Do I Feel Lucky?

Always important to keep the importance of "luck" in mind. Yes it is true (in my opinion) that stocks are not priced perfectly at all times. I think TLBTBTM shows that. But it is also true that over the short term (which my six+ months at this), the movements of individual stock prices are essentially random.

JG tells us that a portfolio of 25 to 30 stocks will underperform market averages 5 out of 12 months. Given that fact, what is the probability of underperforming market averages after 6 months? Hard to get an exact answer without more data as you'd need to know the distribution of severity (meaning if you underperform the market in a given month, what is the probability of underperforming by various amounts). Well, JG says in his study that MFI underperformed market averages once every 4 years. So I'd have to estimate that 30 to 35% of the time you would do worse after six months. And if you have a smaller portfolio, perhaps even a greater probability.

What does this mean? It menas you should not get too excited about great results or too down about poor results over the short term. Luck is at play. I know that I sound hypocritical as I show week-by-week graphs and discuss daily movements of stocks in this blog. That is just for fun and so 10 years from now I can track the begins of my fortune (LOL).

Well, I pulled the trigger today. I bought my 29th stock to replace IVII. I was really torn between about 8 or 9 stocks. In the end, I chose BBSI. The big reason for the purchase was because it dropped 5% today on no news (and I got it for 7.5% below where I started watching it). I was split between getting a company cheap (as I did) or focusing on a segment (pharmas for instance). The segment focus last time when I bought KG hasn't worked so hot and BBSI seems like the sleeper I like.

The are Barrett Business Services and do exactly that, provide business services to companies. Things like payroll, WC, health benefits etc. The things a smaller company really can't afford a fulltime staff to handle. They've been growing revenues and income at a steady clip. They did have a hiccup in May that dropped the stock from $25 to around $21. I got in at $19.18 as they dropped a buck today.

It is good to have something to be excited about as the market is absolutely dreary today. I am down a miserable 1.6%, pretty much on par with the QQQQ drop but (as always seems to be the case) worse than IWV. If the market drops a couple more days, I may jump in with my 30th pick... we'll have to see. I will almost certainly be selling PCU in mid October which will open up a slot.

CHKE reported their earnings today at 1:17 pm (Cherokee Inc. Reports Record 2nd Quarter Fiscal 2007 Results). Very odd as I do not know of another domestic stock that reports earnings while the market is open. They made 56 cents and all-in-all the numbers and the story looked ok (growth of about 10%). I still can't do the math on how they will maintain a 60 cent dividend. They do have a strong balance sheet, $9.8m in cash, $11.8m in receivables and no debt. An odd point was made about $33m owed to CHKE by Iconix for the sale of their finders fee agreement. They say they expect this $ in the upcoming quarter. What is weird is that $33m is huge to CHKE. The net worth of the company is $24m. And nowhere (do I see) in that net worth where the $33m owed to them is considered. I will have to do a little more digging on this $33m.