Risk Risk Risk.

The history of mathematics as it applies to the probabilities and the stock market is of course one of the most fascinating subjects around. The book "Against the Gods: The Remarkable Story of Risk" covers it in great detail. A fascinating read, Peter L. Bernstein reviews the beginning of recorded history of "possible outcomes," to how the idea "evolved" into the current system of statistics and probability theory.

One of my favorite topics is the middle ages when insurance companies started to issue life insurance. Originally, companies would charge the same amount for a life insurance policy no matter the age or health of the individual, as the concept of "likelihood of death" was an evolving concept. They had no term for evaluating risk of death!!!!

Even more cool is the the way that he explains the history of the Gaussian (Bell) curve that we so admire. I was amazed to learn how much of the mathematics of probability was NOT invented by mathematicians, or even physicist or astronomy types. It was evolutionary biologists! Imagine that! I was shocked to say the least. I never realized how much mathematics was developed by the likes of Galton, Darwin, Mendel and his peas, and other tree huggers.

The last part covers modern game theory and other "recent" developments, such as efficient market theory and the Sharpe Ratio. Absolutely fascinating. A must read if you are into the history of statistics.

Unfortunately, no part of the book identifies any particular strategy for investing. No bets today.

Whales 1, Shark 0

So, the shark has lost. Per the last review, I dutifully bought their recommended stock, and placed a stop loss order on it. Not one week later, the stock tanked. Well, at least the stop loss kept me from losing more cash.

WFR just cost me 50 bucks!!!!!

Poor me.

Well, throw that book into the trash.

Otherwise, lets see where I stand. Since starting on October 29th, 2007, the S&P had a loss of 9%, while my scheme gave me a loss of 1.4%. This includes all commissions, but not taxes, as I am currently losing money (about forty bucks total). If it wasn't for the shark strategy, I would be up ten dollars.

Jaws Attacks!!!!!

"RevShark" as he is called, started a investing career after he went deaf, got divorced, and lost his job. He then traded up to millions of dollars and started a website for self promotion that reminds me a lot of Jimmy Buffet's.

He then wrote Invest Like a Shark which is a clear advertisement for his website, which can cost thousands to subscribe for a year! Don't worry, I will sum up his entire philosophy and strategy in a few short sentences.

First, his philosophy. Little investors can act like sharks. Fast, aggressive, following trends of the whales (big Wall Street types), and quickly moving on to the next opportunity.

Second, his strategy. Follow a low-cap stock, wait until it "makes a move" which is essentially crossing the fifty day moving average. Then, take a few "bites" by buying some shares. Finally, dump the stock very quickly if you lose money. If you do not lose money, hold onto it. Then, sell it once it stops performing for you, preferably with a 8-10% stop-loss.

What to buy? Well, that is easy. You can sign up for the "stock of the week" which conveniently fills all the requirements. This week, WFR is the one to buy. I will buy 500 smackers worth at the open, and place a trailing stop-loss that will automatically dump it if there is a drop of 10% from its high point.

Don't worry about the RevShark. He is making millions, got remarried, and now has a cochlear implant and can hear everything just fine.

Blow them away!

In preparing for the new year, I have many books on the list that will be evaluated, and gobs of money will be spent trying to beat the market. This will be the year of the Shotgun Investor!!!!!

Oh the Possibilities!

In Fooled by Randomness, Nassim Nicholas Taleb (real name, not an anagram) discusses how randomness affects almost every daily event and how most do not make sense of it.

The most prominent people in the book are market traders who ignore the random component of their job. He gives multiple funny examples of peole making millions per year, thinking that they are the bomb, and then losing it all by not recognizing that a large component of their success was based on the fact that the trading system they were using was good, unless something "unlucky" happened.

Good stuff. A very entertaining read. He does not pull punches for the likes of George Will, and other media pundits. One point for the nerdy statistician!

My favorite section is when he compares winning ten million dollars playing Russian roulette versus earning the same through dentistry, explains the importance of "multiple probable outcomes," and relates how our brains are thought to interpret such different risks for the same reward. Neat.

The book is written like a blog or journal, and is entertaining and quite a easy read if you pass over all the philosophical name dropping. he also wrote a book called "The Black Swan" which will definitely be on my future reading list.

What to buy? This does not easily lend to a specific trading scheme, so I will sit this one out. Also, I spent my money buying gifts.

Abracadabara!

In looking for investment ideas, it seems as though the world is all too ready to give advice on stock market picks. Everyone wants a simple "magic formula" to investing. Ideally, one would go to a website, click on a button, and have an instantaneous result of a list of stocks to buy that could only go up.

Thankfully, Joel Greenblatt has already done it. Nothing could be more simple for the little guy. In "The Little Book that Beats the Market" a straightforward formula is given that bested the S&P for 30 years.

Basically, he uses the Return on Assets(ROA), and ranks the stocks. Then, he takes the earnings yield, and ranks the stocks. Combining the two lists of rankings, he comes up with a rank of stocks. For example, if Joe Blow company ranked #2 in ROA, and #376 on earnings yield, then overall the stock would gain a rating of #378. From this list, he then eliminates foreign companies, financial companies, and utilities. One should buy 20-30 of these stocks, and hold them for a year minus one day if the they are a loser, and for a full year if they are winners (for tax purposes).

More simply, he has a website that does all this for you, giving you your list.

A good book, only takes a day or two to read. Get it from your local library.

So for my "magic" selection, I have simply visited the site and obtained the stock ICF International, (ICFI) which is a companey that.... well, never mind. You see, you don't even have to know what the company does. See how easy? I'll buy twenty shares on Monday.

Buff-a-what-a-gee?

Buffettology looks at investing from the view point of the big man, Warren Buffet, legendary investor and 2nd richest man in the USA. The author, Mary Buffet, is the ex-wife of Buffet's son. But I guess she kept the name.

Whatever.

She describes his basic investing strategy as "business investing." That means not trading stocks with wild abandon, but rather looking at the entire business and deciding to invest on the merits of holding stock for years, or forever. For example, if you had the money, would you purchase ALL of the company for yourself? In this way, you know that you are dedicated to holding it for the long-term, certain that it will continue to bring in good earnings, and give you a great return on your investment.

He views stocks from the point of view of bond investing. Essentially, a bond gives a fixed rate of return. A stock is reviewed concerning the earnings per share and growth rate. If they are assumed to remain fairly constant, then the earnings of the stock (how much it appreciates over say, ten years) can be equated to a percentage return annually. This can be compared to the annual return on a fixed investment such as bonds. There are numerous examples in the book for you to investigate.

The trick is assuming earnings and growth will continue. this is where the idea of a margin of safety and consumer monopoly comes in. Coca-cola can charge much more than other companies for the same product because of name recognition, and it does not need to invest money in research and development or other capital expenditures in other companies.

What to buy? I looked at some ideas from the buffet letters to shareholders, the buffetwatch blog, and did some searches. I came up with a company Wabco (WBC), that makes vehicle control and stabilization systems.

If it is good enough for Warren, then it is good enough for me!