This is a response to this question:

I’ve been interested in stocks for the past few years and I’m finally looking to invest in some stocks. One thing that alot of investors recommend is to invest in companies you actually like. I was just wondering if this is a bad idea? I’ve also read about the importance of diversification - pick 5 stocks, all from different sectors, and gather information about said companies.

The companies I’m looking at are Costco and Chipotle. Both have expanded to my area within the past year and I really enjoy the service and environment. I’m a huge Apple fan and I’d love to get some Apple stock but I don’t think it’s within my budget. I feel like there stock can only rise if they meet their sales for the year with the iPhone. Nissan’s stocks look within my price range at roughly $18 a share. I feel like this may be a good pick with their shift to electric cars in 2010.

There’s some truth in the advantages to investing in companies you know. I think Apple is actually a good example. When I invested in it at the beginning of last year, everyone told me it was overvalued, “everyone loves Apple!”, etc. But I saw the huge growth in their PC market, and knew the iPhone would explode no matter what. And what happened? The stock doubled last year.

But the exact same thinking can kill you. I owned Jones Soda (JSDA) mostly for technical reasons (who wouldn’t want to own another HANS), but I also loved their soda, and thought there was a hole in the market they could take advantage of. The stock hit a high of $28 and now stands at $2.90 (though luckily I sold at $24).

So in the end, you have to have other solid reasons for investing in a stock besides the fact that you like it.

Regarding Chipotle: It was a great stock in the last bull market, but one common tidbit thrown around is that the leaders of the last bull market rarely have the same run-up in the next one. It’s in a clear downtrend since peaking at the beginning of the year.

Lastly, the price of the stock should have absolutely nothing whatsoever to do with your budget. What’s the difference between 10 shares of a $10 stock and one share of a $100 stock? Nothing! A stock is only “expensive” in terms of its price to earnings ratio. This is a common misconception I hear all the time.

It’s been another solid week for my portfolio, even with market’s performance yesterday. The masses are still rife with fear, meaning it’s a great time to invest, so I became fully invested as of last week. The more bad news, the better!

Cleveland-Cliffs (CLF) is close to having doubled for me since I bought it. While I would normally be inclined to take at least some profits here, commodities show absolutely no sign of slowing down, and CLF is definitely a leader there.

I am a bit disappointed about Google (GOOG) and VMWare’s (VMW) performance so far this year. I was warned about picking the leaders of the last bull market, as they rarely perform the same in the next bull market, but I just felt very confident about both of these companies. I will still give them time though, especially Google.

Renesola (SOL) has amazed me, up nearly 80% in one month! People can keep talking about how the solar market is overvalued and bound to crash every day now. With my company having made 400% profits from First Solar (FSLR), and me now profiting from SOL, I strongly feel that solar stocks are here to stay. I wouldn’t be too surprised to see a correction of some sort sometime soon though.

Since last updated, I added F5 Networks (FFIV), an internet networking infrastructure company, Fluor Corp (FLR), an engineering company involved with oil and natural gas, and Marvel Entertainment (MVL), of comic book fame. I added FFIV due to its strong performance over the past month, as well as it being a subject I’m familiar with (I have a natural tendency to be more interested in tech stories). I added FLR as a test of buying a stock after it’s spiked on earnings, as I did some reading about how most stocks continue to rise even after a one day gain of 10%. Lastly, I added MVL due to the success of Iron Man and betting on the fact that they will continue to make large profits off of their properties (now that they full control the movie making rights to them). I am a bit hesitant about MVL though as it pick based mostly on a few stories I read, and not as much the fundamental and technical research I like to do.

Finally, I sold Immersion Technologies (IMMR), maker of touch screens, after tepid performance for the past month, and added a favorite from last year, China Fire & Security Group (CFSG). CFSG was one of the biggest winners for me last year, and took a massive hit due to what appears to be equivalent to a gossip column about one of the major stock holders. China’s infrastructure boom is huge, especially with the Olympics, and this company seems to pick up contracts left and right to do the fire and security systems for these buildings.

