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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.

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4 Comments Post a comment
  1. greg8885 #

    I have to ask a question, but I first want to qualify it with this parenthetical aside (you seem to consider yourself long-term focused, and I want to caution this by saying that 1) I respect the ideas that you’ve put forth and 2) I am of the camp that there’s obviously a middle ground between buy and hold and short-term trading. So when I say I think you’re long-term focused I think that you look at companies and their trajectories over the span of multi-years instead of quarter-to-quarter. This is not the same as saying you are buy and hold in that you invest in a stock and then do nothing for years. You’re obviously also not a day trader)…ok so now the question (and I apologize for the aside) but, why bother playing this short-term game? I understand the desire to attempt to market time; it’s human nature. But surely the companies you own would not at all be affected by the government shutdown/prospect thereof (unless of course it dragged on so long as to negatively impact real businesses in a way that proved more permanent than simply a simply of billings). But really the real risk of the shutdown was headline risk or price risk.

    It just strikes me as potentially detrimental to incorporate a response mechanism to events that are popular but likely don’t have a material impact on the actual value of one’s investments to avoid short-term price drops. Again, I really like your work and this isn’t an attack (as at least half of blog comments I read are), but I do think that even if the hit of managing your portfolio to event this time was only de minimis, over time it will be meaningful as they compound.

    October 26, 2013
    • Its a good comment. I’ll write a post about it. I have reasons and have thought them through.

      October 27, 2013
  2. Joe #

    Where’s the ‘Like’ button? There it is!
    Thanks so much for sharing your thoughts.

    October 27, 2013
  3. Jack #

    Big fan of the blog…thanks for taking the time to make this public…

    October 27, 2013

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