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Posts from the ‘market psychology’ Category

2012 Recap

Below are the results for 2012 from my actual portfolios.  My bank does a good job of providing performance analysis; its improved to the point that I may start to track my actual portfolio directly rather than through a practice account.  The results available from the service go back to 2009.


In 2012 I managed to outperform the S&P and the TSX and I’m pretty happy with that.  I’ve commented before on my time constraints.  I work a day job  so my time to analyze investments is mostly limited to a few early morning hours, an hour at lunch and sometimes (when I’m not too tired) an hour before bed.  While my hope is that this will eventually change, right now time limits me from investigating every possibility and often causes me to get to ideas much later than I would otherwise. Read more


Week 79: From Chaos to Order

Portfolio Performance



I am going to try to keep to a shorter update but given my track record with brevity we will see how that pans out.  The reason I want to keep it brief is that I am attempting to write a Visual Basic program this weekend that will allow me to paste my transactions into an excel spreadsheet and automatically spit out a list of the closed positions, the open positions, and the relevant transaction parameters.  I want a better solution than a snapshot of the RBC Practice Account portfolio holdings page;  I have no ability to come up with graphs and charts of performance with my current snipit method, the practice account summary has a bug that screws up the book value and gain/loss numbers every time you make a partial sale of a position, which is a real pain, and I want to be able to post a consolidated list of all my closed positions along with their gain and loss, something that is not possible from the practice account (my current method, which has been to post every one of my updates on my portfolio page, is getting to be a little too long).

On the Cliff

The market was a real yo-yo over the last couple weeks but I didn’t really panic much.  I have been known to do violent purges in the midst of chaos, but not this time.  I was pretty confident that something would get done, either at the deadline or as a result of the steep fall that would occur after it was passed.  As it was, things turned out just about in-line with my expectations. Read more

Week 63: Bending History

Portfolio Performance

More on my Tepper moment

In a response to my post Yesterday’s David Tepper Moment, the comment was made that the original David Tepper moment came after stocks had already moved quite a bit and that, if this was to be another David Tepper moment, it would be because we are far closer to the top than to the bottom.  The comment was directly especially at gold stocks.

This made me think twice.  As I remembered it the months after the original Tepper moment were some of the best for my portfolio.

Of course it was possible that I was re-imagining history in the most flattering way.  Rather than take my memory on its word I decided to go back and check the stats.

2010-2011 Portfolio Holdings

As it turns out, the 5 months following David Tepper’s comments were very good for my portfolio. They were also fairly good months for stocks as a whole. The S&P returned 13% over that period. Read more

Week 47 Update: When in doubt – Get Small

Portfolio Performance

Portfolio Composition

For the last two weeks of moves, click here.

Letting Go…

The occupation of investing is really one of evaluating risk.  If you run a large institutional fund or a hedge fund or some other large sum of money, you perform this evaluation on a formal basis, giving its conclusions a formal sounding name like risk adjusted return or something of the like.  If you are an individual investor your process is much more informal, your conclusions are often not written down (though a blog helps in this respect), but nevertheless you are continually going through the same basic process of evaluating the potential risk against its potential return.

I try to eliminate risk through exhaustive research of the companies I invest in.  That elimination process involves getting up at five in the morning on weekends and spending hours readings through 10-Q reports and MD&A’s. It involves staying up late on week nights listening to conference calls and reading industry publications.  All this effort is done in the attempt to understand what makes each particular business tick, and to understand if the fundamentals of that business are improving in such a way that value is about to be realized.

I find this to be time well spent.  On the one hand I enjoy the investigative process.  On the other, it is profitable.  I am often able to narrow my focus to sectors that should experience positive fundamentals, and then to further narrow my focus to companies within those sectors that have competent management teams and solid assets that can deliver on a consistent basis.  Whether the sector is mining or mortgages, paper or potash, banking or bitumen, it makes little difference to me.  Given the time I can understand the business and develop a thesis to invest or not, and more often than not I am right.

In the 1990s and in the early part of this decade that was all you needed to do to consistently beat the market.  You could do the work, pick good companies, understand the industry trends and wait for it to play out.  It was a simple time.