YTD Performance as of 05/21/2008: Up 11.81%

Portfolio Holdings

Changes

Date	Action	Stock	Price	Shares
5/8/2008	BUY	F5 Networks (FFIV)	27	373
5/13/2008	BUY	Fluor Corp (FLR)	187	53
5/13/2008	BUY	Marvel Entertainment (MVL)	34	292
5/19/2008	BUY	China Fire and Security Group (CFSG)	11	1124
5/19/2008	SELL	Immersion Technology (IMMR)	10	620

(Click for big)

So it’s been awhile since I’ve done one of these, mostly because I still can’t find an easy way to dynamically display my portfolio online. So for now I’m back to taking screenshots of the spreadsheet I use to track it.

About two weeks ago, for the first time this year, my portfolio went from the red to the black, and I finally showed a profit! My portfolio currently has a gain of 3.63%, compared to -5.59% for the S&P 500. I am very happy to be outperforming that index by over 9 points.

The big winner this year has been Cleveland-Cliffs (CLF), up an amazing 88% since I bought it in mid-December. This kind of performance in a bull market would be exceptional, but seeing this growth from the past four months is amazing. Commodities are very hot right now (and have yet to show any slowdown), and CLF is really leading the way.

I am also very happy with Google (GOOG), which I talked about in a post a few weeks back. It trounced earnings estimates after the unnecessary, fear driven sell-off. I do hope it can keep up the momentum it got from that. My company doesn’t really believe in investing in “last year’s” bull market leaders, which is my only hesitation with holding GOOG.

Two of my other energy stocks - SandRidge (SD) and Helmerich & Payne (HP) are performing decently. It’s pretty funny how I discovered SD - I was watching a somewhat entertaining show called Wall Street Warriors, in which a money manager is heavily investing in Sandisk. Curious as to how the stock ended up performing, I entered “SD” expecting that to be Sandisk, but instead found SandRidge, and immediately noticed how strong the chart looked. So I bought it, and it’s returned 24% since. Not bad for a stock I stumbled upon!

Two of my recent additions - VMWare (VMW) and Immersion Corporation (IMMR) are both down a bit. I’m not too worried about VMWare, but I’ll need to take another look at IMMR (a touch-screen technology company) if it drops much further.

At the investment company I work for, their general approach to earnings is not to play them either way. Overall, I think this makes a lot of sense, because it often seems like a risky move to buy or sell a stock before it announces earnings in hope that it will move one way or the other.

So I really had to be sure before I spoke up on Wednesday’s stock meeting about Google. I should preface this by saying that even though I have been very happy with my portfolios (both real and paper) in the past year, and feel as though I have learned quite a lot in the past year and a half, I still am very nervous whenever I speak up at this meetings. Combined, these people have a century (or more) of knowledge about the stock market, bachelors and masters degrees in finance, and to top it all off are just extremely intelligent people. I think they invited me to this meeting last year both to encourage my interest in investments as well as get a “fresh” opinion on things - even if that opinion was based on a few months of investment experience.

Anyway, about a month ago, Google’s stock got hit when ComScore, who is kind of like the Nielsen ratings of the internet, announced that its growth from online advertising sales was slowing drastically. I immediately put 10% of my portfolio in the stock, for three reasons. First of all, ComScore is notoriously inaccurate. I had actually researched the stock last year as a possible investment, before reading too many stories about how their calls were often way off. Second, by spending a lot of time in the online advertisement industry, I can see first hand how Google’s online advertisements are continuing to grow.

Last, I feel as though Google is one of the best overall companies I have seen in my lifetime. It is well run, has a great business model, and puts out incredible products. I never got a chance to buy into Google last year, so I felt as though buying it nearly 375 points off it high was a great deal.

So at this meeting Wednesday, I said that I strongly felt that the next day, Google would beat earnings estimate and everyone who sold off in fear the month before would dive back in.

And, incredibly, I was right. Google opened this morning up 80 points, or nearly 20%.

I feel really, really good. I know that, like all investing, there was a good amount of luck in this. But I feel as though this was a great example of how you can really benefit from investing when you understand not only a company, but the company’s stock as well.

My only regret was not purchasing ten real-money shares on Wednesday like I was tempted to. If I had done that, I would have gained about $800 overnight.

