Vad's Best Ideas

One might have sensed quite a bit of sarcasm in a most recent link from the Strategy Lab writers that pointed to the SLO home page- "Open players learn some hard lessons" the line read. My initial reaction wasn't exactly positive - I have spent the last three weeks trying hard to preserve the gains accumulated over the last few months and felt that I have done a very decent job at it ,or so I thought, as my fund has outperformed the SP500 during the last week, month, three months and four months.

Yes it is true, recently my fund has been pretty much stuck in neutral, but there is a good reason for that- DOW is down 1400 points since the high reached in October and is trading at a very important psychological level. My prediction here is simple- whichever direction the Market finally takes off in- the move will be swift and quite possibly painful...So I have positioned my portfolio accordingly- hedged with ultra shorts that minimize my downside while probably taking some upside out of the equation as well.

Preserving capital is a paramount of an intelligent investor's strategy, and so I if that means I have to give up some upside for a significant downside protection -so be it. I wish we could short stocks outright in the competition as that would give me an opportunity to truly protect the downside as well, but utlrashorts could serve that purpose as well.

Anyway, back to the original message- after my initial reaction, I started to calmly analyze the statement of the MSN writer by trying to look closely at the returns of several former Top players. It turns out I realized he/she might have had a point unfortunately...

My personal strategy in this competition has been pretty consistent and reasonably successful- identify good contrarian opportunities (never to exceed a quarter of my portfolio) while positioning the remainder of the portfolio to benefit from the major market events (in effect similar to a sector rotation strategy...)

Since the beginning of this contest, this strategy has frequently put me at odds with other players competing for the spot in the Top 5. During the first several weeks Andrew Carlson (Demonhawk) and I have frequently exchanged positions at the top, until I decided that it was time to bail out of the sub prime. I obviously did not sell all of my sub prime holdings because I thought it was a nice thing to do- the risks of further deterioration at the time have simply outweighed the benefits... Andrew countered with what was a very well written but dangerous post saying some like this -"When buying junk, buy junk".

I thought at the time that this strategy was reckless and was very disappointed. I mentioned that in several of my blog posts already, but anyway I'll repeat it again, I honestly wanted to compete with Andrew all the way to the end, but now it seems highly unlikely given that his fund went all the way down to the bottom 20 of ALL funds in the SLO...Same thing happened to MagickNiner whose stories have been fun to read. Robert has invested purely in one sector- and based on my experience in the world of investing -diversification is a must because not a single sector goes up all the time...

Same thing happened to the Chinese sector investors, as well as with the ones loaded with various momentum plays... I mean, I hate to admit it but the MSN person was right- hopefully there have been many hard lessons learned here in SLO contest during the last few months ... I hope that in the next contest starting in January we'll prove to the "Pros" out there, that the phenomenal performance many players have demonstrated over shorter periods of time here, could be sustained over a longer period as well.

Anyway- back to business - I will posts my thoughts on the market overall in the next 24 hours but here is the overall punch line- I still do not understand how could one expect commodities (especially basic materials) to outperform the market if the whole world economy is slowing down? Hence my advice is- be careful with anything related to materials (including shippers). I personally bought DUG and SMN yesterday on the unjustified strength of oil. I do not necessarily buy into the hedge against rate cuts arguments- as these expected cuts imply weakness of the economy-hence less demand for commodities in the near term.

If you truly want to hedge against the weak dollar- buy US based large cap stocks with significant presence overseas...They would be the true beneficiaries of the dollar weakness, not commodities. I am also starting to warm up to a thought that US Financial Sector might be nearing some kind of temporary bottom- so I am trying to look out for opportunities there as well. I bought a small position in FRE today as it has underperformed FNM and could be up for a short term rebound as one could reasonably expect that protectionist Congress might push OFHEO into providing some kind of relief to the pillars of the mortgage world- decrease a capital requirement, increase caps etc. If FRE keeps declining without any new significant negative news I might buy more...

I also sold my ultra short China play FXP today for a very nice 20% gain. I still fully expect emerging markets to underperform the US in the short term in most of the downside scenarios, but I also think that given a steep decline in many solid stocks over the last several weeks, one might have quite a few better individual stock picking opportunities out there. So putting in MagickNiner's terms -I am starting to slowly navigate my ship out of safe harbor waters towards its original purpose of actually sailing and making money...

Trade safe and cheers, Vad

P.S. Don't try to time the market -stay fully invested at all times and Happy Thanksgiving

Comments: View Comments |  Wednesday November 21, 2007