Thursday, July 03, 2008

A Named Cat; A Violent Market; and The Wisdom of Patience and Not Blindly Following Others

(The picture is Mimi--finally named. She's a female and the other cat is a male. His name is Wyatt.)
Yesterday was a violent example of what happens when there is very narrow leadership in the market that gets kicked in the stomach.

While I have been frustrated with various positions that I've taken, overall, I've outperformed the indices--though I take small comfort in that. I've not lost money to this bear market, and I take much comfort in that.

A week or so ago GaryK noted the strength in the commodity sectors and stated that he was perhaps going to buy a coal stock. I was surprised given the extended pricing on these names. I stayed out. And the importance of making a decision such as that is that I realized that I had decisively crossed the threshhold from being a tentative investor to an very informed investor.

I'll not change the title to my blog--for I'm quite certain that I'll always be a perplexed investor. But what I've come to understand is that no matter how BAD things are, money is always searching for a home for it has an insatiable hunger for return. And that hunger sometimes addles the appropriate valuation of risk and consequently creates bubbles.

I was watching briefly Fast Money. One of the guests mentioned that the CME changed the margin requirements. Many of the shorts in oil had to cover, and they waited to do so until the last 5 minutes. NG notes the divergence in the oil service stocks and the price of oil. That's an important divergence. If oil is being bid up due to speculative, not demand forces, and oil service earnings are related to fundamentals, then such divergences are important to heed. My DVR calls are not doing so well!

Yesterday, and perhaps early, I closed out of my BNI JUL 90 puts. I left money on the table, but I took that drop as a gift to exit this position. I also want to share with you a habit of mine that I must correct. The habit is being too anticipatory. Here's how it plays out. I see a legitimate "issue". In the case of the rails, it was slowing volumes but "pricing power" due to their charging through a fuel surcharge. If outrageous fuel comes down (or even stays flat) this erodes future growth or can lead to a decline. It should also be noted (and I've not heard the media speak of this) that ADM had a suit against all of the rails for the surcharge. I think Dupont just won a case against CSX.

To my eye, this thinking was readily known. And umpteen money managers recited "we like the rails here". I hear that as, "We LIKED the rails, now we want to sell them to YOU!" When you hear the "story" from the media, please understand that the easiest money has already been made (though there are exceptions--and I would caution about the Walmart and Dollar Tree stories--those are getting long in the tooth). Here's a chart of BNI--:

More about my habit.....I bought my BNI puts because I thought it was over extended at $95. It proceeded to go up to 110. When you have $90 puts, that puts you under water fairly deeply--no treading water, no gurgling--just suspended in your pain of being wrong. So what happens is that once the position starts to improve, I just want to minimize my pain and get out. It is weighing taking a 25% loss v. a 100% loss due to time decay and some resiliency. Essentially, I have built a psychological box from which I cannot easily escape without leaving some skin on the edge of the opening.

To revisit a previous point..... There is so much made of investors such as Buffet and the like that people blindly follow what they do. Buffet went into HMO's at their peak. He went into BNI, and he is the single largest shareholder with 63m shares--a position 3.5 times larger than the next largest institutional shareholder. And lets not forget Carmax.

Please don't misunderstand me--I'm not knocking the strategy of one of history's greatest investors--but I wanted to provide an example of investors thinking for themselves. Taking positions in stocks when they are trading at their peak--and let's face it, that is when the stories are most compelling--can be capital-costly proposition.

I want to close with a reminder that the stock market fall began with the REITS more than a year ago. Market sectors do not fall in unison (and that is also a critical lesson for me to learn)--nor do they rise in unison. So watch for leadership in sectors previously beaten down.

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