Nowadays however, following that recipe in a vaccuum can you leave you without a leg to stand.  The market today is analogous to playing a hand of cards where within the deck lies a single trump card that if played automatically will lose the hand for you.  You can manage the cards you are dealt the best you can, do your darnest to evaluate the probabilities and make the best risk adjusted decision, but if that trump card is played you will lose it all.

That trump card was the US banking system in 2008 and it is the European sovereign system now.  In either case the details differ, but the trump-like nature is essentially the same.  The risk is systemic, the probability of that risk occuring is unknown, the outcomes of that risk impossible to quantify.  Whenever you play a hand in the market these days you put yourself in danger of the consequences that the risk happens to be realized while your money is still on the table.

Because this is a risk that is so difficult, perhaps impossible, to understand, there is no way to hedge against it.  I have yet to hear anyone, expert or otherwise, offer up a coherent and definitive conclusion on what to expect if Greece exists the Euro.  Do markets open down 10% and continue to fall? Is it a non-event and an opportunity to buy?  Is Greece this years Bear Stearns, to be followed by a few months of a false reprieve before the big one hits, perhaps it being Spain that takes on the role of Lehman this time around.

There was an excellent conference call held by Donald Coxe this week.  During the call Coxe laid out the situation in Europe as well as anyone has.  It appears to be coming to a head.  More and more what we are seeing is that people, organizations and banks are making adjustments on the assumption that the Eurozone will not hold.  Banks in the Eurozone are frantically trying to tie their loans to countries that may be forced to leave by getting financing from within those countries rather than abroad.  Assuming there is an exit, the potential for a true global financial crisis is great if it is not an orderly one.  Along with that would very likely come a global recession.

While it is not clear whether Greece will leave this week, next week or next month, it has become more clear that they will indeed leave eventually.

What is unclear is how such an event will ripple through the system.  To provide a few examples, consider the following:

  1. Right now the Eurozone countries run deficits with one another.  Primarily Germany runs massive surpluses against southern periphery deficits.  These imbalances are currently tallied in something called the TARGET2 mechanism.  Target2 is essentially a way of transferring funds to countries (like Greece and Spain) that are running current account deficits so that those countries don’t run out of money.  As long as all the countries are in the Eurozone these liabilities are just a paper trail between the individual Euro nation central banks and the ECB.  However if a country with a large Target2 liability leaves the Eurozone, suddenly that liability needs to be paid back (the ultimate owner of the liability is the ECB).  But will it be paid back?  If it isn’t the ECB will take a big hit to its capital, potentially one that is big enough to cause the Central Bank to run out of capital completely.  What happens when a Central Bank runs out of capital?  I don’t think anyone really knows.  Without a doubt it will be damning to confidence at the least.
  2. What exactly is going to happen to Greece (or a little later, to Spain) if they leave the Euro and stop receiving funding from the rest of the Eurozone?  The reason Greece is able to make basic payments such as salaries, pensions, drug and medical benefits, is because of the inflow of money from outside the country.  If that inflow stops, what happens to the country?  Does it devolve from borderline chaos to complete chaos?  You have to wonder.
  3. There are pension funds and insurance companies and other large entities that perform basic public services that likely have large balances of periphery debt.  I was listening to the Goldman Sachs Insurance conference before bed last night.  William Berkley, who is the CEO of the William Berkley Corporation, gave a fascinating talk about the industry.  Most interesting perhaps is that Berkley believes that the biggest source of upside in the insurance industry over the next 24 months is likely to come from the failure of one or more of the large insurance giants in Europe.  He gave it a 50/50 chance of happening.  The reason he expects it to happen is because he is fairly certain that these companies are holding the bag on a large amount of peripheral sovereign and corporate debt.  If this doesn’t scare you, it should.  While 2008 began with the crisis of Lehman, it was amplified and extended by the crisis of the insurer AIG.  Had AIG not been dealt with, that crisis could have been far worse.
  4. What will bond holders of Spanish, Portugese, and Irish debt do in response?  You always have to remember that, as Donald Coxe has described, the situation is existential.  What that means is that the perception of weakness is weakness, and it will breed weakness.  Will a Greek exit destroy the perception of Spain to such a degree that it becomes inevitable they will leave to?  Do Spanish bond rates skyrocket in response?

