No Fat Pitches

My process, if you can call it that, goes something like this:

I have a whole bunch of ideas.  These ideas have taken the form of stock trades.  Some are working and some are not.  Most of the time more are working than those that are not.  But sometimes, usually at least a couple of times a year, that flips.

I start losing money.  Losing money makes me antsy.   Then angry.  This anger leads to disgust.  The disgust eventually leads me to go on a selling rampage – throwing in the towel on many names and what keeping many others in smaller quantities.

At that point I go through a period of mild depression.  All those hopes and dreams from the stocks I have just sold are lost.  I am left to reconcile my new portfolio level, which is inevitably off the highs, instead of clinging to the hope that the same names that led it down will lead it back up again.

But then I come out of this period of despair.  I suddenly feel invigorated again.  Why?  Because I have opportunity.  I have cash.  I have decisions to make.  I am not stuck with past decisions that aren’t working.  Many times, I never look again at the stocks I just sold.  If I do it is with new eyes.   Why do I own this?  Why should it go up?  If it’s a short – why should it go down now.

I start looking at new names, thinking of new ideas, having lots of cash opens up opportunity rather than it seeming like a burden to managing finite capital.   I spend my time trying to figure out where the fat pitch is instead of hoping that it comes from something I already own but that isn’t panning out.

This is the same process I have gone through for 10+ years. The only thing that has changed is my risk tolerance. It used to happen on a 10% drawdown. Today, its more like 2%.

I just went through this process in the past week.   We got earnings season and I got whacked.   First Thursday on Impinj and then Friday on Snap/Sentinel/Crowdstrike.  At that point I said enough, I’m clearly NOT thinking clearly, and sold a whole bunch of everything.

As it often happens, as I work my way from despair to invigorated, I get sent something that puts it all in perspective.  This time a friend sent me a great little interview from Stanley Druckenmiller that really summed it all up.

Druckenmiller is pretty, pretty negative.   Or at least unsure.  Well negative – after all he is in the “hard landing camp”.  When Stanley Druckenmiller says he is more uncertain about the market than any time in his 40 years, that is saying something.

But the comment that summed it up to me is when he said – I don’t see any fat pitches right now.

I hadn’t really thought of it that way until he said it, but its really what I’m feeling right now.

2022 was actually kind of easy.  At least straightforward.  Try to stay out of the way of the freight train.  The first couple months of 2023 wasn’t too bad either – just look for a bounce.  But now?   Man, its hard to know.  Are we still bouncing, is this back to a 2022 playbook, or something altogether different?

That isn’t to say there aren’t promising stocks out there.  There are.  But where we are with the market, the economy, it just makes me reluctant to call them a fat pitch.   A fat pitch is when it all lines up.  There are plenty of stocks, especially in the micro-cap world that has been really hit hard, where the valuation looks quite attractive.  But with rates at 5%, with the market up here well above 4,000, I just don’t know if I want to pull the trigger on them.

I have survived the last 2 years. I have not lost money yet and have actually made a little money mostly on account of shorts and GICs even as the market has gone down a decent amount. I have done this by:

1. Being cautious
2. Selling when it isn’t working
3. Taking only small positions in just about everything
4. Always being hedged

Here is what I have not done.  I have NOT survived because of my incredible stock picking ability. 

I simply haven’t.  I wish the opposite was true.  I’d love to say I’m Michael Burry and I have found multi-baggers in the bear market. But unfortunately, no. I’ve had some nice winners over the last two years and some equally terrible losers.  Even this year, I’ve done better on the short side then the long side (which is really weird to me given the market we’ve had).  Overall what has kept me in the game is the process (essentially puking up whatever is not working quickly) and not the picks.

In fact I have been best served by scalping profits quickly when I do have gains.  Take Impinj for example, which was a mess this week.  I sold half before earnings on no other reason than the knowledge of my own fallibility. This helped offset the massive drop on Thursday.

Apart from a few large caps it just isn’t paying to buy and hold in hopes of a larger trend.  Unless you have more knowledge about the business than I can divine from conference calls and earnings releases.

As I lean into Druckenmiller and his ‘hell if I know’ thoughts about the market right now, I think that remains the path to be on.   There’s gotta be a really good bull market out there at some point, and when that happens I can try to rack up another one of those years, but until it feels like its coming, I gotta stick to the process that keeps me in the game.