I pondered this question as I drove back from work some hours ago. After months of difficulty finding bargain stocks, the incredible one day 7% drop in the stock market over the past 12 hours, combined with the decimation that occurred over the last week, has finally brought many stocks into value territory. But as soon as one difficulty was solved, another arose. How can I take advantage of a possibly fleeting drop in prices, with so many possible stocks and so little time? I have a modest database of several hundred stocks that I have previously investigated in detail, but if I am to place my orders the next trading day, there is not enough time to carefully peruse the latest stock-specific news. Clearly, some kind of quick-and-dirty statistical measure of value will have to be substituted for the usual carefully poring through the annual reports. Through a selection of 20-30 stocks based on some crude measure of value (I’m leaning towards free cash flow multiple), I can hedge against the few bad calls that will probably occur. I intend to place an additional 20% of my portfolio to this strategy, using margin to do so.

I discussed my plans over dinner with the wife, and was asked the inevitable question: What if the stock market falls further? I answer that since we cover all living expenses from my salary and have no need to draw on our investments, and that we are only moderately leveraged through margin, it is highly unlikely that we will meet a cash crunch or a margin call and be forced to liquidate. But in the back of my mind, I am debating the question, is the stock market really the best asset class now? What asset class will best be able to withstand even a double dip recession? Gold is clearly the asset du jour, but I am uncomfortable with an asset with no intrinsic value and negative carry costs, necessitating careful daily tracking of the price to ensure that I do not miss the popping of the bubble. Timberland, farmland and real estate are attractive, and I intend to try and include some REITs in my portfolio. Holding cash or bonds with their extremely low yields is unattractive to me, given that interest rates are at record lows, and not sufficient to compensate for possible default. I would rather hold blue-chip dividend paying companies that can clearly survive a recession.

As I write this, I am racing the clock to complete my portfolio selection before the market opens. I’ll be leaning towards dividend paying stocks, but since minimal analysis would have been done, I’ll probably treat it as a basket of stocks, and report the overall gain/loss based on the entire basket on this blog some time in the future. But for now, I need to buckle down and do some stock selection.

P.S. The Obama administration is clearly clueless about what is driving the markets. The S&P downgrade itself is a non-event, as evidenced by the flooding of funds into Treasuries. It is the reaction to the downgrade, with the possibility of extreme fiscal austerity tanking the economy, that has the market spooked.

AHCI, a home care staffing company which I have previous written up here, has been bought out at $3.90. I liquidated my entire position at $3.83 instead of waiting  for the acquisition to close. This is a gain of around 50% over 7 months.  There are substantial synergies between the acquirer and AHCI, and I view this as a win-win acquisition. AHCI loses the undervaluation associated with being a small cap in a niche business, while the acquirer can diversify its existing staffing business.

In other news, I also covered one-third of my SODA short at a 20% loss. This is mainly a precautionary portfolio management move, to limit the size of this SODA to around 2% of my portfolio, but I was also motivated by the resolution of the Greek debt crisis in Europe.

In a recent blog posting, John Hempton complains about the slim pickings in small cap value stocks, and relatively cheap large cap stocks. He finds more trash than gems among small caps nowadays, and as a result, Bronte Capital is now running a long large cap short diversified small cap portfolio. I, of course, am not running a hedge fund. I am an amateur investor who runs my own money for fun and profit. I’ve worked out a long time ago that if with only several hours a week to devote to stock analysis, the strategy with the highest long-term return is to concentrate on long-term holdings of small cap stocks. The only caveat is to ensure that you’ll never have to liquidate them under duress. In times of stress, small caps get absolutely crushed, a fact that any small cap investor who has lived through 2009 can attest to. But I held onto nearly all my stocks, and made it through that period unscathed. You just need to choose your small cap properly and always have a safety margin in mind.