Look, I am not an expert on the Eurozone or the consequences of a break-up.   I’m just throwing out these ideas to highlight the complexity of situation and to illustrate how it is basically impossible for any of us to make a legitimate assessment of it.  What it means to our investments is anybody’s guess.

Lighten Up

All I think I can do in a situation like this is to get smaller.  Take on less risk, don’t take too many chances, wait for it to play out one way or another before wading in too far.  Remember that even after Lehman went bankrupt, it took a few days for the market to recognize the consequences that were about to be felt.  I don’t think this was because the market was ignoring those consequences so much as that no one really knew what they were until they started to happen.  Same considerations this time around.   It could be Y2K all over again.  It could be Lehman all over again.  We will just have to wait and see.

As an individual investor you are at many disadvantages.  You don’t have access to the research, you don’t have access to the capital, you don’t have the range of strategic alternatives (hedging, taxes, etc) that a larger investor would be privy too. But the one advantage that you have as an individual investor is your ability to act quickly and to the extreme.  A mutual fund, pension fund or hedge fund would have a lot of difficulty going to all cash, both from a logistical and a performance perspective.  As an individual you answer to no one but yourself.  You generally can cash out with little to no movement of the underlying stock price.  If things get hairy, you have a legitimate choice as to whether or not to wait it out until they aren’t anymore.

Such is even more the case for my particular circumstance.  The reality of chasing above market returns is that I am constantly venturing into areas that are volatile.  Such is the case with gold stocks, oil stocks, even to an extent with the mortgage servicing stocks and smaller banks.  These companies trade up and down to a greater extent than the market.  Whether the fundamentals dictate it or not they will move down hard if the general market moves down.  There is no amount of analysis  that I can do to mitigate or prevent this.  I can only accept this consequence as the likely reality, and plan accordingly.

I completely sold out of Gramercy Capital, Bank of Commerce Holdings, and Shore Bancshares in the last two weeks.  I lightened up on the rest of my holdings by 10-20%.  I ended this week with a little less than 30% cash.  I plan to raise that cash level to 50% in the next week or two.

I would have an even higher cash level already, except that I have also entered into two short term positions as well.  OceanaGold and Mart Resources.  My thesis for OceanaGold is that the situation for the gold stocks appears to be turning.  There have been a number of days where the stocks have outperformed the bullion, and there was even one day were gold was down substantially while many of the large cap mining stocks were up.  This appears to me to be the start of something.  OceanaGold remains one of the cheapest gold producers out there.  It is by no means the most efficient producer, and thus it has also been beaten down substantially during this bear market in gold shares.  I bought some shares at $1.80 simply on the notion that if this is a turn in gold stocks, OceanaGold should see some outsized gains as it recovers the ground it lost.  If gold weakens further or if the gold stocks resume their downward trend, I will bail quickly.

Mart Resources is purely an event driven purchase.  I own Mart in another broker managed account already and so I follow the story closely, but have never owned it in the account I track here so I don’t talk about it much.  The company has two news events that I suspect are going to occur shortly.  The first is the potential for an announcement of a dividend.  I believe that such an announcement could result in a significant pop in the stock, as it gives credibility to what is otherwise looked on warily as a Nigerian story.  The second is a pipeline deal with Shell, which would allow Mart to increase their production, perhaps substantially, and allow the brokerages that follow the story to up their targets based on larger 2013 volumes.  Again, I am looking for an event to occur in somewhat short order, but I am not holding this stock for the long run.  If the events in Greece take a turn for the worse, I plan to cut and run.

I come back to the quote I gave last week from Peter Bernstein.  I think this is something worth repeating at a time like this:

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.

We live in impossible to understand times.  You have to accept your own limits of knowledge and simply walk away from the table.  Will I miss opportunities by having such a high level of cash?  Quite possibly.  But you can’t chase shadows.  You have be a prudent manager of risk.

