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TheGarcipian (56.87)

Know Thy Enemy

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November 22, 2007 – Comments (9)

Funny thing happened on the way to market chaos… just about the time Mr. Market started his most recent impression of Sybil on a bipolar binge of  bartering & barfing, I was distracted by those things that come with life, like my real world job and (something more fun) planning for a colleague’s retirement party. In early November, having to travel cross-country and sit with customers all day kept me away from the machinations of this crazy market, so I missed a lot of “opportunity” to sell/trade my CAPS picks. Still, I tracked my daily performance, but had little time to trade stocks in my real or virtual portfolios. Indeed, since Halloween, I’ve not posted a single blog and have only added 6 picks to my CAPS lineup (which were done on the weekends). Meanwhile, I’d noticed in alerts I received regarding my Favorites’ choices (the people I follow), there has been frenetic trading activity, each trying to jump ahead of the downturn that is now upon us. I envied them, to have the time to do so, especially for my real world portfolio which has been absolutely hammered. Since 10/31/07, I’ve received more Tricks than Treats, having lost a staggering 23% of my non-IRA portfolio’s value.

So, what’s so funny about losing 23% of your real world portfolio, you ask? Not too damn much. But oddly enough, my position within CAPS hasn’t really changed all that much. The volatility my Rating has experienced ran my Rank from #76, up to #59, down as low as #152, and now back to #87, almost from where I started. And that little bit of volatility appears to have more to do with my Accuracy than with my Score, as I’ve alluded to several times before.

But if I’m trying to learn things from CAPS to apply to my real world investing, and I want CAPS to reflect (partially) that real world investing, then why has my CAPS score remained relatively untouched while my real world portfolio has been scathed, a poster child for Black Friday?  I think this question has a two-part answer: (1) sector overweighting, and (2) CAPS is a “relative system”.

Regarding the overweighting, CAPS scores all picks evenly, as if I’d placed equal amounts on money in each choice. While I completely understand why TMF did this (it normalizes the data they’re gathering on all stocks and stock pickers, presenting us with better apples-to-apples comparison data in the end), it resembles my real world holdings very little. For instance, my real-world PCU holding is killing me right now because I own larger portions of that stock than in my other real-world picks. This is not true in my CAPS’ choice of PCU with respect to my other 199 picks.

Regarding the relativity of CAPS, I’m glad to know that I’ve basically not moved in the rankings, all the while fellow participants have been swinging the bat at a lot of pitches in the past 3 weeks. Ha, my laziness (er, fast-paced, jet-set lifestyle, yeah, that’s it) has paid off in saving me all that time. My Score rises and falls with the rest of the market, and since CAPS is a relative system, it only pits me against others in the same system. This only points out that my virtual portfolio is, well, resistant to the churning and burning that’s going on right now in Mr. Market’s freak show. Oh, how I wish that were also true of my real-world portfolio! Because things like car maintenance, broken garage doors, painting & house restoration bills, and Mrs. Gar’s upcoming birthday have a way of requiring “items” from that real-world portfolio, it’d be nice to pull some of that money out in order to pay for those things. Yeah, I do stupid things too, like putting (perhaps) too much money into investments... Should I sell and take these losses to extract money from that portfolio and keep from losing more money? Or just stay on for the downward spiral we’ll be in for the next 9-12 months?  It’s questions like those that bring me to do bone-headed things sometimes…

Like “selling low”, not to mention my even bigger penchant for “buying high”. I don’t believe in curses, but sometimes, man, I really gotta wonder about having an evil talisman hanging over my head when it comes to buying or selling stocks. Yeah, yeah, I know everyone feels like this, but I swear mine is so much greater. Ok, you want to call it “personal bias”. Whatever. But it’s effectively a curse for me. Really. I’ve got proof from my brokerage statements. For instance, I recently covered a short I had on CBL after that dog ran up significantly and I could no longer stand the pain. In looking back over my last brokerage statement, I got into the short with a sell price on 8/14/07, right when everything in the market was still reeling from the July 23rd sell-off. Everything was headed down the crapper, and a financially-wobbly housing-sector-associated stock like CBL & Associates Properties just had to continue downward, right? After all, it’d plunged from $45 down to $30 for the 3 months prior to this. More was to come, right? Well, little did I know that our good friend Fed Chairman Bernanke would cut rates two freakin’ days later, picking the market up out of its gloom, and my dog of a stock, CBL, right along with it! After the pain got to be a prospective 20+% loss, I covered the short. And what day was that, you ask? Why, October 11th, the exact day that CBL peaked and started falling again!  Augh!

