return on equity.
  • Accounting methods and reporting standards.
Once we have identified the Contrarian Value universe, we begin our fundamental, "bottom-up" research. There are a number of low P/E companies that deserve to be valued where they are, as they have serious competitive problems, are in declining industries, or are simply mismanaged. We avoid problematic low P/E stocks and concentrate on those that have shown above-average earnings growth on a five- and ten- year basis. Our experience indicates that we have been most successful by owning profitable companies rather than trying to discover turnarounds, where the investment may suffer through many unrewarding years before a price appreciation.

Along with earnings growth, dividend yield is the other key criteria for us in stock selection. A company's dividend rate is a predictive factor, we believe, of future success. Our computer studies reveal that stocks with growing dividend yields outperform the market return because of the combined dividend income and capital appreciation. High dividends also provide a defensive characteristic for a portfolio during bear markets.

Once a stock has passed through all of these screenings and analysis, the analyst or portfolio manager will recommend it to the Investment Committee for approval. Should the Committee sanction the purchase of a stock, we will either execute a one-time purchase of the issue, or accumulate shares deliberately, based on the risk characteristics of the stock and its intended weighting in the portfolio.

In accordance with the preceding methodology, we are interested in companies that have fallen beneath the scope of the market 'experts,' while still maintaining strong business growth and sound fundamental characteristics. Quite often, the ideal stock is one that has been recklessly oversold by traders because of a negative news item, depreciating the price far below its "correct" valuation. Another appealing investment scenario would be a blue chip company with a long track record of earnings growth that gradually falls out of favor with the market because another hot sector has caught the general public's attention. This was the case with a number of strong industries during the high-tech bubble of the late 1990s.

It is important for me to note that just because a stock passes a particular screen it does not mean it is a buy. You must do your own due diligence prior to purchase and you must keep your investment/trading goals and guidelines in mind. If you're a value investor you're probably not interested in the screens for growth and vice versa. The data is provided to allow you to narrow your research, based upon your individual criteria for investing and or trading.

Source: Dreman Value Management
Largest Changes In Raw Numbers (21 Days)

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This Week's Economic Reports

Have A Great Week!

Bill

Disclaimer: Trading in securities, of any type, may not be suitable for all individuals. The contents of this newsletter are not a solicitation to buy or sell securities. The opinions expressed are solely that of the author. You must do your own research, contact your own financial advisor for suitability of any investments. Data gathered is from sources believed to be reliable, but NO guarantee as to their accuracy is made.