THE STRATEGY OF NOT CARING
Much like anything else in finance, every tool for investment whether fundamental, technical or emotional has its uses and a season for that use. Fear is not always a terrible trait. It could have saved investors greatly in 2007 - 2008. Greed is not terrible either. I know many greedy investors who have done extremely well in the markets. There are no Ten Commandments for success in finance. It makes for a good title to sell books to the hopeful (another trait that can be used sparingly), but the fact of the matter is that the fluidity that is investing will never allow single point of fundamental, technical or emotional success to have an uninterrupted, peaceful existence. Caring is an endearing trait that is celebrated for good reason. That is perhaps why so many individuals will bring the act of caring into perpetuity with them to the realm of investing. It simply doesn't transfer. Investing when approached properly is a simple game of making decisions that have a positive expected value over the long-term. The only way to gain knowledge as to what constitutes positive expected value is through experience. Those who are consistently successful in the markets after 10, 15 or 20 years, have naturally found a path towards decisions that have a positive expected value, whether they realize it or not. Most will chalk it up to dozens of different skills they have gathered. But the essence of what they are doing is good decision making on a consistent basis. The problem with consistently caring, as so many individuals believe it is their duty to do, is that it leads to various peripheral evils that will eventually all gather together like a Chinese sandstorm, collapsing an investors ability to make decisions that have a positive expected value. Those peripheral evils primarily have to do with over-thinking situations that require no thinking at all. When you strip away everything and I mean EVERYTHING from the markets, the situations that an investor faces become abundantly clear. What investors so often fail to realize is that 95% of the price movement that is witnessed on a yearly basis does not require judgement of any sort. It simply IS. This means that out of the 250 or so trading days that we experience each year only 12 of those days (keep in mind, I am talking about investors, not traders here) require our effort or judgement. The rest of time the markets are simply filling space through random movements that are meant for those who care in perpetuity, which is the vast majority. After all, entire companies have been built on the...
HERE ARE THE ONLY TWO CHARTS YOU WILL NEED FOR THE REST OF APRIL
Simplification of seemingly complex situations in the markets is key to longevity in this business. If a situation cannot be simplified to the point of being explained on the back of a paper napkin then it is likely an endeavor of ego, pride or false hope. In any case, the situation being constructed or deconstructed will have a negative expected value right from the onset. In the spirit of simplicity being the basis of proficient market analysis, I present to you the only two charts you will need for the rest of April. Here is the Nasdaq Composite followed by the Nasdaq 100. Behold: click chart to enlarge...
WHAT THE IPO MARKET AND PHASE 4 STOCKS ARE REALLY TELLING INVESTORS ABOUT A MARKET TOP
What follows is the "Looking Ahead" section of my monthly report to investors to be released in the coming days. There are enough misconceptions, misinformation and downright naive analysis floating around about an impending top or potential bubble forming that I felt this deserved to be separated out on its own. Being that gauging short, intermediate and especially long-term tops has become an obsession among the most recent generation of market participants, it is worthwhile to occasionally divert attention away from the micro and look at this secular bull market from a reasonable, measured perspective. This perspective relies heavily on lessons learned from secular bull markets of the past, with a special focus placed on the secular bull of the 90s. Why the 90s? It was the last innovation led rally that was guided greatly by technology, with an emphasis on new and emerging companies revolutionizing the way we communicate personally and professionally. It was a rally that was misunderstood, doubted and criticized nearly the entire way up. It was a rally that was resilient through numerous seemingly disastrous macro events. It was a rally that was also resilient through consistent and persistent overvaluation. The bull market of the 90s was born from two distinct negative events that influenced psychology (and monetary policy, for that matter) greatly. The 1987 crash effectively ended the secular bull market that started in 1982. The psychology of the investor class was further damaged by the recession of the early 90s that was exacerbated by events such as the Gulf War, rising oil prices, high unemployment and substantial deficits. These condemnatory events separated only by a few years resulted in a dramatic shift in investor psychology from what was the pervasive bullish sentiment of the mid-80s. This foundation of skepticism and fear provided the perfect foundation for what would be a historic rally throughout the 90s, taking the S&P 500 up some 300% during that decade. What has occurred from 2000-2012, effectively set the stage for what we are experiencing now. There is no possibility of a substantial secular bull market being born from a point of outright optimism. Secular bull markets are born from the defeated psychology of investors who have little hope or desire of creating anything substantial out of the financial markets. Instead they have come to focus on cash preservation and alternative asset classes that are driven by the desperation of the avoidance of further financial pain. Due diligence becomes a choice phrase. Risk aversion becomes a wise choice. There is no deviating from this path until the reality of a bull market becomes so cemented in the investors mind...