There’s a classic saying that you should never discuss politics, religion, and sex at the dinner table. After nearly a year of investment blogging, I’m of the mindset that market timing should be added to that list as well.

When I began studying investing, two of the first books I read (on the recommendation of personal finance blogs) were A Random Walk Down Wall Street and The Little Book of Common Sense Investing. They were both well written books that did a very good job introducing investing to me. They both also shared a common philosophy: It’s a fool’s errand to try to beat the stock market. Give up now and try your best to mimic it.

Most conservative investors push two main concepts: First is to never buy individual stocks, and second is to never try to time the market. I have written about both here, but it’s the second I would like to focus on in this post, spurred on by an article in the Wall Street Journal today entitled Stocks Tarnished by Lost Decade. In brief, the article says that money invested in an index fund nine years would be in nearly the exact same place today, even less when taking into account inflation.

Supporters of the buy and hold philosophy like to say that market timing is risky. It’s funny, because I think the exact opposite: Staying in your investments no matter what is happening in the market seems ludicrous! I’m in the middle of a book called How I Made $2,000,000 in the Stock Market by Nicolas Darvas, and he has a great little paragraph on this:

I work at an investment advisory service that practices market timing. For nearly four decades they have beat all the market averages. In late 2007, they advised moving heavily in cash, and are now doing almost three times better than the S&P 500, and four times better than the Nasdaq.

Yesterday, I went down to the archives room and leafed through their monthly newsletters from 1987. As each month passed, they advised moving more and more money out of the market – right in the middle of a massive bull market. Three days before Black Monday, their headline was “REMAIN IN THE STORM CELLAR.” Buy and hold investors watched their profits from the past year completely wiped out three days later.

The most often quoted “fact” I hear about buy and hold is that if you missed the best X days in the market, your portfolio would be down X percent. This is an argument chock full of holes, such as:

• Missing the worst ten days would have profited you three times as much as missing the best days (source)
• Most of the best days are followed by the worst declines, wiping out those huge numbers (source)
• All but two of the “best” days occurred in the 2000-2002 bear market (source)

Next these arguments are followed up by a slew of quotes from famous investors. Of course, there are just as many famous buy and hold investors as there are market timing investors, so it’s a logical fallacy to cherry pick the quotes that agree with one side of the other. But let’s take a look at one of the most famous and successful investors of all time, Warren Buffett, on market timing:

Part of the “problem” with market timing is that there is an actual strategy to it. The buy and hold strategy is simple. Market timing can be incredibly complex, so it is important to follow a system that works – or follow an analyst who uses a good system.

Unfortunately, due to both credibility and privacy issues, I cannot say the name of the service I work for. But there are services such as Hulbert which monitor the performance of investment advisory services, many of which practice market timing.

I ran my weekly portfolio update this week and found I was down 6% since the end of the year. I am actually pretty satisfied with this. Why? Well, mostly because the S&P 500 and Dow are both down about 9.5%, and the Nasdaq composite index is down 13%.

My decent performance, at least in comparison to the major indexes, is due to three general changes I made to my portfolio: Completely avoiding growth stocks for the time being, trying to stay around 50% in cash , and investing in resources and energy.

When the market timing indicators here started turning negative in December, the standard call to trim your portfolio went out. In my case, that meant getting rid of my weak stocks, which now were the same growth stocks that had been leading the pack in the summer. It was particularly hard to say goodbye to Baidu after those fantastic gains it gave me, but I’m sure we’ll run into each other again soon.

This left me with, well, no stocks in my portfolio, which shows just how heavily invested in the growth stock leaders I was. They had treated me wonderfully during the past year, but were not at all what I wanted to be invested in as the new year approached. I now somehow had to find the next leaders to spend half my cash on, in a pretty terrible market.

So I instead turned towards the boring, uninteresting stocks of the resource, energy, and gold sectors. Honestly, how exciting is mining coal? Still, I had to give them credit for their surprising performance in such a negative market climate. So I purchased four of them: Cleveland-Cliffs (CLF), Arena Resources (ARD), Yamana Gold (AUY), and Cosan (CZZ). The first two are involved in general resource operations, the third is obviously a gold stock, and the last is a major player in the ethanol field.

