Know Thy Enemy
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:
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,
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...