On Becoming a Lurker

A bit of a variation on a previous theme. I think that this will be a longish, rambling post, so I'll apologize in advance for being a wind bag.

Banker notes that these markets have not been easy and 2nd_ave notes that he has become less rational with better success. As the market is frequently (perennially?) at odds with what any of us thinks, our efforts need to be re-directed. There is a common market aphorism that the market can stay irrational longer than you can stay solvent. Well, I’m arrogant enough to be unable to check my noggin and all of its (yours too!) extraordinary powers of perception, deception, cogitation, agitation and realization at the door. Rather, I’m going to adopt the persona of a lurker. Though being a lurker suggests benign activity (and didn’t I just post about thinking v. doing?), I’m going to suggest that lurking is more appropriately channeled activity. Let me explain.

Nothing is more illustrative of the delayed reaction in the market than the subprime issue. All that is coming to pass (BSC/UBS hedge fund blow ups) you have read about here and other places. We were cutting on teeth on that realization back in mid-March, 3 1/2 months ago. Did the market care? Hell no. I was expecting the market to have it's epiphany and have an "Oh $hit" moment then in April/May. Not so. It is only beginning to happen now. Why so? Because there is evidential matter--hedge funds blowing up--that is making a shadowy fear in the market psychology more of a stark (and scary) reality. This delayed reaction was also manifested in the homebuilders—the market did not react to its misconception that a bottom had formed until the evidential matter of asset write-downs, wrong and then withdrawn guidance acted like the proverbial smack in the forehead. This issue is but one example, but it is a useful example for explaining the benefits of being a lurker.

What/who is a market lurker? It’s going to be me. I’m going to be a shadowy figure peeking into alleyways, jiggling doorknobs and peering in windows (insert your own lurking behaviors here). Lurking is a way to channel and satisfy my hand-ringing, nit-picking, weeping and wailing tendencies. I’m going to revise my view of my investment notebook, and I’m going to retool it a bit. First, I’m going to rename it my Lurker Log. By taking my lurking findings and documenting them in my notebook, I’m creating a basis for informed action.

Do you not have a notebook? Get one. Every genius keeps a notebook, and you should to. Make daily/weekly observations of what you read/hear and reduce these to some thought on how you might be able to make money on that idea. My notebook is about 18 months old. Your notebook will help you distill your thinking and that of others. It will help you create an investment theme--the context for making your investment decisions. Also, it will help you capture your thoughts for you to later evaluate with the benefit of hindsight.

This process is critical to your developing trust (or realizing that you need to cultivate your insights more). When you travel back through your notebook with the benefit of hindsight (or foreknowledge), do so equipped with a highlighter/colored pen and make notes. Stocks to watch—note the price when you thought about it and when you go back put the current price. Is the price action what you expected it to be? Why or why not? If you do this, I guarantee that you will amazed you how well this process will cultivate your insights. You will also see how fallible many of the experts are when you do this process, and it will help you not misplace your confidence in the prognostications of others or even yourself.

To translate this concept into a workable process, first, get a notebook (I know that I’m repeating myself). Second, consider creating a watch list of those stocks that you think will benefit or suffer if your prognostications (theme) come to pass. I generally do this starting with a stock and then looking at all of the stocks in the sector. For example, with subprime, you would create a list of the subprime lenders. I use Fidelity, and S&P's Compustat (Reuters does the same), generally lists the other stocks in that sector/sub-sector. I use that list to create a watch list in StockCharts. You could also look at the ETF's that represent these sectors. Personally, I like to buy stocks rather than the ETF's, but the ETF's are a good way to analyze if your time/expertise prevents your performing a more detailed analysis. In your notebook, you could simply create a section of stocks to watch.

For those of you who pooh-pooh technical analysis, I believe that you are depriving yourself of an important tool in your stock/sector evaluating arsenal. Technical analysis gives you an objective tell on where money is moving through price and volume patterns. Call it voodoo if you like, but ultimately, return is based on price and volume. By the time you hear about it on TV or your favorite paid subscription(s), you will have missed some of the easier money. I have had my VERY BEST success using this process. I, like you, read a lot of opinions by others. But it is YOUR money; accordingly, you would do well to develop a process to inform, develop and evaluate the quality of your opinion. At the very least, make a list of the stocks that fit your investment theme, and watch them however you wish to do it, and decide WHAT criteria need to come to pass that will move you from lurking to acting. This stock/sector watch is the penultimate method in evaluating your investment theme, developing acumen and developing trust.

If you've done your homework, worked on increasing your investment skill, then you have to trust your work. The single most difficult factor that I have to contend with is lacking trust in my thesis. You could call it lack of conviction. While strong conviction can make you money, MISPLACED conviction can lose you a lot of money. The trouble is we are bombarded with the concept of "smart money" (the proverbial "THEY"). So if the smart money is not talking about our idea, it's hard (at least for me) to hang onto that idea when there seems to be no interest. It's like when you throw a rod into the water, and you are waiting for a bite. There could be tons of fish below the surface that WILL bite, eventually, or it could be a dead hole. You just don't know for sure which it is--but therein lies the concept of risk v. reward.

Here's a coulda, shoulda, woulda story that will bring a tear to your eye. Last year I was one of the few people who owned TNH. It was a teenager at about $18. It only traded less than 20K shares per year day. I was scared out of it because (1) it was very thinly traded and (2) NO ONE was talking about it. I was early in my investor education and very thin on trusting my work. I think that it closed over $125 this week. I owned 1,000 shares of that baby. A perfect example of my not having trust in my thesis. Now, it could have gone the other way, certainly. The antidote? For your investment decisions, document your theme, your risk reward and the catalysts that you are looking for to have that investment belt out a song that will have the house standing and clapping.

I want to close this post with a cautionary statement. It is about the proverbial "THEY" which Selden notes (click for link), to whom we confer omniscient, omnipotent powers. For a moment, let's think about this notion of "THEY" affects OUR PSYCHOLOGY. We can have two reactions. First, we can believe that despite all of our efforts we will be thwarted by "THEY" who we characterize as something dark, evil and emanating from Mordor (Lord of the Rings reference) under the Dark Lord, Sauron, intent on parting you from your money. Well, there may be some truth to that! But conversely, we can adopt another view where we are content with being a parasite on Sauron's corpulent body-so we can be tick-like (hey it's summer in VA!) and get fat.

I sincerely believe that too much hand-wringing over the “they” results in investment inertia. It has been for me at least, and I’ll be honest and not project that unfairly upon others. But I do observe that behavior, and I know that you do to. I’m not suggesting throwing caution to the wind. But I sincerely believe that transforming my investment notebook to a Lurker Log with specified action (as opposed to sinking into thinking without doing) and documentation of objective evidential matter against my investment thesis will enable me to overcome some of the obstacles that I’ve created for myself over these last few months. My apologies for sounding pendantic in this post. I don’t wish this to come off as telling you what to do—most likely you know better than I--but rather as it is…a confessional of sorts of my own continuing evolution as an investor.