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oh to have had more experience... opportunities missed

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June 04, 2009 – Comments (5)

I am very grateful for how well investing into this bear market has turned out for me, and some things have gone well. 

In essence, I have succeeded by following the basic, boring, long-standing, historically proven principles of:

1.  being greedy when others were fearful.  ICheck my late feb/early march post on financials and mark to market accounting.  Nothing was more out of favor then than financials. 

2.  buying cheap stocks.  I didn't, at the bottom, look at anything that wasn't down at least 50%, very few things I bought weren't down at least 75%, and probabaly 1/2 of my portfolio at the bottom was down 90% from its previous highs.  I looked mostly at forward p/e and price/book or specific analysis of price/cash flow price/operating income price/historic earnings etc.  Very little at trailing p/e or price/sales.  I also focused on how historically low a stock was.  For example, at its bottom Alcoa (AA) was at a 25 year low.  I looked it up and the last time it was that low it was a 4 or 5 billion dollar company, many times msaller than today.  DOW was a 20+ year low.  ASH was an all time low, far less than 1/2 of its previous historical low.  XL was at historic lows.  Etc Etc Etc.  As David Dremman taught me in the only book on investing I really took to heart:  cheap stocks win, again and again, and by substantial margins.  Chasing popular stocks loses, again and again, and by substantial margins.

3.  Averaging in.  Every single stock I have ever bought, save ONLY RRGB went down after I first bought it, so by averaging in I considerably reduced my cost average. 

4.  Buying small caps.  Small caps (<$2B or <$1B) have historically outperformed, and this is particularily true coming out of a bear market.  This is particularily^2 true for "sudden small caps" that were previously big caps but got beaten down so badly as to become small caps.

5.  Not going with the flow.  I've been called an idiot on CAPs at least 20 times, I don't know if anybody ever said "wow, Checklist, you're really smart".  Alot of people tell the super hyper mega bears how smart they are, especially a couple months ago when the S&P was 670.  Thats always a sign that you're doing something right, i guess. 

So I made money by playing the simple boring pre-established historical odds and betting that this time wouldn't be different. 

But along the way my lack of experience has bred some tremendously missed opportunities.  Some that should have been blatantly plainly obvious to someone with a decent amount of experience on the market. 

Some of the obvious plays that I've completely missed or screwed up are:

1.  Shorting levered bear ETFs.  Lets see, its march 6th,  the markets are at 12 year lows, financials must be at 20 year lows, levered ETFs decay over time all other things equal (meaning a flat market makes you a WINNER if you short these) the odds that the market stays down for 1-2 years from S&P 670 are close to zero...  shorting those, or selling calls agains them, or buying puts on them, was one of the most obvious plays a person could find in our entire lifetimes.  And I totally missed it, i just didn't know enough about them to make it happen. 

Today its probably still a good move to do that, but could blow completely up on you in the short term

2.  sometimes its ok to put alot of your eggs in one basket, a high % of your portfolio in one stock.  Three stocks stick out.  One is DOW.  at a 20+ year low, just bought Rohm and Haas (this is why it got so low), is a good company, good yield...   The biggest one is ASH.  ASH was never really in danger of violating its loan covenants, is a good company, was at an all time low about 60% lower than it had ever been in the last 25 years... and I should have gone all in, but I didn't.  I put at the bottom about 5-6% of my portfolio into ASH, now about 10%, should have done more.  The other is XL.  XL gets shorted when you buy FAZ or SKF.  It had a pretty good quarter, reporting in February, the stock jumped after earnings to almost 5 bucks before all the hyper shorting in financials later in february sent it back to the 2;s.  I was at that point comfortable that XL would live and go back to double digits.  I didn't back up the truck, I put about 5-6% into XL, should have put 15-20.

3.  Buying USB  at the bottom instead of BAC, C, FITB and others.  USB and WFC were the "in-vogue" banks.  The ones people knew would be ok.  One never wins by betting with the crowd, you outperform by going against it.  Never bet with the crowd, it just won't outperform.

4.  Underestimating the strength of this rally.  I raised cash starting from S&P 750 all the way up to may 8th.  A conservative move...  but one thaht in retrospect I should have known wasn't the highest-odds play.  At the bottom there were all time high cash positions, all time high short positions, all time high monehy in bonds and money market.  The market was wildly, irrationally low.  I should have let it ride until the 875 range.  I didn't, oh well.  I continue to cost myself returns by continuing to hedge and underestimate the strength of this rally.  I'll only be wrong about that until I'm right...  Hedging never pays off every day, it just pays off in the long run.

Whats a boy to do? 

If this ever happens again, and I have cash at the bottom...  I'll do alot better coming out than I did this time.  Live and learn, lessons recorded, duly noted, onward and hopefully upward 

5 Comments – Post Your Own

#1) On June 04, 2009 at 1:39 AM, arabianmoney (< 20) wrote:

You could play the volatility of precious metals in another dip - silver allowed a doubling of money in six months - and the long term leverage against gold and money supply is good, see:

http://arabianmoney.net/2009/06/04/volatile-silver-backs-off-16-but-set-to-go-higher/ 

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#2) On June 04, 2009 at 7:15 AM, sentinelbrit (82.30) wrote:

I find these types of blogs very helpful. I too wish I had been aggressive in March. I too wish I had put more money into some stocks at that point. Sorel once said that when he had really strong conviction about a stock he backed it big time. That is how one makes big money - provided you're right.

Good blog.

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#3) On June 04, 2009 at 9:18 AM, rofgile (99.43) wrote:

Good work checklist. 

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#4) On June 04, 2009 at 9:01 PM, checklist34 (99.73) wrote:

thanks fellas.  Can't win them all, and somebody may be perfect someday but its not likely to be me, but overall I am deeply grateful for how well I did do.

But I am haunted by ASH, lol...  i partly joke.  I read the 10q and 10k and surveyed the loan covenants and added up all of the info and called investor relations and looked at their monthly updates to business performance...  ASH gives monthly updates for sales, margins, etc., from which you can reasoanbly surmise EBITDA.

I was 100% comfortable that ASH wasn't a bankruptcy risk and would not violate the loan covenants barring a recession that got alot WORSE than it was in Q4 2008 and Q1 2009. 

Should have backed up the truck... but I just put 5-6% of my portfolio into it.  It was the once in a lifetime shot at a sure thing.

oh well, at least I bought what I did.  :)

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#5) On June 04, 2009 at 11:43 PM, portefeuille (99.66) wrote:

It was the once in a lifetime shot at a sure thing.

Wash your mouth out (see this video 1:51-2:06) ...

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