Vad's Best Ideas

"Everyone, whether contrarian or otherwise, will eventually be right, and wrong. Just wait long enough."
Old Mongolian Proverb

I have made a mental commitment to myself not to post here more frequently than twice a week, and even though I saw some posts by my fellow contestants that I really wanted to answer, I stayed quiet. The concept of the six month competition is just a very tough cookie for me personally to swallow. I am not sure how many of you guys out there are actually paying attention to my portfolio, but ever since I firmly occupied a spot in the Top 5, my turnover has been crimping up higher and higher which is not my usual style...

You know it is hard for someone like me who is a fundamental contrarian to try and play the momentum game against a bunch of sector portfolios. As anyone who has read my blog has seen, I have predominately made my performance stand out (so far) by taking positions in stocks that no one else wanted to buy-sub prime stocks when everyone was scared to death to touch financials in August, CHNG when it went in the opposite direction of the hot Chinese money and most recently (today actually) on Countrywide when almost everyone and their mother feared an immediate bankruptcy.

But you know it takes a lot of patience to actually see your 10% lead evaporating in a matter of weeks, because contrarian picks frequently decline for a while longer after the purchase, as it is almost impossible to pick an absolute bottom and because sector rallies can last for longer than 6 months. I acknowledge my main SLO weakness (strength?) so far- I traded way to much in the last few weeks but now it has to stop- I am not a speculator or a day trader (even though I do both on the small scale). I don't buy stocks because they are hot, and I do not sell because they are cold. If one wants to follow a great trader- please follow someone else.

However, the amazing thing so far has been the fact (check out the timing report of your fund as well) that my buys on average so far have been up 23.53% over a 60 day holding period- that is a pretty tough number to achieve over the long haul. My 1 month batting average vs the S&P is at a 100% as well :)

I love buying when everyone is fearful and hate buying when everyone is greedy. During the last week I accumulated a large position in Countrywide Financial (CFC) because no reasonable person could suggest that they will go bankrupt in 2007 or for that matter any time soon. An average analyst, by the way, can not be reasonable by definition because his/her paycheck comes from the same bank account that feeds his investment banking and commercial lending colleagues.

The screamers "aka Cramer and some others" are just a group of jockeys, which more often than not, just talk about the stocks that are hot, so they can generate some attention. I am not saying Cramer is unintelligent, but he is certainly not someone whose recommendations I would follow. What's more, I frequently do just the opposite, after the initial impact of his "pump" speech fades away- I take the opposite position- usually a week or two after...

Anyway back to business- I sold my CFC position this morning and reinvested a good portion of it into a new contrarian pick Moneygram - MGI. Everyone probably heard the name so there isn't much introduction required here. I am not going to go into too much detail on financials either as I think it's fairly boring for the blog here. Here is the punch line- MGI is now trading at a multi year low because of one stupid mistake their treasurer has made- investing in sub prime securities for a little extra spread for their money order business.

This mistake might end up costing them $500M or so in write offs. So for now the general public is fleeing because everyone is scared that MGI is having a liquidity crisis as we speak. Bu the truth of the matter is that their money transfer business is fundamentally solid, liquid and is worth at least double today's market cap. So even after adjusting for $500M book loss we are talking about an extremely undervalued stock at this price. So I bought this morning and then in the afternoon bought some more. If it keeps going down like a falling knife, I will buy more, and then more again until it hits the 25% portfolio compliance threshold...

Few other stocks I bought today- LCC (US Airways) and ALK (Alaska Air) - both declined heavily because of the oil price sky rocketing to $92, but the truth of the matter is, that even though commodities clearly benefit from the rate cut expectations, I think oil is close to topping out- we might hit a $100 for a day or two but that won't last long... Fundamentally oil should be trading closer to $60 a barrel, and thus we'll get there eventually.

But even absent low oil prices- airline sector is behaving a lot more rationally than it did in the past- shedding capacity, raising prices and plus is ripe for consolidation. So the punch line here- my advice is to allocate at least a portion of your portfolio to airline stocks as they are a good hedge against eventual crash of the oil price.

Another investing idea- E-Trade ETFC- got beaten up again because of the sub prime exposure, but the underlying fundamentals are relatively healthy- volatility is back to life, and thus number of trades people make is poised for more growth. Plus they are cheap right now and thus could be taken over by some of the larger players like Ameritrade.

And to finish off -kudos to my competition: many of you are doing phenomenally well-

MagicNiner- I am in agreement with you on the rationale of investing in SDS- it makes little sense to me as well...

Andrew Carlson-demonhawk- agree on FMD being a good and cheap stock- hope you'll get a nice boost after today and may be another one next week after the Fed meeting...

Colbyhouse- agree that you can't time the market- but you also can't prove that it wasn't just luck that got you in the top 10 unless you can at least bring your portfolio into compliance :)

JeffKalniz, TomA47 and PKauk- enjoy reading your posts- please keep it up...

Jaudio- agree with your overall sentiment and understanding of the market-but you can't really stay all short in the long term- inflation and the fact that your upside is effectively capped at 100% will catch up to you eventually ;)

Anyway good luck and cheers,
Vad

Comments: View Comments |  Friday October 26, 2007