See for yourself with this graph:

http://finance.yahoo.com/charts#chart4:symbol=cbl;range=6m;indicator=ema(50,20)+stochasticslow;charttype=line;crosshair=on;logscale=on;source=undefined

Amazingly anti-prescient, aren’t I?  Seems like I can not win (as I’m sure it does to you at times). Yes, my Contrarian Indicator ways are alive and crotch-kicking me well, yet not disclosed to even myself. Since I don’t believe in curses, there’s only one conclusion I can make from all this: There is a Sybil that lives inside me! Had I held onto that dog for just one or two more days, I would have seen the downturn coming and been spurred to hold onto the short. (But just as surely as I say that, it would have continued upwards! Why does this Sybil character plague me so?!)

Today, Ms. Serendipity walked in and showed me an interview that Bill Mann conducted with Jason Zweig, the noted financial journalist and book author. Zweig’s new book, entitled “Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich”, seems interesting, though I usually eschew anything with the words “Make You Rich” in the title. Essentially, the interview said this:
Look into that mirror. See that person there? That is your enemy. Study & know him well.

To paraphrase Warren Buffett: “The most important quality for an investor is temperament, not intellect.” Buffett has also said that if all you do is understand the emotional framework that Ben Graham gives you, just doing that alone will make you a much better investor.

You are your own worst enemy. I know that I am. (Is that the first step in completing a 12 Step Program for Healthier Investors?) When it comes to investing, if you know yourself, you will know thy enemy. And profit from it, or at least, lose less…

Picking up an interesting quote from Bill Mann’s interview, Mr. Zweig said: “It [investing] is not about turning your emotions off; it is about turning them inside out. There is that wonderful famous quote about Charlie Munger at a dinner party, and this woman turns to him and says ‘Mr. Munger, you know you are a great investor. You have become a billionaire with your investment ideas. What is your secret?’ Charlie, as only Charlie can, sort of spits out three words only and then goes back to his food. He said, ‘I am rational.’ And the conversation is over.”

I am trying so hard to be rational, though the pain is very great right now. Please, oh please, Sybil, leave me be!

Foolish best and Happy Thanksgiving to all CAPS investors,
--Gar

P.S. If you have any stocks you'd like me to short in order to boost them for you, talk to me. I'm sure we can cut a deal. Maybe I'll start a new AMT fund. No, that's not an Alternative Minimum Tax fund. It's the "Anti-Midas Touch" fund...

9 Comments – Post Your Own

#1) On November 22, 2007 at 1:53 AM, HistoricalPEGuy (63.38) wrote:

Nice post.  I think every single investor has been through your dialogue, its just kept internal!

Value investing is so much easier when it comes to "keeping your cool".  If you're heavily invested in high flyers, its almost impossible to stay rational.  Value investing is boring.  Almost entire unemotional - and did I say boring?  Yup, really boring.  No 10 baggers here.  However, knowing that you are your own worst enemy, it can really help you stay focused.  Understanding the market is one thing, understanding yourself is another.  Know you limitations and invest within them.  It won't make you jump out of your chair, but it'll let you sleep at night.

You won't find me anywhere near the top, but I've been a pretty consistent all-star.  Does that make me great?  No.  But value investing is a real style that can work -  it just isn't flashy and doesn't make you look like a god.  But, when it comes to real money, what are you actually trying to do?  Look like a god?  That's ego and emotions.  How about simply beating the market over time?   That sounds good to me.

