2007 was quite a year, perhaps one of the most difficult years to trade the markets in a very long time maybe ever.  I think 2008 could be more of the same, with traders scoring the biggest gains.  2007 was a good year for the SelfInvestors Model Portfolio, following up a 2006 gain of 27.6% with a 30.2% gain this year.  I think more important than the gains, were the lessons learned along the way.  It’s what keeps my job fascinating (if you can call it a job).  Every day presents new challenges, every year provides lessons and can highlight areas of improvement.  The important thing is to track your trades, review your trades, write about your trades in a journal.  It’s amazing what you can learn by going back and reviewing your thoughts over the course of the year and looking at the things you did right and the things you did wrong.  That’s one thing I have been doing more of right here at the blog for all to see. 

I believe in 100% transparency here at SelfInvestors with a review of my Model Portfolio every week.  I do this not only because I’m disgusted with the way that this business promotes itself (by highlighting a few big winners), but because it allows me a place to track my thoughts and more importantly so that my readers can learn from my triumphs and certainly my tribulations.  Reviewing the portfolio, writing the market analysis reports, the IPO updates and everything else on this blog has made a big difference in my trading.  Here’s a tip:  if you want to improve your trading set up a blog.  Who cares if nobody reads it.  It’s for you.  It’s a place to vomit your thoughts out in a permanent place and review at the end of the year.  Your results HAVE to improve.  It doesn’t even need to be public.  Set up a private blog if you have to.. whatever you do, set up a blog in 2008.  Email me if you need help getting set up.  It’s not as difficult as you might think.  Go do it now.

Enough rambling out of me.   I just wanted to highlight a few key points from the Model Portfolio this year and throw out some stats to squash some very common misperceptions about trading the market.

First and foremost.  Forgive the BOLD and UNDERLINE but you need to remember this.  I often get asked the question "What is your winning percentage?".    I cringe everytime I hear this.  It’s NOT ABOUT WINNING PERCENTAGE.  Let me just tell you right now what my winning percentage was this year.  I’m right a bit more than 50% of the time and I’m proud of that.  If I can be right 50% of the time I know I will do extremely well year after year. 

Why is that?  It’s all about money management.  I’ll say it again.  IT’S ALL ABOUT MONEY MANAGEMENT.  If my profit to loss ration is 2:1 or 3:1 I only need to be right half the time.  How do you succeed by failing so much?  BY KEEPING LOSSES SMALL.   In a difficult market like we had last year, my profit loss to loss ration is about 2 to 1.  Actually it was a little less than that as you’ll see below.  In a raging bull market, I can kick it up to 3:1. 

– The bottom line is that in 2007 I failed half the time, but managed to outperform the S&P500 by nearly 10X!
– IN 2007 I put on 186 positions with a winning percentage just over 50% (94 winners to 92 losers)
– My average gain was 12.5%, while my average loss was 6.45%

It was a very good year, but I’ll be the first to admit I can improve.  For one, my shorting strategy was unsuccessful period.  That can’t happen again this year so I’ve looked at the number in great detail to find out where I went wrong.

– I put on 51 short trades this year, but on average each trade represented a loss of .43%. 
  (Yes my shorting strategy did not work this year!)
– I discovered that my Nasdaq Ultra Shorts (QID) were a problem this year with losses of -10.95%, -20.21%, -10.53, -1.06%, -12.37% and -4.73!  Yikes. 

Taking out the failed QID positions and my average gain on the 51 short positions jumps from a loss of .43 to a gain of .72%.  My style of trading is more successful with individual stocks.  That’s clear from the results, so I won’t be hedging with any of the Ultra ETF’s this year.  That’s one way I plan to improve my results.

Improvement Plan

Capture bigger trends!!!!!!  Few profits captured in solar on the long side this year and even fewer profits (ZERO) captured in shorting financials, realty and homebuilders.

Avoid the leveraged Ultra ETF’s of the major indices.  I’m better trading the inefficiencies of invidual stocks.

What Did I Do Right?

