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June 27, 2007 — Issue #327

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Article

Market Efficiency Portfolio Update, by Dr. Van K. Tharp

Trading Education Learn the Tharp Concepts
Trading Tip

Peak Oil – Opening a New Can of Worms, by D.R. Barton, Jr.

Melita's Corner

Three Different Worlds, by Melita Hunt

 

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Feature

Market Efficiency Portfolio

June 25, 2007

by Van K. Tharp

I’m closing out the portfolio effective June 15th, so this will be the last portfolio update for a while.  This portfolio has been running since July of last year. Eleven months later is a good time to close it out.  I’m also traveling for the next six weeks or so and that is also is a clue that it is time to close it out.  My hunch is that I can improve the portfolio performance quite markedly, so there is no sense continuing along the same lines.

So let’s look at our closing portfolio values on June 15th.  These are shown in Table 1.

Table 1 shows our portfolio as of the close on June 15, 2007
Portfolio On June 15,  2007
Stock Entry Cost Shares Stop Price  Value Profit R-multiple
          June 15th   Loss  
Longs                
LQU $54.05 $1,960.80 36 $56.93 $72.82 $2,621.52 $660.72 1.67
CXW $42.33 $1,919.85 45 $40.22 $64.90 $2,920.50 $1,000.65 2.53
MWP $35.54 $1,756.46 49 $47.70 $57.28 $2,806.72 $1,050.26 2.66
DRYS $37.00 $2,013.00 54 $29.60 $36.94 $1,994.76 ($18.24) -0.05
LFL $57.80 $1,749.00 30 $56.44 $81.90 $2,457.00 $708.00 1.97
NU $26.52 $1,765.32 66 $25.03 $28.88 $1,906.08 $140.76 0.36
MFW $62.25 $2,007.00 32 $49.80 $68.69 $2,198.08 $191.08 0.48
NRG $83.80 $2,026.20 24 $67.04 $91.40 $2,193.60 $167.40 0.42
ENR $100.01 $2,015.20 20 $80.01 $98.25 $1,965.00 ($50.20) -0.13
Shorts                
MNI $31.56 $1,878.60 60 $37.87 $26.48 $1,588.80 $289.80 0.84
Totals           $4,140.23 10.75

We have two losing positions and are up $4,140.23.  However, if we assume that it costs us $15 per position to close each of them out then we need to subtract another $150.  That leaves us with a profit from these positions of $3,990.23.  NRG split two for one and I have kept the unadjusted price so as to make things simpler.

Table 2 shows our closed out positions over the eleven months.  We are down, $4060.63, giving us an overall loss of $-70.40 for the eleven months.  The commissions for the last ten sales have not been included in the tables yet therefore the R-values total a positive 0.54R over the eleven months (10.75 minus 10.21). We were in 44 positions, so that gives us an expectancy of 0.012.  We might as well have put our money in a CD.  During that 11 months, we also paid $1320 in transactions costs.  Have you ever wondered how much you pay your discount broker out of profits?

