The Tycoon Report

Avoiding Disaster and Beating the Market - (More Q&As)

Thursday, February 22, 2007 | Chris Rowe

Hello, Tycoons! 

Today I'm going to talk at great length about my daughter, my wife, and who I was best friends with when I grew up. 

Just kidding (private joke...  well, private between me and the 100,000 readers who read last Thursday's article.)

No, I'm going to do what I did last week and answer a couple of your questions.  And remember, even if you don't see your question answered here, we save them all and will be using all of them in the future.  Also, another Tycoon editor may be the one to address your questions or comments (I only write on Thursdays.)

Let's jump right into it...

QUESTION:

I would like more education about risk - how does one assess the greater or lesser likelihood that a stock will fall 20%, then rise 80%?  Barbara F.  Waterloo ON


ANSWER:

They say that "past performance is no guarantee of future results."  Of course.  But in a nutshell, risk can be measured by historic volatility.  In other words, the relationship between risk and volatility is extremely constant and linear.

Now, everybody, just cool it.  I can hear you!  OF COURSE, a stock can have a 10% average deviation from the mean for the last 12 months and then drop by 60% because their biggest selling drug killed 30 people or something.  Duh!  If you don't understand that nothing is absolute in investing, then stop reading this, pull your money out of the market, and start reading again (a LOT.)

The first thing that you want to do is decide what your time frame is.  Remember, in last Thursday's article, we said that higher volatility (risk) does NOT mean higher reward.  The idea is that if a stock trades lower, the stock has to gain much more to break even.  If your stock moves down by 25%, it has to come back 33.333% to break even. 

The stock with higher volatility has a higher degree of risk because if it doesn't work out, it will have a larger negative impact on your portfolio.  You think I'm stating the obvious here, don't you?  Bear with me...

What you want to do to decide how much risk there is in a specific stock is check out the 12-month history of the stock.   Now remember that this is a concept, and not a science, so I'm not going to give you mathematic equations to use and follow in this article.  But you can usually get a pretty good idea of what you're in for if you look at the history of the stock on its chart.  Keep in mind that stocks with higher volume usually hold less risk (because they are usually less volatile.) 

"Risk is not knowing the facts."  The more you know, the more risk is eliminated from the situation.  You should obviously understand the story of what you are trading so that you know if people are waiting on a big news announcement, or if the peer group is waiting for something big (legislation, interest rates, etc.)

Also remember, most of the movement in a stock can be attributed to the movement in the peer group (sector) and the general market.  So when you trade a stock, track the performance of the stock's peer group and/or the top 4-5 individual peers.  If the peer group has been moving higher, then the trend is much more likely to continue.


QUESTION:

Chris, I'm an individual investor in Santa Monica, California who used to own Worldcom.  I would like you to talk about the institutions and their buy recommendations.  You say that Tycoon was founded "in the wake of the settlement between Elliot Spitzer and the top 10 Investment banks" when they were caught pushing stocks for their own benefit.  Is this still happening?  You don't have to give up any of your Wall Street Buddies (LOL!) but give me a look behind the scenes.  Sean.

ANSWER:

Hi Sean.  Good question.  I'll answer your question with a question (a common tactic used by politicians when they don't want to "give up any of their buddies (LOL!)")  Do you think it was a coincidence that Goldman Sachs analyst Robert Barry upgraded the stock of JetBlue Airways Corp. to "Buy" last Wednesday, just as planes full of angry passengers were finally freed after being trapped in the airplanes for 11 hours by a weather-related nightmare at New York's John F. Kennedy International Airport? 

If you want my answer: I don't know.  But it's pretty interesting, huh?  Why is it interesting?  Well, Goldman Sachs, in all fairness, is known as one of the savviest investment banks when it comes to research, and you should also keep in mind that they are also known for being one of the best investment banks if you want to bring your company public.  If we ever decided to take Tycoon Publishing public (through an "initial public offering",) I would love for them to do the deal because they are usually strong. 

Goldman Sachs happens to be the investment bank that brought Jet Blue public.  And I doubt that they would be writing positive research (to bail out a good client from having a plunging stock type of scenario) if they didn't believe it.  After all, that would be wrong and unethical.  But I just think that it is at the very least a notable coincidence that in the midst of Jet Blue's worst disaster since inception, the stock was actually up on the Goldman Sachs report which was issued right as this drama was unfolding.

Now who knows?  I love Jet Blue as an airline (with no opinion on the stock - Symbol JBLU.) I love Goldman.  If I were the CEO of Jet Blue, I would feel all warm and fuzzy with Goldman's investment bank, as well as their research department.  I would definitely consider using their services again in the future.  And so what if the timing of the report was questionable?  Does that make the report bogus?  Absolutely not. 

That said...  I hope that all of you reading this understand that where there is money, there is always going to be corruption.  Wall street happens to be the financial capital of the planet.  Even if it isn't outright BS, you can't stop questioning everything that happens on Wall Street.  Get in that habit, and you will have another weapon in your arsenal (or maybe a shield.)  Today I'm converting you into a skeptic.

By the way, did any of you find it interesting that we just heard all over the news about how the terrorists are gaining on us, and how Al-Qaeda is strengthening and you should be afraid...  Be very afraid.  I have heard a lot more of this talk lately, (right around the same time that people are challenging Bush on whether we should send an additional 20,000 troops to Baghdad, etc.)  Might it be a coincidence?  Sure.  Might it have been tactical?  Sure.  Does that make it BS?  Maybe, maybe not.  Just get in the habit of questioning these things.  That's the frame of mind you should have if you want to profit when you trade stocks when you hear what analysts or institutions are attempting to tell you. 

To sum it up, the answer is, of course, these types of things are still happening.  Elliot Spitzer didn't save the day.  He highlighted what has been happening forever and will continue to happen forever (right when the stock market was getting hammered, and everyone was mad at Wall Street.  Talk about a coincidence huh?)  Nobody is excluded from these tactics.  It doesn't necessarily make it dishonest, just tactical.


QUICK NOTE FROM CHRIS:  I just want to say that I get so much positive feedback from all of you, but I will only post very little of it because I don't want to appear as if I'm doing some cheesy, self-selling marketing gimmick.  But I do want to tell all of you that I appreciate the feedback and read all of it.


COMMENTS:

Chris, I especially liked your response to Joe ("...leave out all the personal stuff...") I appreciate your personal connect because it reveals your human-ness and that you have your priorities (passions?!) right: TYCOON, marriage, baby daughter. I just signed on to The Tycoon Report and I'm pretty new to investing, so I'm like a sponge when it comes to learning how to invest wisely. There are tons of hyped-up investing newsletters out there. Yours is the only one that expresses a desire for a personal connect with your readers.


ANSWER:

Thank you.  I understand both sides.  Not to be too diplomatic.  I didn't take any offense at all.


COMMENTS:

Thanks so much for your help.  You have saved me so much money that I would have spent taking classes. God Love

ANSWER:

You're welcome.  I get a gazillion messages like this, but they always feel good.


COMMENTS:

Well Chris I think dat your personal stuff is as important as the business side, thats part of life. It shows me that you are not an robot. I am also a paid member. So just go ahead be yourself. I seldem give a feedback, bud I enjoy every artikel.


ANSWER:

LOL!  There are two things that let people know that I'm a human.  One is how I talk about my personal stuff, the other is all of the spelling and/or grammar errors in The Trend Rider trade alerts!  (Tycoon Report is edited.)  Nice to see I'm not alone!!!!!


“Profit from the Trend”

Chris Rowe
Chief Investment Officer
The Trend Rider