SIMPLIFICATION TO THE NTH DEGREE
Some changes in the portfolios to be reported in the days and weeks ahead. I've been adding brand new holdings. Getting rid of some other stuff, such as the small position in CIDM I sold today. I've felt the need to refocus here recently. There are some names that I am simply invested in because I have become comfortable using them as a trading tool. This strategy is fine when the market lacks depth in opportunity. However, rather suddenly, I have discovered a handful of names that possess extremely attractive risk profiles paired with appreciation potential in excess of 300%. Undiscovered, misunderstood, in the dirt names that have no coverage or interest. The types of names that investors either cannot find or have no interest in finding due to the various biases ingrained within their souls. Those who tell you this market lacks opportunity, do not know where to look. Those who tell you this market is overvalued are obscenely naive and misguided. Those who tell you this market is fraught with risk are victims of the psychological conditioning brought by the conflagration of the markets from 2000-2011. Those who can't embrace what is occurring will not do so until the final stages of the bull market when pain of missing any further opportunity of gains overwhelms their trepidation. No, we are not there yet. Not even close, in fact. Is there such a thing as oversimplification of facts in an environment where facts flow loosely, taking all shapes and sizes? There is not. The essence of the markets boils down to the prevailing trend that is dominating the market, at the moment. The core of that trend lies in a few places such as the semiconductor index, transports and financials. The engine of the trend is in the names that seem the most overvalued and over-hyped. In these places you will find the facts. I should say, in these places you will find simplified facts. These are facts that have been boiled down until all that is left are the minerals that make up their essence. Everything else is an additive. An additive that is predetermined through pseudo-intellectualism. Pretend know it alls that possess a flare for the useless and a pizzazz for the appearance of relevance. They should be ignored at all costs. Simplification to the nth degree. I'll have nothing more and nothing less. SOX hit a new high today on a shining range expansion. Does it get any more simple? ...
SERENITY AND MARKET TOPS
I don't try to catch tops. I don't trade often. I don't care about the news. I don't take stock tips. I don't talk to the small companies that I am invested in. I don't have analysts. I don't read Wall Street research. I don't come up with new ideas often. What I do is rather boring in nature compared to the classic image anyone may have in mind for an investor. If you find excitement on a daily basis in the markets odds are that you have either not been doing this a very long time or are going about it the wrong way, which means you won't be doing it for much longer. In either case, it is a sign of being a greenhorn. There are moments of excitement, of course. Times when a company I am invested in makes an announcement that solidifies my thesis. Or when I discover an opportunity for the first time and the hairs on the back of my neck literally stand up. That excitement, however, is based on validation of my work as opposed to fluctuation in capital. That is what separates the boys from the men in this poker room. March has been one of the least active months I have had in the markets for sometime. This lack of activity is inversely correlated to the powerful gains the portfolios have experienced during the month. You see, when a portfolio of stocks is functioning properly, the only thing an investor should do is observe from a distance. His hand should be far away from the buy or sell trigger as rhythm in the markets is as valuable an asset as anything. It takes only one reckless act to disrupt an otherwise harmonious portfolio of investments. The harmony I am experiencing here is reflected in the results. I don't have an opinion regarding any market top because I know that nobody can predict them in a powerful bull market. The only opinion I have is regarding the progress of the companies in the portfolios. As long as they are performing well in terms of price that is backed up by growth in the fundamentals and execution by management then who am I to stand in the way? There will come risk/reward setups that favor one investment over another. I don't mind rotating into companies I am familiar with that seem poised to do better than other companies I am familiar with. A recent example being when I recently reduced CIDM to a small position in February in favor of getting into IWSY and SPNS. A reflection of my never ending quest to...