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.

Letter 32: Sacrificing to the gods, the story of gold demand, Atna’s Pinson disappoints (slightly)

Portfolio Performance

 Portfolio Composition

Shaking it up

Things weren’t exactly peachy for me this week.  Rarely have I felt more confused about what sectors I should invest in then I do right now.

One of the best gauges of just how divided I am is the number of stocks I have in my portfolio.  This got up to 20 stocks on Thursday this week.

20 stocks is silly.  I’m not running a mutual fund.

Anyways, on Friday I sacrificed a number of these positions to the trading gods.

A sacrifice to the trading gods?

A sacrifice to the trading gods can be anything from selling a few shares of a single company to wiping out a number of positions in a sort of sacrificial blitzkrieg.

When things aren’t going my way and I am feeling confused and disordered, quite possibly the cause of such troubles is that I have upset one of the trading gods.  In such a case, it is necessary to appease these gods by “sacrificing” one or more positions as atonement.

On Friday, in the midst of another crummy looking day, I did just that.

In my actual account I also liquidated Second Wave Petroleum.  I came within a hairs breadth of selling OceanaGold, Golden Minerals and Canaco as well, but I decided to stick with them (for now) because it just feels to me like gold is on the verge of a move up.  There may be a second leg to this sacrifice yet.

So what is this superstition all about?

Well on the one hand the sacrifice is about gods and reconciliation and bowing to the higher power.  You don’t mess with the supernatural.

On the other hand, there is a method to this seeming madness.

Let me tell it like this.  I was listening to Radiolab this week.  Help!   That was the title of the program.  The episode had a story about a young man who had “lost his life to a coin toss”.

What, you say?   Well that was what the reporter that overheard the remark said, and so he set out to track down the poor, life-less man that uttered those words and to find it how it was that a life could be lost by such chance.

As it turned out the young man managed a massage parlor.  It had been his fathers business and he had taken it over.  A number of months (maybe years) before his father had come to him and his brother and told them that one of them had to take over the business.  The father didn’t care which boy took it over, but it had to be one of them, and the boys had to figure out which one would be it for themselves.

Neither of the two brothers was very excited about the prospect.  After sitting on it for a few days, hanging over their heads, finally the one son couldn’t take it any more.  He proposed to his brother that they make a bet on who had the most tea leaves float to the top of their next cup of tea.  The one with the most tea leaves would walk away clean.   The loser would take the business.

Well the bet was made and the tea leave floated.  The brother who lost the bet was despondent at first, but he begrudgingly took his place.  He had to be dragged to the massage parlor for work by his father, and he had to be forced to work on his own father’s feet until he became proficient enough to work on the clients.  At first he hated it, but over time his attitude changed.  Soon he began to like the interaction with people, the sense of performing a service, he felt good about having happy clients with happy feet.  He began to relish his job, coming in weekends and working late nights.  He no longer regretted his decision.

Now here’s the interesting part.   When he was asked about the bet by the report, he replied that it was luck of the draw.  But his brother said something enitrely different.  His brother said he would have never have let that bet decide for him whether he would take over the business or not.  The bet wasn’t going to make the decision for him.

But not so for his brother.  He believed that the bet was never about him anyways, it was always about his brother.  His brother, he says, deep down wanted to manage the massage parlour.  He couldn’t admit to himself, and definitely couldn’t bring himself to admit it to his father.  The tea leaves helped him along, gave him the reason to do what he should do but did not want to come to grips with.

The reporter went back and confronted the brother now running the massage parlor with this theory. He didn’t deny it.  On the one hand he wouldn’t say that he set up the whole gig with the tea leaves just to have an excuse.  Of course not; he couldn’t say that.  But he also wouldn’t deny that the tea leaves had led him to act as he really wanted to act.  “I probably couldn’t have done it without the tea leaves, he says, but once the tea leaves had spoken then I had no other choice.”  The tea leaves made him do what he knew needed to be done.

And that’s why you make sacrifices to the trading gods.

Weekly Trades