Vad's Best Ideas

It seems like the above quote from Hubbard could some up an overall mood of some of the most recent blog posts here at SLO. People are frustrated with themselves for selling too high and/or too low, furious about the illogical behavior of their stocks, and for not following their stated discipline... I share the sentiment overall but think that people here underestimate just how well many of them have done so far.

SP500 is down 4.5% since the start of the competition but look into rankings page- over half of the more or less active contestants have actually beaten the market. And we all know that over 75% of professional money managers actually fail to beat the market, so don't feel bad- we, as group are doing quite well for now.

However, good or bad, it seems like turnover in most portfolios has been increasing day by day. And with turnover this high I would guess more people will start feeling pain of trying to outguess the market. We all (most of us anyway) agree that timing the market over the long haul is extremely tough but we all still trying to do it one way or another.

Unfortunately the nasty "Mr. Market" keeps playing tricks with investors during times of extreme volatility- when it seems like stocks are almost ready to start going up - they go down, and then during the next day when people move into a net short position - the DOW goes up by 200 points... Dow Theory says "sell", most "experts" say "buy" etc... I bet you can really lose your mind if you are actually listening to all of experts at the same time.

My recipe for dealing with a market is very simple -good investors should keep their portfolios fully invested at all times. When at cross roads- like now- its ok to protect the downside with short positions, but don't go into a 100% short position or move your portfolio a 100% into cash. Moving into cash is a very tricky move that could be only managed profitably by someone who has an iron will and applies a very well thought out and consistent strategy- no exceptions. My advice to most investors - don't waste money on commissions -those damn brokers make too much money as at is.

Now back to business again. The question on everyone's mind seems to be whether or not US will end up in recession? Fed and most economists seem to believe that the economy is strong enough to weather the storm; others disagree. Some now (finally) think that inflation is an issue, some do not. Given the historical prediction track record of an average economist I would not pay too much attention to their individual ramblings but overall change in ton could be an important indicator.

The fact of the matter is simple- US will end up in recession - it always does - the only real question should when? I think the main factor determining this will be whether the domino effect of the financial sector write downs is going to be mitigated fast and aggressively enough. I'll repeat myself though- Fed rate cuts won't solve this- they would merely postpone it and fuel more inflation a long the way...

The cure unfortunately lies in taking more quick write downs to restore confidence in quality of the remaining assets, as well as in bringing the off-balance sheet liabilities (SIVs etc) on the books quickly. Finally it also requires cutting dividends and raising new capital by diluting the existing shareholders to restore capital ratios to more appropriate levels. It also requires Fed supplying sufficient liquidity in the form of unlimited short term borrowing secured by good collateral but at penalty rates. And finally it might also require for politicians to shuffle their newly proposed regulations somewhere deep in side their bodies for long enough to actually give the sector time to recover a bit...I am not sure all of the above could actually happen so for now I would be very carefull with the banking sector...

P.S. Quick notes on my portfolio- sold GRMN and DUG, bought more PTNR and now looking into buying some more GEOY- it went on sale today for no particular reason...

Anyway, trade safe and cheers,
Vad

Comments: View Comments |  Wednesday November 28, 2007