ARE YOU NATURALLY A SELL OUT? JOIN A HEDGE FUND
The hedge fund industry is a failure. An outright embarrassment to every speculator who has ever looked into the eyes of the market with lust and want. An abomination by any stretch of imagination that has contributed greatly to the continued mistrust of Wall Street despite record highs in the major indices. What is at the core this failure? How is it that a group of supposedly gifted, talented, well heeled individuals haven't been able to beat their respective benchmark over a three, five or ten year period? Surely there must be an explanation besides the typical excuse of misallocation, misunderstanding of macro conditions and misuse of client assets. I want the essence of this pile of shit dissected and place in front of me as if it was a plate of Fettucini Alfredo at The Olive Garden. The truth of the debacle that is the modern day hedge fund can be explained by looking at what they have become. Or rather, let us look at what they are not. Hedge funds are no longer places where the most talented traders, investors or analysts go. They are not the cut throat shops that bred the legend of Soros, Robertson, Kovner or Tudor Jones. They are not beacons of independent analysis that point out the extraordinary while leaving the mundane to die. The modern day hedge fund is no more than a glorified frat house, where individuals of "esteemed pedigree" carry on in a psuedo-business environment, making pseudo-intellectual decisions that create pseudo-results. The vicious cycle of mediocrity they have fallen into is a direct result of the farm system that they access to find talent. There is no originality to be found. Only stale forms of overly-analytical thought that are streamlined away from dynamic forms of analysis that can actually cement relative outperformance. They all think the same way. They all behave the same way. They all react the same way. They all pile into the same investments. The passion for investing that creates greatness does not exist. Only the passion to collect their 1/20. And that 20 is derived from closet indexing rather any relative outperformance, in most cases. Perhaps an easier way to convey my message would simply be to say that hedge funds have sold out. I don't mean in the traditional sense, but rather the Chuck D from Public Enemy sense of sell out. The hedge fund industry has been taken over by punks. Individuals who have gone straight corporate without regard for the art form that should be investing. How much was the average hedge fund up for 2013? 9.21% How much was the average hedge...
PORTFOLIO UPDATE: BLACK CATS
During the trading day Friday, I tweeted the following: After listening to CIDM's conference call and reviewing their earnings report, I can't say I was disappointed with anything that company had to say. The quarter can best be described as positively transitional, with the sum of all their parts being moved into place in order to create the company that CIDM will turn out to be 24-36 months down the road. In the meantime, however, my focus is on performance. CIDM did constitute roughly 30% of overall portfolio exposure before I sold half of the position. With the reaction to the earnings report, I couldn't perceive a clear outcome for the stock over the next few months. Given that reality, the prudent decision became the best decision. Trimming exposure down to a roughly 15% position overall will allow me to judge the circumstances evenly as they evolve over the intermediate term. I could add back in. I could reduce the position further. I'll simply take it as it comes. I have no love for any of my positions. The only thing I am in love with is the consistency of my performance. Anything that has the potential to interrupt that love affair gets kicked out of the house. And that is how I differ from the typical special situations, value, restructuring guy. I'm not willing to put up with the inordinately large drawdowns over any timescale. I've weighed the expected value (EV) of this decision as it pertains to long-term performance very carefully. The plain and simple of it is as follows: A drawdown in excess of 30% has a far more detrimental influence on a) long-term performance b) confidence of client base than any positive outcome of sitting through disturbances that your typical special situations, value manager would be open to doing. To borrow loosely from Paul Tudor Jones, given that I run a smaller asset base I have the luxury of being that fast boat on a choppy sea as opposed to being the large tanker that is immobile and clumsy in nature. I'm going to take advantage of that until I absolutely can no longer do so. Additionally, I don't think there is another special situations investor out there who has as good an understanding of the tape/price action/technical analysis as I do. With that said, I'm going to play into that strength with both entry points and exits. I have no need to sit still, allowing the market to have its way with me while proclaiming that "price and volume mean nothing over the long-term." Being proactive in studying price and volume as a complimentary function...
