A Newsletter "Gem"

11/18/2005 12:00 am EST


James Oberweis

President, Oberweis Asset Management, Inc.

Congratulation to Jim Oberweis. His newsletter, The Oberweis Report, was just ranked #3 by the Hulbert Financial Digest for performance for the past 15 years. Here he offers some very valuable guidance on investor psychology, as well as a small-cap favorites.

"We cannot predict the future direction of the market. Neither can anyone else. But some observations may be in order. If volatility were to spike up, it will be more important than ever to maintain investment discipline. Use your discipline to profit from volatility rather than be tricked by it. Experience tells us it is much easier to define a strategy in advance. Time after time, normal market oscillations, particularly after periods of low volatility, have ‘tricked’ investors. Cognitive scientists have repeatedly documented the tendency of people to overestimate the probability of unlikely events if the memories associated with them are recent and vivid.

"For example, if you see a house burning or witness an auto crash (or a stock market crash, for that matter), it increases your belief that such an accident will recur far more than it should based on statistics. Accordingly, the normal human reaction to a market decline is to reduce equity exposure. Conversely, people tend to increase their equity investments after a bull market, when prices are high. People systematically overestimate the probability of recurrence of market trends, which recently have occurred.

"There is no academic evidence, however, that a market correction is predictive of a subsequent market correction. In actuality, academics have leaned more toward the opposite conclusion that markets tend to revert toward mean valuations over time. In short, if there is a reasonable way to ‘time’ the market, it is the opposite of what most folks actually do. So next time the market pops by 15%, temper the exuberance. After a 10% decline, no need to fret. Stay the course. Look for opportunities after declines. Use data as your guide, not emotion.

"Charles & Colvard Ltd. (CTHR NASDAQ) makes lab-created moissanite gemstones for the worldwide jewelry market. The company's Moissanite gemstones are marketed as distinct jewels based on their fire, brilliance, luster, durability, and rarity and are made from silicon carbide crystals grown by Cree, which is another publicly traded firm. The company asserts that moissanite has more fire, brilliance, and luster than a fine diamond at a fraction of the cost. Charles & Colvard is the sole manufacturer of moissanite.

"In October 2004, the company announced a distribution agreement with JC Penney. The gems are also available at Lord & Taylor, Marshall Field’s, Macy’s, Dillard’s and other department stores as well as at Ross-Simons and other jewelry stores. In the company’s latest reported third quarter, sales increased 118% to $11.4 million from $5.2 million in the third quarter of 2004. Charles & Colvard reported earnings per share of $.15 in the latest reported third quarter versus $.02 in the same quarter of last year. Meanwhile, we would note that clients of Oberweis Asset Management own 220,000 shares. These shares may be appropriate for risk-oriented investors."

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