Newsletter

October 21, 2006

Personality And Trading

Market & Sector Review
Playing Defense

Largest Changes In Raw Numbers (21 Days)

This Week's Economic Reports

Personality And Trading

Last week I began a discussion on what it takes to be a good trader and covered the subject of character. This week lets move on to the next characteristic, one's personality.

Personality is how a person behaves as opposed to what that person believes. Personality defined from Webster's:"(1)… the complex of characteristics that distinguishes an individual; (2) the totality of an individual's behavioral and emotional tendencies; (3) the organization of the individual's distinguishing character traits, attitudes or habits; (4) their disposition."

What are the ingredients of a healthy psychology? Can humans learn to change? Do you have what it takes? These critical questions are extremely important to everyone in leading a happy and successful life. They are however, even more critical to a profession that is one of the toughest.

The reason trading is so difficult is that you cannot lie, hide, or rationalize failure. In the life of a trader, reality is what it is. Other professionals get paid no matter what happens: A lawyer for instance can rationalize he/she didn't have a case to defend; a doctor can rationalize we did all we could, in both cases they still get paid. Trader's do not get paid for failure, there are no excuses, and all that really matters at the end of your particular accounting period, is whether you are plus or minus capital.

In the words of Ayn Rand: "The symbol of all relationships among (rational) men, the moral symbol of respect for human beings, is the trader. We, who live by values, not by loot, are traders, both in matter and in spirit. A trader is a man (woman) who earns what he/she gets and does not give or take the undeserved. A trader does not ask to be paid for his/her failures, nor does he/she ask to be loved for his/her flaws."

This is the essence of the trading business! Understand it! Accept it!
Market & Sector Review
Playing Defense

Runaway bull market or topping out? The economy slowing down; will it be a hard landing or a soft landing? Inflation is dead, or is it about to reignite? Stocks are expensive or are they cheap? Are you confused by it all? I know I am. So what is one to do, chase the hot stocks, go short anticipating a decline, hold on to what we have and hope for the best? This week, to borrow a sports term, lets look at the possibility of playing this market defensively.

No matter what happens with the economy, be it a goldilocks situation or about to decline into a hard landing, fundamentally some things will not change. We will all still need to buy consumer staples, i.e. food, beverages, personal products, household products, liquor, and tobacco. Individuals will in a severe slowdown pare their spending, no doubt, but probably not in the above mentioned consumer staples. Cheaper brands perhaps, but nonetheless spending will continue in these areas. Can we find stocks in this area that represent value and perhaps even future growth? For this newsletter I will look at just one of the sectors mentioned - Food & Beverages. However do not limit yourself to this sector, look at the others as well.

The latest market rally as we all know has been led by the large cap stocks, represented in the DOW Jones Industrials and the S&P 500. With that in mind I had no expectations for the Food and Beverage groups when looking at the relative strength tables on site. Here's a quick view:

There are a total of 209 industry groups, the rankings are of 209. Brewers are undoubtedly the strongest group and with two exceptions the groups rank in the top half. Not exciting, you say, well certainly not on the surface, but let's take a look at the members of these groups both technically and fundamentally. As you can probably tell I am a big fan of spreadsheets when it comes to making comparisons. The technical data is explained on site in by clicking on "The Reports Explained" link. First a few definitions of the fundamental data you are about to view.

One of the most popular techniques used to seek both value and growth involves finding stocks with low price-earnings relative to earnings growth. The P/E to growth ratio (PEG ratio) is computed by dividing the price-earnings ratio by the earnings growth rate. Ratios below one indicate that a stock may be undervalued, while stocks with ratios above one may be overvalued. Bold face type and highlighted for those with a PEG ratio equal to 1 or less.

A low price-to-sales ratio is a way to identify "cheap" stocks. In "What Works on Wall Street: A Guide to the Best-Performing Investment Strategies of All Time", James O'Shaughnessy found that the price-to-sales ratio was a very effective screen for stocks of all market-cap sizes and that low ratios consistently produced higher returns. Unlike earnings, sales are less subject to management assumptions, therefore more difficult to manipulate, and are often less volatile. Those with a price to sales of 1.5 or less in bold face type and highlighted.

While the market does a good job of valuing securities in the long-run, in the short-run it can overreact to information and push prices away from their true value. Measures such as price-to-book-value ratio help to identify which stocks may be truly undervalued and neglected. Price-to-book value was a favorite measure of Benjamin Graham and his disciples (think Warren Buffet) who sought companies with a share price below their book value per share. During the depths of a bear market, many firms can be found selling for a price-to-book ratio less than one. In the latter stages of a bull market, few companies other than troubled firms sell for less than book value per share. Joseph Piotroski (accounting professor, University of Chicago) found that most stocks trading with an extremely low price-to-book-value were either neglected or financially troubled firms. In bold face type and highlighted are those stocks with a price/book of less than one.

The information below was gathered from sources believed to be reliable, obviously no guarantee implied or otherwise is made as to the accuracy. Green print is MG-347 Food & Beverages: Brewers, Black print is MG-343 Food & Beverages: Packaged and Processed Goods, Blue print is MG-349 Food & Beverages: Soft Drinks.

To repeat in bold face type are: PEG ratio less than 1; 5-year earnings growth rate greater than 10%; P/E ratio less than the 5 year average P/E ratio; Price to Book Value ratio less than 1; and Price to Sales ratio less than 1.5. The data presented should not be considered as a buy or sell recommendation for any security. It should be considered as any scan, a tool that will highlight stocks you should consider as potential purchases and/or sales.

There will be a few stocks, depending upon your style, level of experience and objectives that should be of interest. I know I've found a couple. I'll be doing further research along with you this weekend, and will probably include some in a watch list or two. Do any fit into your style?

Below are charts of the two stocks with PEG ratio's below 1. Both issues are rather thinly traded which should be taken into consideration if either is of interest.

Largest Changes In Raw Numbers (21 Days)

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.