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EScroogeJr (< 20)

my Caps rating

Recs

8

September 02, 2007 – Comments (4)

Posting blog entries becomes especially hard when you score reaches the record-breaking minus 1423. I could talk about the vissisitudes of fortune, or take consolation in the fact that my accuracy rating is still a respectable 64.76%, but overall, with a performance like this, there isn't much to be proud about. Hey, at this point I could almost start an anti-newsletter named "Do the Opposite" or "Contrarian shorts".

So, what went wrong? A defeat has a tendency to exaggerate both the real and the imaginary mistakes you make. It's a damned-if-you-do, damned-if-you-dont situation. Admit your mistakes too early, and later on, with Mr. Market vindicating your earlier picks, you may well have one more mistake to regret. But if you choose to remain unrepentant for a little longer, people will say, "but how dare you defend your picks when you're so wrong"? Even the most imprudent picks will seem intelligent in retrospect if you had a case of good luck, and even the most intelligent picks will look foolish if Mr. Market chooses to sour on your particular sector or industry. I was obviously wrong to short CTRP (underestimated the potential of China), NVTL (misunderstanding technology), AMZN and ZUMZ (underestimating the business model), and I was probably wrong to short WBD (yeah, who could have thought that it won't be confiscated, though, I'm afraid that the jury is still out on this). These are all classical mistakes, and they have cost me about 100 points each. Yeah, ugly. 

Then there are picks that were most likely wrong, such as TPX, KONG, LONG, or NEXT. I am down about 50% on each. Where they mistakes? Not necessarily. LONG may still finally catch up with CTRP, KONG may still realize its potential someday, TPX may still feel the effect of gravity, and so on. But it seems clear that, at least in the short-to-medium timeframe, these, too, were the wrong bets. Although, how can one be sure? There is always a delicate boundary between a wrong bet and a case of bad luck. Having said that, these picks still belong to the category of likely mistakes; you cannot blame everything on bad luck.

Sometimes bad luck is pretty obvious, though. How about that 59.84% loss on ENCY?  48.69% loss on FLML? Such picks are inherently risky, but they still have a pretty good risk/reward ratio. But sometimes clinical trials fail. There is no way to predict such things. One simply takes a 50% loss here and 80% loss there until one of his ten picks returns +1000%. Meanwhile, he inevitably looks like a fool for taking justified risks.

And then, there are picks that are just misunderstood by the market at the current moment. 

Like REFR, a ridiculous company employing 11 people that has been in business for 42 years and still has not reported a penny of profits. A company that specializes in pumping up its "suspensed particles technology" with P/S of 1097 that finances its operations by selling stock to bagholders. It returned -33.37% since I shorted it in Caps.

Or RZ, another garage operation that specializes in CAD drawings and in imitation of geothermal lease activity. It rose 32.82% since I shorted it.

Or MWA, down 20.94%. I see no fault with the company and expect it to beat the market handily, but I have a negative score -1423.62, so my opinion doesn't matter anyway. (Never mind that everybody else in CAPS shares the same opinion). 

Or AFR, a good solid REIT that acquires commercial properties and could not care less about subprime mortgages. It's down 20% since I "bought" it. OK, eventually this pick will turn green, or at least the probability lies in that direction, but I'm not allowed to say that, am I?

Or UFPI and USG, down 19.54% and 5.67% respectively. Everybody understands that their turnaround is only a matter of time, but for now, they are still making me look foolish because I failed to call the bottom precisely (if you know how to call a bottom precisely, drop me a line).

Homebuilders is another group of stocks that falls into the category of "temporary losses". I "bought" MTH,  CTX, RYL, DHI, HOV, MDC, LEN, PHM, TOL, KBH, BZH, and all of them lost anywhere from 7% to 75%. Again, I see all of these stocks as even greater bargains at these prices. With no chance of mass foreclosures (support for homeowners is the one case where it is safe to put our trust in George W. Bush; but if you're a Democrat, I have news for you. Hillary has a special opinion - she thinks homeowners deserve even greater amounts of support), and with builders scaling back construction projects, the real supply (I don't mean the "inventory" of phoney properties advertized by realtors and of ads by unmotivated sellers who would sell if you pay them 50% above the market but are not selling at the current prices) is now minimal. On the other hand, the pent-up demand has never been greater. There are tens of millions of people who missed their chance to buy during what they they had been told was a "bubble", and are still waiting for a price drop, but with prices rising instead of falling, and with the landlord demanding his monthly checks, their patience is not going to be infinite. When they finally see the truth, bearish views will be discredited so thouroghly that for the next 50 years nobody in this country will buy into the fairy-tale of falling  housing prices. So future still looks incredibly bright for builder stocks. The segment of cheap housing (everything below $400K) already shows every sign of buyer panic, with prices growing 20% a year in some areas, and it will take but a few months for buyer capitulation to spread to the luxury segment (i.e., the one in which homebuilders are allowed to operate). So, I am sure that at least this group of stocks is not going to drag down my score for much longer.

