Excess Returns Again

Excess Returns are under or over-performance against a selected benchmark. For example, if after a year, the Dow Jones (I always use the Dow, but the S&P 500 is probably the better benchmark) is up 10% and I'm up 5%, my Excess Returns are -5%. Below, I've included a graph of my historical excess returns. The blue area is the daily rate, and the red bar represents my average for the whole period (Oct 1, 2008 to June 25, 2010)

My current excess rate is 19.84%, and I'm trying to figure out how much is too much. In the long run, I should only have returns at or near the Dow Jones. If I'm making more than the Dow, than it's only temporary and a correction might be coming. You can see in this chart that I peaked in at least two moments, at around 40% in June of 2009 and at 35% in April of 2010. I held the gains in both cases for less than two weeks. So the question I'm trying to answer this weekend is, how high is too high? If I get to 40% again, should I halve my positions or buy put options? Can I get higher than 40%? Is 30% a better limit? I don't want to bail out of stocks early (see Ford, Tata Motors, US Steel, Dr. Pepper, Leading Brands, Entravision Communications, etc;), but learning how to limit my losses seems like the long-term winning move.

If anyone know anything about this, please post a response and let me know. Thanks!

Thinking about AgFeed

Found an interesting paper on the Chinese cycle of pork prices. According to this paper, the cycle lasts 42.33 months (on average). Pork prices peaked in the summer of 2008, which puts us at the bottom of that cycle right now. I hope to realize substantial gains between now and 2012. AgFeed, even with pork prices as low as they are, has almost no debt and is still making a profit. Why is FEED so cheap? Am I way ahead of the curve or missing something?

The link to the paper won't work. See: www.prairieswine.com/database/pdf/39650.pdf.

Jim Cramer is Alright with Me

Jon Stewart may think Jim Cramer is an asshole, but he's alright with me. When I decided to open a brokerage account two years ago, it was his show that I watched everyday and it was he who got me excited about investing. I've read Real Money and Stay Mad for Life and I liked both of them.

I took a look at my excess returns for 2010 and there's some advice that he dispensed in Real Money: Sane Investing in an Insane World to which I should have paid closer attention.

Now, I'm paraphrasing, but Jim said amateurs worry about not making enough money, and professionals worry about making too much money. At first, that statement pissed me off. It seemed like the sort of formulaic advice that's hip right now: take something that everyone thinks is true and just say the opposite. Are you drowning in the sea? Don't try to swim, try to sink! Then, when you get into the details of the advice, you realize they're actually recommending swimming, not sinking. A lot of articles on the internet are set up like this, just to catch your attention. It's bullshit. However, in the context of excess returns, that's actually awesome advice. In May of this year, I had returns 25% greater those of the Dow Jones. That was an aberration. I'm not good enough at investing to sustain returns that high. Had I really understood the advice, I would have either sold out of a few of my positions and held cash, or gone long puts to protect myself against the inevitable correction. Too late on a smart play, AGAIN. Oh well, I have to learn these lessons to get better, right?

Excess Returns and crazy AgFeed volume

Relative to the Dow Jones, I'm still doing pretty well for the year. Had you invested $100 with me on January 1st, it would be worth $10.00 more than if you had put it in the Dow Jones.

I've also updated the look of the blog. Blogger now has some fancy pants new designs, so expect changes. I ditched the clunky Fidelity widget for Yahoo! Finance's and I'm going to change the program powering my comments.

Yesterday, 313,426 shares of AgFeed were traded. Google Finance lists the average daily volume at 642,000. Today, 4.82 million were traded. I have no idea what caused that. Other US-traded Chinese agri-stocks had similar jumps in volume, but not other Chinese ADRs. An appreciating yuan only helps these agricultural firms, but I don't get the jump. It seems excessive.

Update 06/15

I hope we can keep this rally going. I was down 7% for the year at one point, from a high of positive 18%. I added money to my portfolio earlier this month and doubled my position in AgFeed. I'm up 9% on that investment so far.

What does it mean to have such a strong rally on low volume?