Vad's Best Ideas

Rule #1- Never Lose Money
Rule #2- Never Forget Rule #1

I tend to believe that the true the investment talent could only be separated from luck in a period of bear market turbulence. It is just simply too easy to claim that one is great at stock picking just because his/her portfolio has done well during the period of widespread bull rally. As the wisdom of the world's most famous investor states, the first objective of the investment management is to make sure you do not lose your clients money. Swinging for the fences could be great for winning a short term investment contest or earning a quick bonus but not for a long term investment marathon.

As I have stated before, I am an opinionated contrarian investor who likes to disagree with the general public opinion. But I also have no problem switching my stance towards a specific stock or a sector if the facts tell me to do so. "Flip flopping" might bad if you are running for president but it is a necessary skill if you want to succeed in investing.

Unless you have developed a disciplined way to deal with money losing positions you are likely to have your gains wiped out completely or severely reduced by bear markets. I have a few basic rules that I follow when constructing my portfolio that I recommend adopting for anyone out there who is willing to listen:
1. Never have your money invested in one sector because your probability of losing money quickly increases drastically
2. If you are a contrarian and like to average down on stocks that are going through a period of a serious correction never take a full position to start. (I usually begin with roughly 1/3 of my mental maximum position) Leave yourself some room for error, as you are certain to make quite a few of them. Markets do overreact all the time but they also tend to be right over the long haul.
3. Don't invest more than 25% of your money in one stock (that includes positions were you averaged down several times as well)
4. Don't argue with the Fed- I don't care how passionate you are about it and how wrong do you think the Fed is- don't forget Fed controls the dollar printing press and thus could win any short term battle by default
5. Don't listen to fools who tell you that you can time the market- your chances to do that consistently are not much higher than winning a lottery. Stay fully invested- if you aren't feeling good about the market-hedge with lower beta stocks to reduce the overall sensitivity of your portfolio or short sell the weaker players in the same sectors you are already invested in
6. Don't be afraid to disagree with everyone with anyone except the Fed- but make sure you have enough liquidity to stay solvent, if they (general public) turn out to be right for a prolonged period of time

It has been a rough ride for the market in the last ten days. Not unexpected but still tough. I had to make quite a few trades in the last several days again to preserve my gains and was able to bounce back about 4-5% from the recent low including gains on both Thursday and Friday. It has been pleasant to see my portfolio to actually go up on the days when market was losing 200 points.
To achieve that I had to make some tough sells and hasty buys. I also told my wounded greed to shut up and to listen closely to the fear. My positions in LCC and ALK have backfired on me last week, when after a quick 5% gain the whole airline sector got shuttered by oil stubbornly climbing towards a $100 a barrel mark. I sold all of LCC and most of ALK for a hefty 10% loss. Being stubborn is not smart when investing- if you are wrong just move on.

I also sold E-Trade because between MGI and ETFC I had more than 25% invested into "catch a falling knife mode" stocks- hence I had to stick with my discipline and picked MGI as a stronger one of two. It paid off when ETFC kept going down and MGI bounced back. I trimmed/sold other positions (TSP, EMC, NXG, GILD) and reinvested proceeds into MO and CG as they are both low volatility safe-haven stocks that tend to do well when market is in the correction phase. Today I also sold most of FSIN as there seem to be better deals popping up out there now.

I also quickly reversed my NOK and BQI positions early this morning with proceeds going into ultra short hedges - I have split a 16% portion of my portfolio into four stocks to preserve capital- QID, SDS, SRS and DXD. These are not long term holding for me and I will look to reverse them when one of two things happens- they appreciate 4-5% or if/when DOW hits 12800 and/or bounces back.

Some other quick market observations that are a bit of a puzzle for me as we move through the next few days:
• Retailers have reported dismal October sales and forecast even slower growth- how can that be good news for anyone?
• MasterCard's announcement that sales at gas stations dropped off significantly during the last three weeks went almost unnoticed- another notch in the recession belt? Negative for commodities?
• Mining stocks are hitting new highs, heh? If the world is going into a recession how you would expect the most cyclical industry to behave once it actually becomes clear we are there?
• Do you really believe that China is recession proof with only 16% of GDP supported by its own consumers? If you do - I wish you luck. Petrochina at a $1 trillion market cap? Not a bubble? Duh?
• Yesterday's high fliers are declining significantly faster than the rest of the market- first Chinese stocks, followed by dry shippers and now technology? Miners next?

More to follow in the next few days but for now trade safe and cheers,
Vad

P.S. The next time your mouse nervously moves towards a negative rating because you disagree with my assessment of the job Ben & Co are doing, please remember that we all will be proven right and wrong eventually, the main goal in the end is to make money and to have fun doing it. Remember an old saying "A bird does not sing because it has an answer. It sings because it has a song"

Comments: View Comments |  Friday November 9, 2007