Table 2 Shows our closed out trades prior to June 15th ,2007
Stock Entry Cost Shares Stop Exit Price Value Profit/ R-multiple
              Loss  
FAL $54.25 $1,968.00 36 $48.83 $55.02 $1,965.72 ($2.28) -0.01
BSX $15.74 $1,983.24 126 ($17.31) $17.31 $2,166.06 ($182.82) -0.46
DLX $14.55 $1,978.80 136 ($16.01) $16.01 $2,162.36 ($183.56) -0.46
AETH $6.05 $2,011.50 330 $5.45 $5.65 $1,879.50 ($132.00) -0.33
AYE $40.55 $2,001.95 49 $32.44 $40.00 $1,960.00 ($56.95) -0.14
CG $58.21 $1,994.14 34 $46.57 $57.13 $1,942.42 ($66.72) -0.17
OGE $35.97 $1,957.38 54 $28.78 $35.58 $1,921.32 ($51.06) -0.13
WPI $22.61 $1,989.68 88 $27.13 $26.02 $2,289.76 ($315.08) -0.79
EBAY $24.22 $1,971.04 82 $29.06 $28.51 $2,337.82 ($381.78) -0.95
CHS $18.45 $1,955.70 106 $22.14 $22.08 $2,340.48 ($399.78) -1
HOV $27.33 $1,980.09 73 $32.71 $31.66 $2,311.18 ($346.09) -0.87
PBCT $44.62 $1,755.18 39 $35.70 $44.18 $1,723.02 ($32.16) -0.08
VTR $39.95 $1,957.55 49 $31.96 $37.96 $1,860.04 ($112.51) -0.3
LEE $26.29 $1,998.04 76 $29.03 $25.25 $1,919.00 $64.04 0.16
JRCC $22.06 $2,000.40 90 $12.35 $12.35 $1,111.50 $873.90 2.18
GYI $45.41 $1,952.63 43 $54.49 $49.15 $2,113.45 ($175.82) -0.44
SYX $13.25 $1,976.00 148 $14.44 $14.38 $2,128.24 $137.24 0.34
CPY $48.85 $1,969.00 40 $39.08 $42.01 $1,680.40 ($303.60) -0.76
OMG $53.17 $1,982.29 37 $42.54 $49.03 $1,814.11 ($183.18) -0.46
ENR $75.00 $1,965.00 26 $60.00 $71.14 $1,849.64 ($130.36) -0.33
JRC $7.15 $2,002.70 278 $6.87 $6.87 $1,909.86 $77.84 0.19
FMT $13.87 $1,984.54 142 $16.64 $15.76 $2,237.92 ($268.38) -0.67
MLS $14.73 $1,988.82 134 $17.68 $19.62 $2,629.08 ($655.26) -1.64
MRCY $11.50 $2,085.00 180 $13.80 $12.62 $2,271.60 ($201.60) -0.5
ASVI $14.46 $1,779.12 122 $17.35 $17.35 $2,116.70 ($352.58) -0.89
ERES $6.33 $1,744.74 278 $7.60 $6.70 $1,847.60 ($117.86) -0.3
PLRO $5.55 $1,014.00 180 $3.33 $3.33 $599.40 ($414.60) -1.04
RHB $12.41 $1,777.22 142 $14.89 $14.89 $2,114.38 ($352.16) -0.9
VCI $13.72 $1,985.00 145 $16.46 $16.85 $2,456.27 ($471.27) -1.31
JRCC $9.54 $1,732.20 180 $0.00 $7.64 $1,375.20 $357.00 1.04
EWP $52.12 $1,734.96 33 $44.35 $57.28 $1,890.24 $140.28 0.36
CHL $42.32 $1,750.12 41 $38.54 $46.16 $1,892.56 $127.44 0.32
SGF $18.75 $1,908.75 101 $15.00 $16.92 $1,708.92 ($214.83) -0.54
ALB $71.55 $1,732.20 24 $65.30 $83.88 $2,013.12 $265.92 0.67
              ($4,060.63) -10.21
                -0.3

We averaged four positions per month and that was way more than my intention in a long term system.  One reason for that high turnover was my initial criteria that if a “better” stock came along, then I would buy that one.  Well, there was always a better stock, so toward the end of our portfolio, I stopped doing that.

Only 16 of our 44 positions were profitable or 36.3%.  While that’s acceptable for a trend following system, our largest gain was 2.66R and that’s not acceptable.  I believe we could have done much better with this efficiency system, and I intend to find out why we didn’t.

In subsequent issues, we will look at how we could have improved the portfolio by, 1) looking at all of our positions from the time we first bought them until June 15th and looking at the maximum adverse excursion against us, and 2) looking at the 10-20 best performing stocks during the eleven month period and determining if there was a way we could have selected them with this model.

Remember that my intention in doing this program was not to tell you what the most efficient stocks were so that you could buy them, but to give you some insight into developing and testing a somewhat discretionary system.

I will be in London and traveling in July so the first in depth analysis of this portfolio will probably appear in August or September unless I get an opportunity to work on it at an earlier time.  Until then, this is Van Tharp.

About Van Tharp: Trading coach, and author Dr. Van K. Tharp, is widely recognized for his best-selling book Trade Your Way to Financial Fre-edom and his outstanding Peak Performance Home Study program - a highly regarded classic that is suitable for all levels of traders and investors. You can learn more about Van Tharp at www.iitm.com.

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Trading Tip 

Peak Oil – Opening a New Can of Worms

By D.R. Barton, Jr.

We’re going to take a break from our “No-cost Internet Resources” series this week because I read an article that was so interesting, I just had to share some of the thoughts with you.

My good friend and business partner Christopher Castroviejo (who reads more market information per day than anyone I know) sent me an article from the always compelling Kate Welling.  She interviewed Charley Maxwell, who she considers the “dean of Wall Street’s oil analysts”.

