Week 49 Update: Hedged Bets

Portfolio Performance

Portfolio Composition

For the last two weeks of trades, click here.

With the news this weekend that Spain will receive E100B to help recapitalize its banks, one has to think that the markets will open higher on Monday.  However whether these gains can hold is an open question.  One hundred billion euros hardly fixes Spain.  It won’t bring down unemployment, or plug the budget deficit.   It will do nothing to help persuade the Greeks to stay in the EU.  All the problems that existed on Friday still exist.  But now the Spanish banks have more capital.

My strategy for almost a year now has been that with regards to the Eurozone, it is best to sell first and ask questions later.  What I realized from living through 2008 is that no one, or at least very few, can predict the consequences of a major shock to the financial system.  I come back to the point that I have made before that in 2008 it took  for two days after Lehman for the markets to begin to react to what the bankruptcy had unleashed.  It was not anticipated.  The consequences of systemic shocks are not at all clear beforehand.

Some would say  that I am fighting the last war with my fears.  They might be right.  But I have yet to hear a pervasive argument as to why what is happening in Europe will definitely not create a systemic shock at some point.  There are plenty of arguments as to why it should not.  Greece is too small.  Money managers and banks have known about it for a year.  The banks have been capitalized through the LTRO (and now the Spanish bailout).  The problem with these arguments is that they deal with the knowns, and the problem with a financial shock is with the unknowns.    Moreover, there are very intelligent people, like the Michael Novogratz interview I posted, that believe the consequence of a Greek departure is an open question.

Staying Small

My response to the uncertainty has been to  get smaller.  I was smaller throughout the second half of 2011.  When the LTRO led to a rally in stocks, I briefly got bigger again.  This was, perhaps, a mistake.  As I wrote in early January I didn’t believe that the effects of the LTRO would be much beyond the short term liquidity it provided.  Yet I got caught up in the mini-bull that occured from January to March and took on more risk.  The lastmonth and a half has been about taking that risk back off.

As an individual investor the primary advantage that I have is that there are no expectations of performance.  I do not have to outperform the benchmarks and no one will be taking away the money I manage or my job if I don’t.  The consequence is that the only thing keeping me from derisking in an uncertain environment is my own psychology.  If I can warm up to the perspective that it is ok for others to make money while I am not for a time then there is nothing to prevent me from getting out and waiting it out until a time when the game appears to be more clear.

Its that last point that can be tough to follow.  When markets are rallying and I am sitting in 30% cash, it can be difficult to swallow.  Monday will undoubtedly be frustrating. Stocks I have pared back on will rally, and stocks I have not bought yet will be bid up further.

There are a number of companies I have been looking seriously at in the last couple of weeks, but that I am waiting to pull the trigger on until at least the Greek election has past.  Xerox, AIG, MBIA are all companies I think will do well in the coming months.  I just want to buy them at a lower price.

Waiting for a lower price is perhaps the most difficult thing to do with investing.  But I don’t see the resolution in Spain as a lasting solution to the greater problems of either that country or of Europe as a whole.  It certainly does nothing to remove the risk of a Greece exit.  Until that risk begins to diminish, either from an exit or an integration, I am reluctant to take on too much risk myself.

And so it is that I plan to sit on my 30% cash position.  Staying small.