Doc's Diamonds

Please realize, More than just the Fed Cut

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Well, unfortunately the Fed didn't quite live up to the market expectations. I had anticipated this happening. The market had priced in a too aggressive rate cut and anything less than a 50 basis point cut would be a disappointment. Further, the Fed did not cut the discount rate by 50 basis points either and cut it 25 basis points. If the Fed had cut the discount rate by .5% (50 basis points) and only cut the funds rate by .25% the market still would have sold off but not quite as severely. Only a .5% cut in the funds rate AND the discount rate was going to please the market.

That is the prevailing logic in the investing and financial press and I certainly agree with that assessment. However, what they aren't telling you (in my humble opinion) is that the market would have sold off even if the market had gotten exactly what it wanted. There were four major factors in play creating the environment for this sell off. 1) The disappointment by the market in the actual cuts I have just outlined. 2) The market was severely "overbought" just prior to the fed action. 3) The VIX (volitility index) had dropped to a very low level just before the fed news (indicating complacency). and 4) The overall fear that remained in the market despite the recent nice runup in all indicies.

In my view, it was almost inevitable that there would be a "sell the news" approach by the market today. That being said, I have mentioned over and over that you can never "outguess" the market and should generally be fully invested at all times with a diversified portfolio. Even though I still believe that is the best long term approach, I realize that this approach will not win me a stockpicking game such as ours. At least not with such a widely swinging market and a fear predominated market. That is the market we have today.

In preparation for this market approach, I sold about 20% of my portfolio before the fed decision. I did hold onto about 80% and realized I might take a beating. That will, at the least, give me the flexibility to pick up some last minute bargins for an end of the game push. This was a good decision, but as with my other moves, was not aggressive enough. If I really wanted to gain some ground, I should have sold all of my portfolio and rebuy at a lower price.

My sincere congratulations to the savy investors who picked the right speculative and nonspeculative stocks that gained 30-40% in months. I still believe I will have a nice gain by the end of the competition, but I will be lucky to finish in the top 100. I just couldn't violate my investment principles for the game and I will pay the price for that.

I am sure my SRO competition realizes that there is a vast difference between winning in a stockpicking game and winning at investing. There are some pretty sharp investors in the top group (my fav is dishwasher) who, if they could invest their own money at the rate they went up in this contest, would be millionaires by now and would never have heard of the strategy lab open. Their annual rate of return would be about 120 - 160%. So, I leave it up to each and every one of you reading this to determine what you have read that makes the most sense for your own portfolio strategies.