The topic of the interview was peak oil.  The concept of peak oil – the time when world-wide crude oil production will reach its peak – is largely credited to M. King Hubbert.  It is a controversial subject (especially the timing of such a peak), and is the reason I said in the title that this article is opening a “new can of worms.”

Clearly, if the world’s oil production starts to decline before the demand for oil is reduced by conservation or alternative energy sources, that will have a wee bit of impact on oil prices.  Some believe that the current elevated crude oil prices are the early stages of the peak oil scenario playing out.

For Mr. Maxwell, the question of peak oil is not “if” but “when.”  And his prognosis is for sooner rather than later.  And his evidence is compelling, at least on an anecdotal basis.

His first chunk of ammunition has to do with the state of oil production among non-OPEC oil producers.  Out of the top 30 countries that are outside of OPEC, fully 40% of them have already peaked in their production.  And these include some familiar names: the U.S., Mexico, Argentina, Columbia, the U.K. and even Russia.

This means that outside of OPEC, we’re very close to being on the wrong-side of the peak oil curve.

The second compelling piece of evidence that peak oil is an eminent phenomenon (meaning less than two decades away) is that the first OPEC country has peaked in their production – that being Indonesia. 

The two top arguments against peak oil happening sooner rather than later are the assumptions of rationing by price (meaning that as price goes up, use will go down in some orderly fashion) and that there are still undiscovered deposits around the world.

It will be fun to explore those options with you in upcoming articles, as we try to put some numbers to Mr. Maxwell’s analysis of Mr. Hubbert’s theory. 

Next week, though, we’ll jump back into our series on Internet resources.  Until then --

Great Trading!

D. R. 

About D. R. Barton: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena where he is one of the most widely read and followed traders and analysts in the world. 

He is a regularly featured guest analyst on both Report on Business TV,  and WTOP News Radio in Washington, D. C., and has been a guest analyst on Bloomberg Radio.  His articles have appeared on SmartMoney.com and Financial Advisor magazine.

 

Melita’s Inspirational Corner

Three Different Worlds

by Melita Hunt

 

Alrighty folks – this is going to be a longer one than usual….

As per last week’s article I can testify to the fact that I did indeed have a restful and fulfilling vacation based on all of my vacation rules. And of course, I got involved in more than I had bargained for. In fact, I entered three completely different worlds in just over one week.

World Number One: In the resort location (Roatan) I did all of the touristy things for 6 days like zipping through the trees on a canopy tour (awesome), swimming with the dolphins (doubly awesome), snorkeling and swimming, eating way too much seafood (can you do such a thing?), relaxing on the beach or under an umbrella reading my book and meeting many new friends. I also visited a wonderful clinic after talking to a doctor from the US who volunteers there (further details about that at the end of this article). 

World Number Two: On Thursday I flew over to Utila on a charter flight (with a group of people on a real estate tour) and asked one of the pilots if he would consider staying on the island overnight and bringing me back the next day in his little Cessna. One of the girls from the group was celebrating a birthday so she stayed as well and we were introduced to the owners of a quaint, beautiful, but simple hotel. This was the “laid back locale” – and we got to hang out on the beach with the locals for the night as “Mr. Utila” was crowned. It was like stepping back in time, and I laughed and danced all night long. It had an island ambience with a touch of “hippy.” It is just a small island and is known by divers as the most famous location for whale sharks.

One thing that I didn’t mention in last week’s vacation article was that in addition to my one week of rest, relaxation and fun I had also arranged a small “add-on” trip for the final weekend. This was the fulfilling part that I mentioned.

World Number Three: I had decided to come back to the  USA via  Tegucigalpa (capital of  Honduras ) to meet one of my sponsor children for the very first time. I have sponsored Eva for close to 6 years now and this was something that I was VERY excited about and the reason that I chose to visit  Honduras as a vacation spot in the first place. It was SO worth it. She was just one of the many abused street kids who had been living in cardboard boxes or worse.

I know that many of you have visited, supported or volunteered in third world countries just as I have. So this is about sharing the information with others (and I promise I don’t preach – it’s only three paragraphs… so read on).

I was lucky enough to be picked up and given a tour and commentary by a young man named Jeremy who had originally gone to  Honduras for six months and is now into his sixth year. There are over 17, 000 children living on the streets in deplorable conditions and 40 new children join them every month. I even met young Duncan who was 18 days old when he was found (although this is an exception. Most kids on the street are usually 5 or older.) 