First and foremost as I mentioned above I kept losses small for the most part.  That part of my strategy will never change from year to year.  I don’t care what kind of market we are in.  If you’re not keeping losses small you won’t succeed.  Actually my average loss was a bit too large this year.  I like to be closer to 5%, so another area I will work on this year is staying away from the occasional 15 – 20% loss which can happen quickly in my Quick Strike Profit plays.

Supplementing the portfolio with higher risk, higher reward low priced stocks.  I began implementing what I call Quick Strike Profit plays in 2006 which has added a boost to the portfolio.  These are purely technical swing trades in big momentum stocks where I’m looking for a quick 15 – 30% gain in just a few days or weeks.  Examples of these kinds of trades in 2007 were CRDC (45% gain), MVIS (38%), NEXC (15%), BZP (17%), MSI (27%), ALTI (16%) and ZICA (20%).

Trading IPOs.  In previous years I found that I wasn’t doing a good job of keeping track of the best companies to market and missing out on some extraordinary gains.  In 2007 I did something about it, by developing the new IPO Tracker and IPO Portal  as well as adding an IPO section to the Weekly Reports to highlight the best upcoming IPO’s.  I didn’t catch them all this year, but scored some nice gains in LULU (26% and 23%), WX (36%) and PWRD (18%)

No leverage, lots of cash.  I didn’t use one penny of margin this year and maintained an average of a 40 – 50% cash position for more than half of the year!  That’s right, the portfolio outperformed the S&P nearly 10x with VERY LITTLE risk.

Diversified.  I carried around 10 positions across a variety of industries and hedged with short positions for nearly the entire year.  My short positions hurt me this year because of the QID failures but this year I will succeed on the short side.  I have to.  Having a short strategy is key to killing it in a tough year, so I’ll avoid the Ultra ETF short plays and stick to shorting individual stocks, which is where I did have some success in 07.

Google.  It was 10 – 15% of my portfolio this year.  A portion of my portfolio is made up of core positions and Google was the pillar this year, returning about 50%.

Stripper Stocks.  RICK and PTT (now VCGH) both took off this year.

Model Portolio Commentary Highlights

The following are some highlights over the year which captures my frustrations with my underperformance in the middle of the year, my trust in my strategy, a few lessons along the way and ultimately an achievement of my goal for 2007. 

May 28
After leaning the wrong way for much of the past several weeks, I’m still looking to get back in synch with this market after a strong performance in the first few months of the year.  With the YTD performance at 4% (compared to 6.9%), I’ve got my work cut out for me in the latter half of the year.

June 18
With the long overdue selling setting in, the portfolio is beginning to  get in better synch with this market and beginning to close the gap of underperformance.  I mentioned last week that I began getting short way too early and that hurt my performance, however I expect my current positions/strategy to begin paying dividends.  The portfolio was off just .2% last week, but still significantly lags the S&P with a 3.5% YTD return.  I’ve certainly got my work cut out for me if I’m going to whoop the S&P again this year.  I’m 15% cash.

July 15th
I still don’t regret the decision to hedge my bets with these Ultra Short ETF’s, despite te fact it hurt my performance considerably.  I have to trade what I see and what has worked well for me over the years.  From a technical perspective, my analysis was showing some trouble ahead.  It hasn’t panned out that way but I’m still in good position to beat the market by keeping pace during what has been a highly irrational (from a technical perspective) and volatile market.  A sizable portion remains in cash (30%).  UP 8.9% year to date.