But recently, I have also noticed that it is becoming incredibly difficult to find additional small cap value stocks, so much so that I have difficulty assembling a portfolio consisting of just 20 such stocks. As a result, I have started to put some large cap stocks in my portfolio as well. But I am uneasy with this strategy, because large cap stocks usually underperform small caps, especially over long periods of time. It takes a lot to move the needle with large caps, and even if they move, the price appreciation is usually very modest.

I have also started thinking about shorting stocks. I have done some sporadic shorting in the past with a modest return, but in general, my long positions vastly outperform my short positions. One major problem is that when shorts move against you, the position size increases, and so initial position sizes with shorts must be much smaller than for longs. This means that I have to do a LOT of research just to put a tiny portion of cash to work in shorting. Secondly, you can technically be forced to cover a short at any time, since you have only borrowed the stock and do not own any rights. While I have never been forced by my brokerage to cover a short position (nor have I even heard of anybody being forced to do so), the possibility nevertheless hangs like a Sword of Damocles over any short position. Because of these reasons, I have already decided that if I were to engage in shorting, I would do so not on the basis of an analysis of the fundamentals, but by collecting a list of suspected fraudulent and/or overvalued stocks and shorting the entire basket. This strategy requires minimal time on analysis, and limits damage which short squeezes and forced covering can cause. If any of my readers think that this is a good or bad idea, I’ll appreciate any feedback.

Now that my grant application is done, I’ve time to start up my investing hobby again. I thought that I would start off just by summarizing the positions I’ve liquidated in my 2 week self-imposed cone of silence, the one position I added, and the current state of my portfolio.

My recent liquidations (% gain or loss in parentheses) are: CHUX (0%), HA (0%), FLL (+30%), URI (+90%), EME (+20%), DIT (+50%). I took advantage of the recent strength to do some profit taking and rotate into more defensive positions. CHUX is a chain of casual dining restaurants, and HA is Hawaiian Airlines, and both are obviously dependent on disposable income and more exposed to a downturn than I liked, so I decided to liquidate them near break-even. Of the rest of the liquidations, most pre-date the time when I started regularly blogging about all my positions, and I had only written up FLL, which is here if you would like to read it.

I have also initiated a new position, RSH, which will be the subject of a forth-coming write-up. My current portfolio is listed below, with gains/losses rounded to the nearest 5%. I have done write-ups on many of them, although there are still a few legacy positions. My cash position is way larger than I prefer it for now, so I would appreciate any ideas any of my readers have. As for me, it looks like a couple more weeks of analyzing annual reports until I have my cash position down to less than 10%.

Its been slightly more than two years since I started this blog at the suggestion of my wife. I have stuck to my principle of providing original content and stock research rather than up the frequency of my posts and providing second-hand links or garbage. I am a subscriber to the slow blogging philosophy, and feel that this philosophy is more appropriate for medium- to long-term value investors. My posts have a tendency to be long and meandering, and are not suited for the attention span of the typical online reader. The price I pay for this is to be consigned to a negligible role in the blogosphere.

Still, I am happy that I started the blog. The past two years have brought me much knowledge about my own investing strengths and weaknesses, as well as technical knowledge about how to use WordPress and run a blog. To recoup the costs of running the blog, I have used Google Adsense advertising on my site, and recently added a tip jar. Over two years, my earnings from the blog totals less than $50, which is barely enough to cover hosting expenses. However, I have built up a very small base of readers, and am thinking about moving to an ISP with better bandwidth if the increased ad revenue allows me to.

Far more valuable to me are the advice and ideas I get from commenters and fellow bloggers. I have also recently added a blogroll, and the first two entries are fellow bloggers with which I’ve had very fruitful interactions. From Old School Value, I’ve obtained the investment idea of GEOY, which has already given me returns of over a thousand dollars (disclaimer : I still have a position in GEOY). From TMWTFS, I’ve obtained the RCI investment idea, which has given me several hundred dollars in put writing, as well as a new appreciation for Canadian stocks.

