Thoughts Percolating

First, my portfolios continue to do pretty well.  Up like 4.5%, which is hard to complain about so far this year.  I do not have my worksheet in front of me, so you'll have to wait for the weekend update.

I have been percolating some new investing approaches the past week as I drive in the snow here in the Nutmeg state.

The first idea is to mine my data base a bit.  Recall that every month or so I have been pulling a great deal of information for about 2,500 stocks.  So I have a great point in time database (though I may need to dig it off my Seagate). My thought is to go back two years and identify the stocks that have performed the best in that time frame.  Then look at all the data I had back then and see if there are any predictors in the data of the future performance.  I am sure others have done this, but may be I will see something different.

The second idea is borrowing a bit from a reader of this blog who once asked about options and MFI.  I have never bought an option in my life as the added leverage frightens me a bit.  But I have started a test portfolio to track how one year call options on MFI stocks.  The thought process is this:

1. MFI stocks generally are "hairy" stocks, often with some warts and issues.
2. Throughout my tracking, they have always been more volatile than the average stock.
3. So why not find a way to make volatility work for you?

When you buy an option, it can trend towards being a binary kind of outcome.  If the stock goes down at all over the next twelve months, you probably lose everything (that is the part that scares me). But if the stock goes up a lot (and recall, these stacks are intrinsically more volatile, both ways), you could make a lot. Now, I do not know whether the second part offsets the first.  This is a main reason for beginning testing.

The other large risk is more a beta risk.  If the entire market crashed, probably almostall the options would be worthless.  That is a real risk.  So here are my thoughts on how to manage the risks:

1. First try to back test or monitor how the approach works.
2. Keep the overall bets small (I might put any one year 5 to 10% in this approach).
3. Only pick MFI stocks/options greater than 750m in market cap.
4. Go with a larger count of holdings in portfolio, probably 10 to 15 at each purchase.
5. Wait for the market to crash (this will alleviate the beta risk somewhat).

So the other part of my plan (while I wait for the market to crash (which to me means a bear market with over a 20% drop) is to open up an account just for options trading and to put seed money in it.

Finally, I did take Paul's advice yesterday and sold FSC. It was a good buy, but looking through the numbers they seemed to be supporting payments by issuing more stock. That approach is obviously not sustainable.  I am sitting on the cash for a bit, thinking about a couple closed end funds or else private equity firms like KKR or BX.

Have a great Friday all!