And what is that ugly red blot on my scorecard? -345%?? Can you believe that? What kind of insane action should one commit to sustain such a huge loss? Sell puts on Celera Genomics? Short Google? Engage in a derivatives gamble on Yukos? No, ladies and gentlemen, that -345% fine is what one gets for being skeptical on Dryships, Inc, and for saying that you must be crazy to pay 7x sales for a company that owes its rise to the Baltic Dry Index. That single ticker DRYS is responsible for 25% of my disastrous negative score. And there is nothing to be done about it. Close this position now? That won't get my 345 points back, and, anyway, if I hated this stock at $13, why should I love it at $72? The only thing I can do is to wait for the BDI to come down, and for DRYS to go belly up. It will happen of course, but only God (who doesn't exist) knows when.

There is also one more thing. Until recently, most of my portfolio consisted of short positions. The trouble with short positions is that, while they can help enhance your accuracy, they don't contribute much to your numerical score. You can be right 9 times out of 10, and still have a negative numerical score if the stock you were wrong about is named DRYS. With long positions, you will probably be right only 6 times out of 10, but you'll do better with your numerical score becuase your downside is now limited to 100% and the upside is limited by infinity.  Considering that I have done so much better on the accuracy score than on the numerical one, I suspect that my short bias could be a part of the problem.

So, where do I go from here? In a nutshell, I don't see the need to radically overhaul my Caps strategy, but I do need to make some revisions. One half of my negative 1400-something score - about 700 points -  will probably disapper by itself, given enough time, so sitting around doing nothing is the solution to this part of the problem. But I will still need to focus on improving my numerical score. Particularly, I should be more careful when it comes to shorting solid companies like TPX merely because they appear overpriced. AIso, I am going to change the composition of my selections so that long positions would comprise at least 2/3 of my virtual portfolio. This way, I can hopefully avoid another 345% loss a la DRYS. 

4 Comments – Post Your Own

#1) On September 02, 2007 at 7:33 PM, DerektheDude (98.70) wrote:

You might want to reconsider those 10 outperform picks you have for Residential Construction. If you change those 10 from green to red, you could juuuust about have those 1,000 points back by next Friday, 09/07.

Housing is the absolute worst thing to be bullish on right now. Maybe it'll turn around next week or next month, but for now that is the single sector that has kept you negative. Other than that, I'd chalk it up to the market correction. If that was my own real-life portfolio, I'd "lose" my username and password for a few weeks and try not to think about it. Don't worry, if you've made good judgements and done some solid DD, your picks'll bounce back.

~~D-Rock

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#2) On September 02, 2007 at 8:54 PM, TMFHelical (99.05) wrote:

EScrooge,

That's a great blog post, I hope Kopp picks it up for his column.  You well express the problems inherent in shorting and swinging for the fences too often.

Shorting on valuation is always particularly tricky, but IMO essential to CAPS mission as a rating service, I hope that players never give it up fully.

 

Zz 

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#3) On September 02, 2007 at 9:06 PM, EScroogeJr (< 20) wrote:

I doubt that I will short residential construction anytime soon. Don't get me wrong, I won't hesitate to change course if I see a mistake in my reasoning. But for that I will need either:

a) irrefutable hard evidence, such as HOV filing Ch 11 - will have to agree that things are really tough even if I can't see the reason why

b) an intelligent explanation why Bush and Bernanke and whoever comes next - the people who want prices to be high, are fully determined to reach that goal, and have every market and administrative tool at their disposal - will still fail. 

As long as my bullish thesis is intact, I simply cannot close my outperforms, because why would I be playing Caps if I wasn't going to follow my own best judgement?

 

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#4) On September 26, 2007 at 5:37 PM, g7game (72.12) wrote:

Nice post, that DRYS is a real boneshaker !

Always amazes me how wall street takes the last qtr, and does a valuation, ignoring the future problems or opportunities.

Still, if they didn't, it would make finding over/under valued stocks much harder. 

 

 

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