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Its a Shitty Time to be a Stock Picker

I find picking stocks to be a lot of fun.  I run through numbers and sleuth out scenarios and wrap my head around business models, all in an attempt to predict the future and find that golden opportunity. I enjoy making spreadsheets and flow diagrams and all the other tools that I use to figure out how a business works.

There are few things as exhilarating as when you find an oportunity.  When you run through a 10-K or an MD&A and the light goes on and you are like, holy crap, hasn’t anyone else figured this out?  So you run the numbers again and read through all the releases again and you sit back in your chair and stare at the screen and say to yourself, “this is a gift.”

That’s good stuff and that is what makes the work worthwhile.

What is frustrating is when you do all the work, have confidence in what stocks should work well in the future, and none of it matters.

And that is where we are today.

On Friday I spent a few hours pouring over the Nationstar Mortgage Holding 10-Q filing.  The company is a no-brainer.  They are going to earn $3+ this year, maybe much more than that.  Being a recent IPO offering, the market has only started to realize they exist, and so they trade at $17, when if you ask me they are worth $25+.

Earlier in the week I looked at Xerox.   A beaten down situation, trading near the 52-week low, at a multiple of less than 8x forward earnings.  Perfect stock to sock away and wait for it to get back into double digits.

This morning I listened to the Atna Resources conference call.  They are on target with Pinson.  The operational efficiencies they introduced at Briggs have started to pay dividends in the way of lower costs, and I think we will see further cost reductions going forward.  The stock is trading at less than 2x what they will cash flow next year once Pinson is up and running.

Three great opportunities.  Each would be solid bet.

But because of Europe, I feel foolish to bet too much on anything.  I have to get smaller and smaller because no one really knows what is coming next.

I listened and read everything I could find on Europe last week.  No one really knows how it will play out.  Not Dalio, not Mauldin, not Novogratz, not Coxe, not Saut, and on and on.  If you really listen carefully to each of the experts, they all hedge their bets in one way or another.

What do you do?

I raised cash on Wednesday, Thursday and Friday.  My current cash level is about 25%.   I raised cash by selling out of Gramercy Capital Corp and Bank of Commerce Holdings, reducing my position in Pan Orient Resources and Equal Energy (finally succumbing to the philosophy of doing less of what isn’t working), and taking 10-15% haircuts from most of the other stocks in my portfolio, including PHH Corp, Newcastle Investments, Atna Resources, and Golden Standard.

I hated to do it.  The market right now is very oversold.  The Dow has been down 12 out of 13 days.  One would expect a market rally here at some point.  Greece is still over a month off and its hard to imagine we only go down from here to there.  Still, many of the stocks I own had held up well, had not yet broken down, and so I felt the necessity to act while I could.  As I wrote on Thursday, the Novogratz interview spooked me into action.  As it turns out, I was barely able to lighten up before the bottom began to fall out of stocks like PHH Corp and Newcastle.

The only stock I have not sold any of is Nationstar Mortgage Holding.  I am watching it carefully.  It has a lot of strength, and I think it may be under accumulation by larger funds.  Being a recent IPO, its underweighted by everyone.

But even with Nationstar, I make no promises that I will continue to hold my position at its current size.  In this environment I have to protect capital.  You have to live to fight another days.

Its helpful to review this quote from Peter Berstein, during times like this:

After 28 years at this post, and 22 years before this in money management, I can sum up whatever wisdom I have accumulated this way: The trick is not to be the hottest stock-picker, the winning forecaster, or the developer of the neatest model; such victories are transient. The trick is to survive. Performing that trick requires a strong stomach for being wrong, because we are all going to be wrong more often than we expect. The future is not ours to know. But it helps to know that being wrong is inevitable and normal, not some terrible tragedy, not some awful failing in reasoning, not even bad luck in most instances. Being wrong comes with the franchise of an activity whose outcome depends on an unknown future (maybe the real trick is persuading clients of that inexorable truth). Look around at the long-term survivors at this business and think of the much larger number of colorful characters who were once in the headlines, but who have since disappeared from the scene.

There will be stocks to pick on another day.

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