In the coming year, I aim to find more investment ideas through conversations in the blogosphere, as well as have others critically look at my own investment ideas. Hopefully, 2009 will prove to be a good year for both investing and blogging.

I hadn’t been researching or writing about investing for quite a while, as shown by the complete lack of posts for the past half-year on this blog. A sudden intensification of project activity at work, the poor investing climate in general, and the trauma of watching my biggest position disintegrate in particular, have all conspired to keep me from writing. However, things have taken a turn for the better recently. The crunch at work has abated (somewhat), the pain of my investing misadventure has (almost) faded, and it now appears that there is a decent chance that the recession will be mild. Most importantly, I have decided that the solution to my investing problems is not to bury my head in the sand, but rather to work harder, and correct past mistakes.

The past few months have shown me the value of diversification. While my financial companies have crumbled, stocks which have increasing international exposure (WMT and DELL) or are linked to commodities (e.g TX and MEOH) have done better. I had previously tried to limit my portfolio to only 10 positions, believing that 10 well-researched positions are better than a more diversified portfolio. However, it is apparent that I am perhaps not good enough to run such a concentrated portfolio just yet. In the near future, I expect to step up on stock research and expand my portfolio to 20-25 stocks. I will also begin to blog more frequently, including even stocks that I take a pass on, and reviews of investing books I like, as well as my general thoughts on investment.

Writing helps me think better. Hopefully, writing will help me invest better too.

Did some additional site maintenance tasks today. For unknown reasons, the reCAPTCHA plugin is not stopping spam comments on one of my posts. Only that particular post is affected; non of my other entries seem to be getting swamped by comments. In frustration, I decided to apply for an API key at wordpress.com and activate Akismet, yet another spam catching service. Let’s see how effective Akismet is.

A commenter also inquired about my PageRank and Alexa Rank. Being new to the blogging world, this is the first time I’ve heard about AlexaRank. A few minutes of Googling revealed that Alexa Rank is a pure indicator of traffic volume. It also revealed two tools for checking the PageRank and Alexa Rank of a site, namely www.timlua.com and www.smartpagerank.com. Not surprisingly, blogvesting.com currently has a PageRank and Alexa Rank of zero. Most bloggers say it takes anywhere from 1-2 years for a site to begin to attract a significant amount of traffic, so I’m not particularly distressed by this. I wish I could say the same thing about my stock investments, given the recent market volatility. Still, ability to stomach market corrections is part and parcel of investing.

Its been a pretty hectic few months for me. And I’ve failed miserably in my initial aim of writing 1-2 posts per week. This is due mainly to my academic instinct of not putting anything in print until I’m sure I’m absolutely correct. In practice, this means the posts I write tend to be long and rambling and full of information justifying my thesis. In the future, I’ll try and switch to a most digestible style of writing, doing short snippets of thoughts, and see if I can’t meet my 1-2 posts per week aim.

As an aside, I just installed the reCAPTCHA plugin to deal with the huge amount of comment spam. Let’s see if that actually works.

I am a neuroscientist by day, and an amateur stock-picker on weekends. I have been investing for about 3 years now (circa 2006), and my fundamental approach is a value-oriented buy-and-hold strategy. I started this blog when I found that there is a dearth of information about value investing on the web. Most of the discussion on message boards and popular discussion sites are fragmented and incomplete at best, and downright scams at worst. The few bits of quality discussion is sequestered in subscription-only boards.

On this blog, I aim to provide quality stock analyses and articles about value investing strategies. My main motivation is that the need to provide material for this blog will continually hone my investment skills. I have also posted my personal portfolio here (accurate to the last week or so), so that you can check to see what stocks I currently own. I put my money where my mouth is, so you can expect that I have a position in any stock that I favorably review.

In return, I hope that readers like you will post comments sharing your views and ideas, so that we can all benefit. Together, we can all become better stock-pickers, for fun and profit.

Initially, I expect to be publishing a post every couple of days, drawing from my accumulated material over the years. Eventually, I expect to be slowing down to publishing once a week.