To date, they have all performed positively. ARD, AUY, and CZZ have returned 5%, 9%, and 7% gains respectively. Normally I wouldn’t be happy at all with numbers like that over two months, but with indexes down 10% I can’t complain much. Cleveland-Cliffs has been the big winner, returning 30% gains since I bought it.

For the time being I’m happy. But believe me that I have my finger on the trigger, ready to jump on stocks like Google and Baidu that are now extremely cheap. I will be waiting for some reliable performance from the market in general before doing that though. I believe we are near at turning point in the market. We’ve had a steady number of 30-50 lows for the past few days, and it seems like the market is just waiting to dart one way or the other.

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At the beginning of last year, I began my job at an investment advisory service. Though I had never been very interested in investments before, dealing with them in my everyday life spurned my interest forward. I went out and bought books recommended by personal finance blogs, such as A Random Walk Down Wall Street and The Little Book of Common Sense Investing.

I was promptly poked fun of by my coworkers.

Not because I was a neophyte in the investing world, but because I was reading books by preachers of index funds. What was so bad about index funds, I wondered? It sounded as though market timing was a myth best practiced by practitioners of voodoo, individual stocks were for the insane or insanely rich, and choosing a successful mutual fund was a fool’s errand.

What I learned was that in the end, index funds are a viable choice, but by buying one, putting a blindfold on, and selling it when you retire, you are submitting yourself to be a toy of the stock market and its investors. So instead, I followed the advice of my colleagues and invested in growth stocks, using market timing to balance the cash I had in my portfolio against the performance and strength of the overall market.

At the end of the year, my portfolio was up 39.32%, which I was extremely happy with. Now I must admit that I credit a fair portion of this with beginner’s luck. Not to mention I was being guided by people with ten, twenty, thirty, and forty years of investing experience – both in terms of stock recommendations as well as market timing recommendations.

So what were my big winners and losses of 2007?

Winners

• Apple (AAPL): Up 132%. This was the very first stock I bought at the beginning of the year. I kept it for the entire year, recently selling it before Macworld as it seemed as though the enthusiasm for the stock was dwindling.
• China Fire & Security Group (CFSG): Up 32%. A tiny company that racked up tons of contracts for installing fire and security systems in Chinese infrastructure. This one was up nearly 80%, but dropped at the end of the year.
• Garmin (GRMN): Up 115%. I was extremely enthusiastic about this stock, as I saw GPS’s becoming the next iPod, and thought Garmin had the best chance of capturing that. And they did – up until them losing their source of maps, Navteq (which they later regained). This permanently damaged the stock however, and it is now worth half of what it was in October. Luckily, I sold it right after this announcement, taking a short term loss but saving most of my gains.
• Dawson Geophysical (DWSN): Up 47%. Dawson found oil for companies by blowing up dynamite underground and studying how seismic waves reflected around. Cool stuff. Sold in October after it had cooled down for a month.
• Aecom Technology (ACM): Up 48%. Probably the “easiest” gain I had, in that it went up straight for nearly two months. This was a global infrastructure play, that especially benefitted from growth in China. Like Dawson, it also flattened out in October.
• Audible (ADBL): Up 23%. An online source for audiobooks. I mostly mention this because I sold it shortly before it was bought out by Apple! Ah well.
• Baidu (BIDU): Up 112%. The Google of China. I always regretted missing out on Google, so I figured this would be a good alternative – and it was, up until recently. Luckily I sold this before most of its recent decline. I still feel as though it will be a strong stock once the market regains some of its footing in the tech sector.

… and losers

• Comscore (SCOR): I work a lot in online advertising, and saw how much we were spending, so I tried investing in a company that profited from that. Unfortunately, this particular company did not, and is still a very volatile stock.
• Loop.net (LOOP): No matter how good the fundamentals look, this stock was a great lesson in why you can’t ignore common sense such as not investing in any stock relating to the housing market.
• Jones Soda (JSDA): I knew this one was quite the gamble, and thought I had found the bottom at 10. This was after a drop from nearly 35. It went up to 14 before falling all the way down to 6.5, where it is now. Luckily I sold it with only a small loss.
• Crocs (CROX): I actually ended up with a gain in this stock, but that gain was quartered after a horrible earnings report.
• Volcom (VLCM): Another clothing stock that I tried to capitalize on. My younger sister, who knows quite a lot about clothing, had never heard of them – maybe I should have taken that to heart!

