PORTFOLIO UPDATE: THE 3 LEAKS OF THE SUBLIMINALLY BLIND
During the trading day today, I tweeted the following: Back to the default stance of 75% invested with 25% in cash. This is a default allocation, so to speak, for my strategy. I'm comfortable with it, actually. It helps with cushioning volatility in what is otherwise a volatile sector: small/micro-cap companies. It is interesting that in bull markets the aura of prosperity seems to blind the lessons of time. I can promise you that a vast majority of those who are making money in this environment will not be able to maintain that success over the next 2, 3, 5 or 8 years. It is the nature of the beast. The markets cannot cater to a majority of participants making money most of the time. For that reason, an investor must be conscious of the leaks that cause those around them to bleed equity at a much faster rate than they can create it. The leaks that plague investors across all categories are too many to mention. I will make note of three that immediately come to mind: 1. Love: Investors love to fall in love with shit. I don't mean shit in terms of investments that seem wonderful but turn out to have putrid underpinnings. I mean shit in the blanket sense of the word. It is as if investors view the market as an extension of their lives instead of an arena where capital is constantly shifting. The markets are not the place to make up for your mommy, girlfriend or mistress issues by becoming starry eyed in the face of abuse. The only thing you should fall in love with as an investor is your equity curve. The moment it starts suffering, you had better make that relationship right. 2. Confidence: We are all terrible at investing. To date, those of us who are positive on the year are simply lucky. You are a footstep away from disaster. Enter the markets each and every day with these thoughts and I promise you that prosperity will follow. Confidence in your ability to profit consistently leads to a slippery slope of mistakes that will not be corrected because your confidence doesn't allow for adjustments to take place. I'm not saying that investors should be a shivering, scared, pale bunch that jumps at every shadow that shows up in the marketplace. I'm just saying that questioning yourself often can make the difference between remaining in the game long-term or just being a flash in the pan. The delicate balance between questioning and being an overly-emotional debutante can only with time...lots of it. 3. Activity: Having the need to act...
AN UPDATE ON THE DIRTY SOX
There is a certain value that comes from being old school. It is your choosing whether you utilize that wisdom to be that crooked old man who has memorized every episode of Bonanza or if you use it for more noble causes, such as practicing prudent and patient methods in speculation. I'm from the old school. I believe in the power of pagers. I like reruns of ALF. I often wonder what happened to guys like Special ED and Kwame. Rewinding VHS tapes before you took them back was a lesson in courtesy and sometimes, patience. Ricky Shroder is still cool. And Kirk Cameron is kinda creepy now. Along those lines, there are certain old school market indicators that are worth their weight in gold. One of those is the SOX. I went over the SOX in detail on July 29th, in a post titled: Is The SOX Foretelling A Major Correction In The Months Ahead? Now is a good time to bring up the SOX because it is on the verge of violating a technical point that is as important as any. Since 2010, a break below this point has occurred three separate times. In each case, the market went into a multi-month sloppy, corrective phase that was best avoided. Three times does not a statistic make...I know. However, given the other negative technical events that are taking place, this certainly bears watching. The first chart shows the failure of the technical point and what is has led to in the past. This the same chart posted in the July 29th posting: The next chart shows the SOX at present. We are awfully close here. Important see how we end the...
4 CHARTS THAT WILL ALLOW YOU TO KEEP YOUR POISE DURING THE WEEK AHEAD
click chart to enlarge
THE FUNDAMENTAL THEOREM OF INVESTING
Those of you who have been reading my stuff for a long time know that I am a big fan of poker theory. I enjoy reading blog posts into poker theory by the top pros into the game. Their thinking into approaching risk and properly assessing countless situations involving imperfect information is the most valuable contribution an investor or trader can make to their repertoire. Forget all of the useless blog posts that 99% of the "popular" bloggers or pundits are putting out currently. They are largely built on feeding popular perceptions in order to retain readership: Bill Ackman is bad, I will write a blog post about Bill Ackman being bad; Facebook is a terrible investment, I will write a post about Facebook being terrible; Facebook is a good investment, I will write a blog post about how great Facebook has become; Tesla is a great company, I will write about how great Tesla has become even though I never mentioned it while it was sitting at 30. Popular perceptions won't give you an edge, they only take you one step closer to being a pasture animal waiting for the abattoir (credit Miles in one of my favorite movies: Sideways). However, looking into the mind of a professional who is faced with literally hundreds of decisions daily involving: Calculating odds, mathematical expectations, deception, game theory, inducing, analysis of opponents, changing pace and texture of play....that is valuable. That can be a game changer for any trader or investor. Grasping onto these methods naturally, making them into a consistent part of your overall investment game will take any trader or investor from good to great. The Theory Of Poker by David Sklansky is a great place to start. In the book Sklansky introduces the fundamental theorem of poker. Wikipedia describes it as follows: The fundamental theorem of poker is a principle first articulated by David Sklansky that he believes expresses the essential nature of poker as a game of decision-making in the face of incomplete information. “ Every time you play a hand differently from the way you would have played it if you could see all your opponents' cards, they gain; and every time you play your hand the same way you would have played it if you could see all their cards, they lose. Conversely, every time opponents play their hands differently from the way they would have if they could see all your cards, you gain; and every time they play their hands the same way they would have played if they could see all your cards, you lose. ” The fundamental theorem is stated in common language, but its formulation is...