-- HPEGuy

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#2) On November 24, 2007 at 10:40 AM, dwot (97.28) wrote:

Yuck to your loss.  Been there done that one...

Caps compares you to the S&P.  The comparison you are using is a fix amount.  The S&P is down and as such, most investors are also down.  I suspect the S&P is down a good percent since the day you mention.

Of course, being heavy in something like PCU has got to hurt big time, but the sell off of that one is no surprise, nor would it surprise me to see it take another 30% hit. 

The US dollar has lost value to many currencies and for commodity stocks that means increased costs when reporting in US.  Additionally, commodity prices have weakened.  

They lay everything out so it is easy to see that earnings are going to implode.  Q3 price for copper $3.50, copper today $3.02, down 14%.  Zinc, $1.46, today $1.03, down 19%, moly is about the same and silver and gold have gone up.

Looks like copper should strip about $150 million off earnings and zinc about $25 million.  Silver will only give about $7 million of that back.  They didn't think gold production was important enough to include in the table.

So, $627 million of earnings should go down to about $500 million.  Add about 5% to costs due to currency declines and you have an additional $28 million in costs, so earnings down to about $475 million.  That would reduce eps to about $1.50, so based on current market conditions going forward 4 quarters the P/E should go down to about 17.

Metals are very uncertain right now.  Economic slow down means that prices could decline further and are likely to decline further. 

This emerging market stuff leaves a lot to be desired in the geniuses that have been promoting it.  South Asian countries have been producing components for China, who has been assembling them and exporting them to America.  Economic slow down in USA and it snaps back big time.  All those economies slow down, as does their use of metals. 

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#3) On November 26, 2007 at 6:42 AM, TheGarcipian (56.87) wrote:

Hi Ms. D,

Thanks for the excellent post. I don't understand currencies in detail very much at all, but at the macroscopic level, yes, I can see why reporting their numbers in USD is going to have a negative effect when that currency is down everywhere in the world. And thanks so much for the detailed breakdown on your numbers, but I don't understand how you came up with a P/E of 17, or how that would be moving "down to" 17. The current trailing and forward P/Es are 12 & 10, respectively (according to Yahoo! Finance at least), lower than what you predict for next year.

Also, I read your InfoMine blogs on "The Abundance of Materials" and "Copper $1.50 Next Year". Very interesting, and full of wonderful details. Thanks a ton (or should I say "tonne"?). I agree with most of it, except that I think you've left out an important metric, the time-value of the extraction effort. For instance, in "The Abundance of Materials" blog, you make a very good point of the plethora of copper/gold/nickel/ there is in the earth's mantle, even taking into account that perhaps only one-tenth of one percent would be recoverable, but there's no accounting for the extraction rate particularly when production is ramping up after a long period of low prices that you hint are in front of us. You can't argue that the mineral is "supply-side abundant" when it's in the earth's crust and not in your hands, anymore than I could argue that moon rocks are abundant because while they may be, reaching them is a time-intensive process (and costs money, which you did take into account).

Finally, regarding economic indicators for a slowdown in the US economy, yes, I believe we will be firmly in the grip of that event (and possibly a recession) throughout 2008, and that the housing slowdown will have economic impact throughout our market and the world's markets. As the US markets suffer, so does the rest of the world, and vice versa (but to a lesser degree). We are all tied together in this ever-cross-connected world market. But China and India, while tied to the US economy directly and indirectly respectively, are not solely reliant upon the US economy. China has other markets to sell its wares, do they not? Japan, Korea, Russia, Indonesia, right?

Maybe a better question is this: What percentage of the China's GDP is tied to the exports it sends to the US as import purchases? Even if it's as high as 40%, and let's say the US economy slows those imports by 20%, that's "only" an 8% slowdown in China's GDP. Not good, but not a terrible slump. And this doesn't consider Fed Chairman Bernanke possibly doing a September repeat of an interest rate cut in the March 2008 timeframe, if things still look bad. Not that I want to put all my money on that bet!