For anyone who has ever said that they haven’t sponsored a child because of any of the following beliefs: “Not all of the money gets to them” or “It’s all eaten up in administration costs” or “I don’t have enough spare cash to do that” – then I ask you to seriously reconsider those thoughts because regardless of how much gets to them (and in this case it is 100%), it is an amazing experience to see the difference that every penny makes. This is real stuff. It’s the difference between getting them fed or not.

1000 people actually live in the city dump scrounging for food and things to recycle every day just to make the equivalent of 50 cents and they use their children to do the same. The standard of living is way below poverty level. I could go on and on about the conditions for hours. But that isn’t my point in this article. I just wanted to share my experiences. If enough people are interested though, I’ll write more about it because there is a lot that is needed and this is just in one region (see side note 2).   

My real point is that in just over one week I was blessed to experience three very different worlds and see pain and joy in each one of them.

In the resort location where money flowed, there are travelers genuinely concerned and distressed about their lives, worried about their futures, security, maintaining their lifestyles and even internet access. I was actually surprised to notice how many wonderful “in the moment” experiences were lost while discussing these things, such as coming along and playing with the dolphins, watching the sunset, swimming in the ocean, seeing a boa constrictor and a tarantula (I have pictures of both) and a barracuda by moonlight. 

In the island hippy world, the only real concern is that the former will come in with forklifts and ruin their ambience and all of those “in the moment” experiences that they have each day, albeit they would like the income from these endeavors. Wanting your cake and eating it too perhaps?  

And in Tegucigalpa the pain is noticeable everywhere, so I’ll focus on the joy instead:

  1. The excitement and pure joy on the faces of the kids when we arrived to visit, and later as they lined up to get their watermelon and mangoes, which I was told was the best thing to bring for them.
  2. The cuddles that they give so easily and readily.
  3. The love and devotion of a nanny who looks after 23 kids herself, day in, day out.   
  4. The touch of Eva’s hands around my waist (because she spoke Spanish and I only spoke English) as she stayed near me and introduced me to her world. With four siblings to watch over (previously it had been five), this youngster (and all of the children that live at the project) has been through much more than most people could ever imagine.
  5. The vision and tenacity of Pastor Jorge, his wife Marta, Jeremy and the many others who shared their stories about the work they are doing.
  6. The thanks, gratefulness and appreciation that exudes from the kids for what they have now (which is still minimal by our standards) but night and day compared to where they have come from.

By the way, I just want you to know everything wasn’t “rosy” by conventional standards on this trip, but it’s all in the way we respond to it.

My luggage was delayed both on the way to Roatan (for three days) and on the way back to the USA from Tegucigalpa (for 24 hours). Funnily enough, it was Atlanta not Honduras that screwed up both times.

I guess some people would get stressed out or sit on the phone for hours with Delta but it would have taken positive energy away from my vacation and I had no desire to sit indoors dealing with it. Instead, I let it go for the weekend, asked the hotel to handle it as best as they could, went to the gift store and bought a swimsuit (two actually), deodorant, a pair of flip flops and sunscreen. Then I went down to the beach and bought a hat and sarong from the local vendors. And, that was how I spent the first three days of my vacation. What more do you need? (The first picture below is me in my new attire.)

I now realize that If I had been to Tegucigalpa first, I would definitely have bought only one new swimsuit and many more mangoes...

One mango:   50 cents
One blue sarong – bartered on the beach:   $10.00
One new swimsuit: $24.00
One week in Honduras with a lifetime of lessons: Priceless

 Side Note One:

Further to the info about the Roatan clinic: La Clinica Esperanza (Clinic of Hope) is a non-profit clinic started by an amazing nurse by the name of Peggy - I found this article on line: http://sidewalkmystic.com/PeggyStrange.htm, which is quite informative. There is no running water at the main hospital in Roatan (hard to believe isn't it?) and electricity on the island turns off at various times throughout the day. I have chosen to personally take on a project of raising funds to help them get a generator to support the clinic when this happens. If you’d like to know more about it, or think you could help in any way, please contact me directly at the address on the bottom of this article.

Side Note Two:

The children’s project in Honduras is a Christian based project called Proyecto Manuelito and you can also email me if it interests you. They have a website at http://www.projectmanuelito.org/  that Jeremy endeavors to keep up to date whenever he gets information and the time, although some of the details of the new babies and children are not currently on there.

       

World 1: The Resort World 2: Mr. Utila World 3: Tegucigalpa

 You can contact Melita at mel@iitm.com

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