I sold Hornbeck Offshore Services (HOS) today at a 112% profit. Hornbeck is one of two Oil Services firms (the other is Geokinetics) that I purchased last summer during the BP Oil spill fiasco, when there were threats to shut down all drilling in the Gulf of Mexico. I knew the U.S. would not abandon our Gulf oil supplies. I described the purchase in this article: Buying When there’s Blood in the Street.
I put a lot of hard work into picking stocks. And it feels good to double my money, and be able to say I beat the S&P 500 by 91%. I was very confident in the value of HOS and Geokinetics (which I’m still holding at a 120% profit). At purchase each of these stocks was easily more than 70% undervalued, a level rarely seen in stocks which have shown steady growth in free cash flow. I knew that the market would one day revalue these stocks more appropriately.
Yet the truth is I didn’t make enough money in HOS. I put 3% of my portfolio into HOS, the standard % I was using last year. That was before I had [re]discovered the Kelly Formula. This formula calculates how much to bet in any gambling situation (from poker to stocks). It assumes that your objective is long term capital growth (ie. getting rich) without going broke. It is mathematically the fastest way to grow your wealth in any betting game. Both Warren Buffet and PIMCO bond manager Bill Gross are said to use the Kelly formula for money management.
Under the Kelly criterion, I should have placed 9% of my portfolio into HOS and another 9% into Geokinetics. Now that they both have doubled, my portfolio would be up nearly 20% from just these 2 stocks. Instead I’m up a decent 6% gain.
After much research into the Kelly Formula, I created an Excel spreadsheet to tell me how much to bet on each stock purchase. This is a fundamental problem for the investor, one I’m glad to finally feel confident that I’ve got a better system for money management. The Kelly Formula spreadsheet is described in this article: The Kelly Formula for Stock Investing: Growth-Optimized Money Management.
More info on the Kelly Formula (also known as ‘Fortune’s Formula’) can be found here and here.
Other Portfolio News
I’m beginning to report my trades using a momentum system applied to commodities, currencies and bonds. You can see these on the Home page using the interactive ‘Google Docs’ spreadsheet (some browsers require you log in with a free Google account).
Also I have a new Gold timing system that backtests very well. May roll it out soon.