Lessons from the Debt Ceiling

In my post from earlier today I mentioned that I had made some portfolio changes over the past fews weeks and would be sharing them in a series of short posts.   In this one I want to talk about what I did and then undid because of the debt ceiling.

In my last monthly update, posted on the 12th, I wrote about how I was reducing exposure to stocks in response to the uncertainty about the debt ceiling.

In my accounts I go into the weekend with more than 25% cash (I’m a little under that in the practice account I show here, at around 23% including my remaining Novus position, as I didn’t quite keep up with the selling I was doing elsewhere). I should perhaps be at an even higher level, but many of the stocks I own are so obscure and out of the mainstream that I feel some confidence that they will be spared some of the carnage that will occur if the debt ceiling is not raised out of indifference alone. The stocks I trimmed the most were the one’s that have proven most volatile to market swings.

By Tuesday of the next week, October 15th, I had moved to a little over 35% cash in my accounts.  I received a few comments that this was a silly move, that the US government wouldn’t be stupid enough to let its interest payments lapse.  They turned out to be right.  Nevertheless, I stand by my decision; I work hard to grow my portfolio and putting that hard work at risk on the assumption that the people in positions of power will do the sensible thing is, in my mind, an unnecessary risk.  Remember Dick Fuld?

On Wednesday the 16th, when I became comfortable believing that the Republicans were going to back down, I added back my positions.  Some, like Gastar and IDT, I had to add to at higher prices.  Others, like Digital Generation, Tronox, and Pinecrest, I was able to add back at lower prices.  While I haven’t ran the numbers on the affair, I suspect that all told I lost on maybe 0.25% to 0.5% of gains.

These portfolio maneuvers had one other unintended consequence.  In some cases I realized I didn’t really want to add back.  I found this to be the case with Chipmos and G Willi Foods, and to a lesser extent with Gastar and New Residential.  In the case of G Willi Foods I removed the position entirely.  In the case of Chipmos I didn’t add back, which leaves me with a position 1/3 the size that it was.  With Gastar and New Residential I added back but not to the same levels.

I often find it surprising how different your perspective is when you are out of a stock then when you are in it.  I have mentioned this dynamic before, and that on occasion I have dropped a position for a few days just to let my head clear.  But its been a while since I have made significant reductions to so much of my portfolio for what was non-name specific reasons.  While the tax implications (I’m probably going to be paying more capital gains than I would have been had I not made the move) make this an unattractive strategy to use on a regular basis, its perhaps a worthwhile side-benefit to consider the next time we are faced with an event with Black-swan potential.