WHY IT IS KIND OF TIME TO BE KIND OF CAUTIOUS…KIND OF
I feel compelled to qualify any seemingly bearish titles with cushions of preordained defeat, such as phrases like "kind of." This is a legitimate means of dealing with the psychological ramifications of a market that has been as one sided as any we have ever seen. Surely, this must be a sign that bullish sentiment has hit a crescendo, you may calmly be muttering to yourself. It actually may have this time. I would caution, however, that I believe strongly in weekly closes being a much more powerful signal than anything on a daily basis. I am curious to see how the market closes this week. Continued weakness, persisting into the close on Friday, will certainly bolster the bearish case for the markets into the end of August. Here are some of the reasons I am worried as a participant who is sitting on a good amount of net long exposure: - Financials (BKX) are comfortably residing below a key technical point that has marked a slowing of the bull trend twice before this year: April and June. I'll illustrate this coming weekend. - The Nasdaq seems to be in the mood to make just a slightly lower high here. An acceleration/range expansion to the downside from this point is highly negative for the Nasdaq into September. - Dow Transports - a leader during this entire bull market - have suddenly started to look precarious in both their technical pattern and the volume that is accompanying the technical pattern - The Dow is in the process of violating a fairly significant short to intermediate term technical point. Again, watch for the weekly close here. - Market leaders such as GOOG are starting to display accelerating downside momentum - Commodities are starting to get way too perky. Copper as a recent example. Crude oil, of course, as well. Precious metals are also starting show some resilience. We haven't experienced this throughout 2013. A change in the macro landscape of this nature is always something to pay attention to. - The biggest concern perhaps is with the SOX. It is getting daringly close to a key technical point that has led to some pretty harrowing market action in the past. I covered the ramifications of a break of this technical point recently here. Let me clear with the following: In a bull market of this caliber, signs such as the aforementioned are not a reason to get short, move to 100% cash or begin reading ZeroHedge again. Systematic, deliberate and calculated modification of risk is all that needs to take place. As an example, if you are leveraged here and the...
PORTFOLIO UPDATE: WHAT WOULD YOU DO IF I SANG OUT OF TUNE?
During the trading day Thursday, I posted the following: First, you will have to excuse my propensity for absence as of late. I have been busier than usual with spreading my gospel of uncorrelated, risk-adjusted market returns utilizing a small-cap strategy layered on top of a tactical asset allocation method in order to control risk. This involves more meetings and travel than I am regularly used to. I prefer a secluded life, frankly, that involves snarling at my children when they make me angry and scolding my wife when she cuts my apples too thin. The markets, while being gracious in their demeanor towards all those who sing its praises, have become somewhat monotonous in nature. This monotony makes for difficult story telling or blogging, if you prefer. We are in the midst of an uptrend, within an uptrend, within an uptrend. This type of one-sided market movement is an intellectual market observers worst enemy due to the fact that any seemingly wise analysis is rendered useless upon arrival. That is not to say that those who are long the market are moronic by any stretch of the imagination. It is just to say that being an intellectual on Wall Street is about as overrated as cupcakes. Its a piece of cake cut into a small circle. There is nothing cute about it. The idea of this ultra-smart, number crunching machine analyzing spreadsheets and making sophisticated business decisions is part of the image. It doesn't stand up to reality. The reality of it is that the ones who have longevity in this industry possess vision, discipline and an edge that sets them apart from the stampeding, drooling and robotic herd. The same herd that things trading for a few points here and there is going to drive their net worth into the stratosphere. The same herd that believes diversification is a method of risk control. The same herd that thinks applying stale ratios of value to an emerging technology sector will tell them whether a company is a long or a short. Let's get back to the subject at hand: I am now up to a 100% invested as a result of putting back on a small position in IWSY. I have also added to SPNS over the past couple of weeks. There is a nice performance cushion in place for this month as well as a cushion for the year that is allowing me to take on a little more risk than I usually would. I am a big believer in leveraging gains to create more gains when you have them. That is how big years are built....
JULY PERFORMANCE SUMMARY AND LOOKING AHEAD TO AUGUST
*This is an excerpt of my monthly letter to investors summarizing the month of July. The full PDF version of the summary, including managed account performance data as well as a few added components is only available via email. Return data will no longer be published as a part of the summary posted to Zenpenny. If you would like to be added to the monthly email list, please contact me at mail@t11capital.com Portfolio Highlights For July: As detailed in last month's summary, HMPR was increased from a mid-sized position to a large position in June, as continued improvements in the balance sheets of regional banking companies (HMPR included) had been greeted by a minimal amount of appreciation in the shares of the company.A relatively substantial appreciation took place in HMPR during July that saw the shares appreciate from a low of 1.22 on July 1st to a high point of 1.86, before settling in the 1.70 range to end July. There were no fundamental developments during the month to spur such an increase in price. The sudden strength in shares of HMPR can be attributed to several things: Overall strength in the financial sector A recognition that regional banks are faring much better along the path to recovery than anyone thought possible just 4 years after financial Armageddon HMPR, specifically, has returned to profitability in their recent quarter for the first time in years. Additionally, their net charge offs and non-performing assets have returned to pre-crisis levels. The market has been somewhat slow in recognizing the recovery in a lot of the smaller regional banks. This is much to the joy of company insiders who have been extremely comfortable with picking up shares for themselves repeatedly throughout 2013. HMPR has not seen any insider buying to date. However, I would be surprised if that doesn't change by the end of 2013. WMIH is another financial sector holding that performed well during the month of July, appreciating 12.5% during the month. WMIH remains a large position in the portfolios since it was initiated in July of 2012. During that time, WMIH has announced no relevant news to justify the 80% appreciation in the share price. It should be noted, however, that there wasn't any relevant news to justify the companies assets selling for approximately $25 million when you strip away the cash at the 2012 lows either. The stock has simply been moving in a range that has reflected the mood of the market and the mood of its shareholders, at any given time. The mood of the markets, as we are all witnessing, has been rather jolly as of late....