Aug 12
As I’ve been saying for the past several weeks here, I starting hedging with short positions a bit too early and it hurt my performance as I misssed out on much of the rally from April to July.  A few people were even kind enough to remind me that they weren’t missing the rally.  Gotta love the gloating.  You won’t find me gloating much in this segment of the Weekly Report when I’m right just as you won’t find me kicking myself for lack of performance when I’m wrong.   Keeping your emotions in check and remaining level headed is critical.  The main purpose of this segment is to provide 100% transparency in my performance in the hopes that maybe other advisory services will have the balls to do so.. and as a reminder that it isn’t always easy to profit big in the market (despite what what many services will have you believe).  Hopefully, you can learn from my successes and failures just as I continue to learn from my own successes and failures.  I won’t always be right, but I will continue to remain confident and trust what the charts are telling me.  In all, the portfolio surged again last weak, vaulting 3.4% higher, bringing the YTD performance to 9.7% which is nearly 4x the performance of the S&P.  What a difference a couple weeks make.  While it may seem like I’m way too aggressive in this environment it should be noted that I’ve been trading small positions and am carrying what might be my largest cash position in a few years.  Overall current allocation is 52% long, 5% short and 43% cash.

Sept 23
Every couple of months or so, there is what I would call a major shift in the portfolio from short to long or long to short.  Considering I was treading lightly with just a few long AND short positions and evenly balanced on either side, I wouldn’t call last Tuesday a dramatic shift in the portfolio, but I certainly acted quickly and decisively by closing out my four small short positions immediately following the Fed decision.  The Self Investors Model Portfolio year to date performance increased to 10.9% and the allocation stands at 37% long, 0% short and a large 63% cash position.

Oct 7
For a few months I hadn’t been playing too many of what I call QSP (quick strike profit) trades which are basically swing trades where I’m looking for big profits in momentum stocks in a very short time frame.  However, while the market has gained strength over the past several weeks I’ve begun to play these quite a bit more and this week the strategy paid off in a big way.  The KEY: cut your losses quickly in these volatile plays and eventually that one big run will wipe out a few small losses and really accelerate your returns.  In addition to some nice gains in QSP trades recently, the portfolio continues to be led by Google (GOOG) a long term holding as well as IPO plays LULU and WX.  For the week, the portfolio surged to a 4.3% gain bringing the YTD gain to 15.6%.  Now that certainly isn’t world beating performance, but as I’ve said before, the market has been unusually difficult to read this year and I missed much of the move in the first half of the year.  I feel like now I’m catching up and in great position to at least double the return of the S&P by the end of the year just as I did last year.  I’m still carrying a decent cash position at 32% and probably won’t move too much more to the long side until we get some kind of pullback/consolidation.

Oct 21
My strategy of playing cautious with a large cash position of near 50% but initiating positions in fairly aggressive stocks continues to pay off extremely well. If you’ve been following my review of the portfolio here in 2007 you know that I struggled a bit in the middle of the year so this is a big turn around and hopefully is a good reminder to all who trade their own accounts that there will be peaks and valleys along the way.  The key is to keep emotions in check, stick with the strategies that have been successful in the past  and remain confident!

Nov 4
The overall market dipped a bit last week but the Self Investors Model Portfolio continues to surge higher tacking on another 3.2% for the week, bringing the year to date performance to  27.6% (exactly where it closed 2006).  I’m continuing to tread lightly in this volatile, unpredictable trading environment.  As I’ve mentioned before, it really is one of the most difficult markets to read I’ve seen in quite awhile so I’m not willing to make large bets on either side (currently sitting on 55% in cash).

Dec 2
With the volatility and uncertain market, I will continue to keep the portfolio sitting on a sizable cash position of around 50% (it’s currently at 46%) as well as hedge with short positions.  It’s a strategy that has worked extremely well in 2007 and I don’t anticipate deviating from it too much over the next several months.

Dec  19
At this point, I don’t really care what the market does from here to the end of the year.  I’m going to maintain a conservative approach and sit on around 40% cash.  If I don’t make another dime from now until the end of the year, I can be satisfied with the 30% gain here in 2007 and looking forward to next year when I anticipate a shorting strategy will be critical.  I’m ready and waiting.  Bring it on bears!

If you’ve read this far, thanks for sticking with my rambling vomitarium of free flowing thought on my performance.  I hope it helps you as much as it helps me. 

Good trading to you in 2008!

If you’re interested in trading along with SelfInvestors in 2008 have a look at my membership options or send me a shout.  I’d be happy to discuss the service that can be most beneficial to you.