Still, your advice is good: I should limit my exposure to metals, unless I'm wiling to ride out the storm. Thanks again for such a good response and for pointing me at those blogs via your CAPS blog on Augusta Resource. I've made you a Favorite, and I'd be very interested in your responses to my questions above.

Cheers and Fool on!

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#4) On November 26, 2007 at 3:56 PM, TheGarcipian (56.87) wrote:

HPEGuy,

Thanks too for your post. I'm definitely more attracted to growth stocks than value plays mostly because I'm usually don't like delayed gratification (who does?). But I've been learning to temper that fault over the 17 years I've been actively investing. It still bites me occasionally (like now), so obviously I still have a ways to go! All the grousing above is partially a cathartic process and partially a reminder to myself mostly (and others if they want it) to remain rational in crazy times like these. Having a venue like CAPS helps me log what I was thinking when I am considering trading a stock or have actually traded the stock. And having it posted publicly will (I hope) temper my Sybil side by having it readily available as a reminder or via public humiliation (whatever works!).  So, you may see in my posts & pitches a lot of "thinking outloud" phrasing.

Thanks for all your advice,

--Gar 

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#5) On November 27, 2007 at 12:03 AM, dwot (97.28) wrote:

You aren't thinking far enough ahead and there is no point in using the existing data, it does not account for currency changes and price decreases.

I reconstruct using the financial reports. 

I was quite shocked doing a bit of research yesterday.  In the US housing uses about 40% of the copper  consumption.  Housing starts are half of what they were last April.  Copper declines from reduced housing starts is only going start showing up now.  That means about 20% of the US copper demand got wiped out this year.

Europe has a housing slow down, as does India.  I think copper demand is going to fall off a cliff... 

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#6) On November 27, 2007 at 12:14 AM, dwot (97.28) wrote:

And on the emerging market thing, I think those are rising economies, but they are highly dependent on exports and when I was looking steel, my "steel speal" post, I just did a search on it and that news story from India came back that was talking about the stock piled still rods because the housing demand was down so much.

The emerging markets are supposed to be saving the world here and I find that without even looking?

 

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#7) On November 27, 2007 at 12:27 AM, dwot (97.28) wrote:

On the Abundance of minerals, I wrote that one because there are literally thousands of small companies out there that have property with mineral reserves and they all claim they are going to make good money.

 

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#8) On December 11, 2007 at 3:45 PM, jester112358 (29.02) wrote:

Don't worry about the so-called abundance of materials.  Copper is in short supply as the direct commodity price and supply demand curves verify.  We are in a comodities bull market, especially energy and food and the housing sector is nearly irrelevant to this story.  Most people own their home outright!  But commodity bull market sare always (and I mean always) negatively correlated with equity bull markets.   So if you are in equities you must be in equities which produce commodities in short supply like oil, food, and metals.  QED

 Stick to your guns with stocks like PCU.  Bad Market timing is annoying in the short run but irrelevent in the long long.

 As you pointed out, too much trading is rarely useful.  Just do nothing most of the time.  (the CAPS game is different in this regard and so can be a little addictive). 

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#9) On December 12, 2007 at 1:29 AM, TheGarcipian (56.87) wrote:

Hey jest,

That's what I'm thinking, especially now that I've stepped away from the insanity brought on over the last few weeks, stepping away because of business travel. TMFSarahGen writes in her blog here that her personal investing and CAPS scores perform better when she blogs. Perhaps mine do better when I travel? I don't see any correlation yet to know that Mr. Market is watching my itineraries, but it does seem to be that way. In fact, whether it's for business or pleasure, my actual travels always seem to incite Mr. Market into going mental on those days that I'm away from the computer or without online access. What does make more of a positive influence on my real-world portfolio is at the root of my most recent blog post found here, penned tonight with seeds from this discussion. Doing "nothing most of the time" (as you write) works better than manically trading, both in real life and in CAPS. (So I'll have to kindly disagree with you on the CAPS game comment).

Fool on, and thanks so much for the thoughts,

--Gar

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