At the beginning of this week, the investment advisory service I worked for posted this notice to their subscribers:

“We believe yesterday’s deeper-than-expected Fed rate cut, along with the market’s super-strong reaction, has kicked off the market’s next bull run. What impressed us most was the significant power shown in the broad market; up volume on the NYSE totaled nearly 30 times that of down volume, while advancing stocks outnumbered decliners by more than 9-to-1. (We get our figures from the Wall Street Journal, FYI.)

These are highly unusual readings … and history tells us they’re very bullish. Jason Goepfert of sentimentrader.com wrote that there have only been seven other times when up volume swamped down volume by 25-to-1 or more. Three months after these seven occasions, the S&P was up an average of 9.4%, and better yet, there was minimal drawdown during that time (read: the market didn’t pull back much at all after those big up days; it usually continued higher).”

At the end of the week, the markets closed – ending the best week of gains for 2007. And what a week it was! One of my core holdings, Baidu (BIDU), the “Google of China”, is up over 12%. In fact, because of its strong performance, my portfolio nearly doubled in value and is now up 22% for the year. I am sure I’m not the only one who benefited that much from this week either.

As you can probably tell, things have appeared quiet here for the past few weeks. This is due to several reasons. First, I am launching the new website at my company in three weeks, which has been a eight month project. So as you can imagine, the last three weeks are fairly hectic!

Second, to be honest, I just haven’t come across much newsworthy information on the personal finance or investment front recently. Sure, I could post about the dangers of credit cards, or how not buying coffee every day can save you one zillion dollars (check out KMC’s wonderful post about how this subject has been beaten to death), but I really feel as though those subjects have been squeezed dry by the personal finance blog community.

While I haven’t written about it much about it, you can believe that I’ve been following the stock market with a close eye ever since the massive drop in late July. However, I am happy to say that my tiny blip of a portfolio is doing wonderfully, up 14% since I started the portfolio over at Zecco on June 12.

So how’s an equal investment in the S&P 500 index, say the VFINX (Vanguard 500 Index fund) doing? It’s up 0.1%. In terms of real dollars, it’s up fifty-six cents since June 12th. My portfolio has gained $70. That means the portfolio is outperforming the index 125 fold. Not bad!

What does this mean? Am I the next Warren Buffet? Are index funds complete scams? I’d have to say a powerful “no” to both of those. First, a lot of my strong stock selection is thanks to the genius market analysts I work for at this investment advisory service, and I am lucky to get such information for free. Second, as you can see from the graph below my portfolio is extremely volatile, and a month or two ago I wouldn’t have been singing the same tune.

In any case, it’s incredible to see the difference between two hypothetical investments like this.

One last thing: I would like to thank everyone who remained subscribed to the RSS feed during the past few weeks. I had anticipated finding only two subscribers when I checked for the first time today (my wife and my mother of course), but instead there were even more than a few months ago. I appreciate it!

The investment advisory publisher I work for has both a value (buy and hold) and several growth (average 4 month hold time) publications, and both do well and have at least outperformed S&P every year. Their current emerging markets publication is up 55% this year, a lot of which was due to their ability to move a fair amount of holdings into cash about two weeks ago.

Both strategies work. Sure, you can time badly and “miss the best 50 days of trading and lose 10% of your portfolio!” I love how buy-and-hold people throw that argument out all the time, because half of what market timing people do is watch the market to make sure they don’t miss those days. Not to mention the opposite side of that argument: being IN the market for the worst 50 days, is rarely, if ever, brought up!

Personally, I just find growth investing more exciting. Waiting two years for Home Depot to go up 10 points just isn’t very thrilling. Chasing CROX and First Solar up 150% is though. Both strategies are viable, but people defend or insult them like they’re talking about religion.

In other news, the lack of updates has been due to me coming home from work and working with my wife on starting our new small business, for which we hope to sell our first product in two weeks. I’ve been writing some pieces on the process of starting a business like this, but would rather wait until that process is complete before publishing anything.