Wednesday, June 29, 2011

What do I know?

  When I’m stumped with a programming problem or a bug, my first stop in finding a solution is to ask myself ‘What do I know?”. Remembering what I know reminds me what I don’t know and focuses my efforts to find out the things I need to obtain a solution. When I'm with a group of programmers that I haven't worked with before and start asking 'What do we know?' in an almost rhythmic chant, they initially look at me as if I'm insane, but within a couple of weeks, we are all chanting together and solving our problems by using what we do know to help us find out what we don't know.

  The baseball season is half over and I’ll admit my pleasant surprise that the Yankees have the second best record in baseball and are 2 and a half games ahead of the filthy Red Sox in the division. The Yankees are on a pace to win around 96 games, but closer inspection shows a 1-8 record against the Red Sox and 3-4 against the Tigers who they are more likely to see in October than the Orioles (6-0) and the A’s (3-0). There is a 7-2 record against the Rangers to be proud of and 17 more games to be played against Tampa Bay which will decide the division along with the 10 remaining games against the Red Sox.

  The Yankees have hit 20 more home runs than any other team in baseball, but have scored less runs than the Red Sox. The pitching has been passable, but injuries to Hughes, Chamberlain, and Soriano have left the bullpen threadbare and the rotation depending on a host of has-beens behind C.C. Sabathia. Pitching wins in the playoffs and the Yankees pitching doesn’t measure up to the Red Sox or Rays at the moment, but if Cashman is able to reel in a top line starter it could be a World Series year. The Yankees won their 5 championships in the Jeter years not by hitting the most home runs, but by having the best pitching and I hope Cashman knows that. Every team that has the money to copy this formula has done so and bidden up the prices on the best pitchers, but that doesn’t mean that pitching isn’t the single best way to win a championship. It just means that the Yankees need to do a much better job developing young pitchers and keeping them healthy. Bludgeoning the humpty-dumpty teams with home runs is OK, but top pitching wins championships.

  I’ve had 401K plans wherever I’ve worked but have never trusted them. Every company invariably picked some investment agency that shows me some line chart that goes up and to the right and viola, 20 or 40 years later, I’m a multi-millionaire. Then the returns don’t match the little line chart because of a) it was a tough year, b) there were a lot of up front costs to set up the account, c) it was a really tough year, d) the fund that was supposed to mirror the Dow somehow didn’t include the top performers, or e) it was a really, really tough year.

  Eventually, I settled on putting all my contributions and any employer match in whatever fund they had that resembled a mattress (normally a money market account). You don’t make very much money on what goes in the mattress but you don’t lose any, either. While I was sticking my money in the mattress, I would monitor funds that mirrored the Dow or S&P and when these funds would go down 3 percent, I’d transfer a little money from the mattress into the fund and then sell it back when it went up 5 percent, pocketing a couple of percent on every swing. When the fund went down another 3 percent before I could cash out, I’d keep on buying. In 2008, I almost ran out of mattress, but I managed to make all my losses up and more over the next 2 years.

  In 2003, I started to dabble in day trading using the same philosophy. I followed Intel, GM, and Microsoft and noticed that every other month or so, these stocks would go down 5 or 10 percent in a day and then rebound almost as much over the next week. I don’t know why and I don’t care. All I was interested in the fluctuation. I would buy some stock and on the down and then sell on the inevitable upswing a day or a week or 2 weeks later. Sometimes I’d get caught in a severe downturn, but I’d have an exit strategy programmed to limit my losses. I was making a hundred dollars twice a month or so and doing well despite the occasional setback, but then I got a book on investing as a gift for my birthday. I read the book and my head got filled with technical jargon like the moving 30, 100, and 200 day moving averages
, head and shoulders, cup and handle, etc... My head got so full of looking for trends (that are not really evident until after the fact) that I lost all my profit plus more because I forgot what I knew which is that stocks go up and stocks go down, irrespective of reason.

  I eventually gave up on day trading and amused myself with my mutual fund game until the ‘Flash Crash’ of May 2010 which saw the Dow drop 1000 points within a minute and recover in the next minute. It freaked me out and I stopped playing with mutual funds that week and transferred my 401K over to a fidelity account mattress fund. Since last June, I’ve been tracking Intel. On June 25th, 2010, Intel was selling for 20.03 and a year and 4 days later it is selling for 21.39. I bought and sold Intel all year according to the following system.
1) Whenever Intel went down a whole dollar (from 20 to 19; 19 to 18; 23 to 22), I’d buy $2000 worth of Intel.
2) Whenever Intel went up enough to allow me to sell all but 5 of the shares I bought in step 1 plus commissions and break even, I’d sell all but 5 shares.
3) That’s it, no more rules.

  A year later, Intel has gone down a whole dollar 11 times, and rebounded enough for me to sell all but 5 shares 10 times. I never had more than $6,000 invested at a time and I’ve broken even but I have 50 shares of stock to show for my efforts. Not exactly Brewster’s Millions, but it’s a fun amusement and fully automated. All I have to do is program a new buy every time Intel goes up a dollar and hits a new dollar amount and a new sell whenever Intel goes down enough to buy. Intel even pays a dividend of 18 cents a share every 3 months. I wish I had more time to refine my method, but I like the simplicity of it and there is a beauty of sticking to what I know, which is that stocks will go up and they will go down, without worrying about the why and when.