THE CIRCUS THAT WILL BE 2014 IS JUST WARMING UP
If 2014 will teach traders and investors anything, it will be that reading too much into any market move is a dangerous, wasteful way to make a living. That is because this seems to be a market that is setting up to be as deceptive as possible. It did it from the very beginning, when it refused to stick by a very dignified ally in January. Instead, it made this friend look like a silly, obnoxious turd. An act of utter defiance in the face of pleasant circumstances. This recent rally exhibits the point perfectly. The rally we are experiencing caught investors off guard after what looked like dismal circumstances to begin the year. It has gone beyond any point of reasonable retracement, with important indices like the SOX hitting new highs, while the bears have been taken for another ride. Given the modus operandi this year, the current rally should be trusted about as much as the dip the preceded it. Both are lies. Both should be looked upon with skepticism. And both tell you nothing about the market except for the fact that it is unpredictable. This is the market we are operating in, however. And I have a distinct feeling that a majority of 2014 will serve the purposes of unpredictable behavior and random movements. With that said, the importance of stock picking should be at the forefront of the investors' mind. This is followed closely by the practice of taking a minimalist stance towards general market analysis. A market environment of this nature will benefit two types of investors: 1. Those who know how to pick the right stocks and are willing to hold onto those names, realizing that winners are now more difficult to come by than previous years 2. Those investors who have the common mental decency to realize that even the best short-term market analysis can, in certain circumstances, be rendered completely limp. In essence, investors who stick to the right stocks without over-thinking the general market will excel. Investors who bounce around the market, attempting to analyze each step the market takes will suffer. It will become exceedingly deceptive as the seasonal tendencies give way to the black hole that is March-May trading. Along that path, will come correlation studies that will call for market crashes. Sentiment studies that will call for smashing rallies. Technical indicators that warn of tremendous volatility. A potpourri of ravenous circus performers begging for investors' attention. Tread lightly. Tread smartly. ...
THE VERY SERIOUS RAMIFICATIONS OF A NEGATIVE JANUARY
The recent market action has put some salt in my game. Not because I am some hardcore bull that can't see outside of my own market thesis. And it's not because of the fact that putting together a profit in January has become a difficult exercise. Rather, it has to do with the ramifications of a negative January for the market as a whole. You should know first that I'm not attached to any single piece of analysis that I put out there. I am convinced of my analysis to the point where I am willing to take on large positions for long periods of time. But I am not attached. There is a difference. Attachment creates judgement flaws that are emotional in nature. Conviction creates judgement flaws that are intellectual in nature. Intellectual judgement flaws that come with conviction can be corrected through new sets of data. Emotional judgement flaws that come with attachment cannot because the data cannot be separated correctly due to its emotional nature. It becomes a cloudy mess. With that said, I can change my mind and often will on a dime when new sets of data become apparent. Bringing me to this January's market action. January rallies following a strong year of gains are like the egg white and the yolk. They just work well together. One does not exist without the other. Therefore, when I crack the egg open and see that the all I have are the egg whites, I begin to worry that the whole carton of eggs may be wrong. That is what has happened here in January. Something that was supposed to happen, with every conceivable type of wind at its back to insure that it would happen, simply didn't. Not there. Absent. That absence is a cause for worry. I will present the statistical data to back this up in my monthly summary next week. In the research I have done so far, however, into the ramifications of a negative January following a strong year, it has led me to believe that 2014 could be more volatile, frustrating and potentially negative than most are prepared to deal with. We are certainly not on track for a 2000 type bear market or worse yet, a 2008 type bear market. Not by any stretch will things get to that level of pessimistic disregard for equities. However, we could very well glide within a range of flat to down 10 percent for most of the year. Nobody predicted that type of outcome for 2014. It now needs to be on the radar of every trader and investor, as the probability...
AN EYE ON GOLD
Being a contrarian by nature, I am drawn into opportunities that the rest of the market dismisses as either nonsensical or passe in nature. It is not good enough that I dwell among the heathens that derive pleasure from buying small companies, ignored as they are. My pleasure comes from a deeper scale of travels into the world of restructured, hated, convoluted, distressed and misunderstood companies. Stuff that not only is passed over by the Wall Street community, but dismissed as being of plebian descent, lacking class and structure of any sort. This character trait that has made its way into my investment philosophy also translates into more macro opinions. For example, during Q4 of 2013 I started glancing over gold names and actually found them appealing. Not because I know anything about gold mining companies, gold as commodity or the commodity markets in general. But rather due to the fact that gold is getting to the point of inflicting pain to the point where there must be an opportunity in our midst. So I started looking at separate gold mining companies. Just looking, mind you. And actually found some candidates that seemed semi-appealing from a risk/reward standpoint. The problem for me is that my macro calls are notoriously and consistently early. They always have been. More than 10 years go I used to pile into positions based on my macro opinions, suffering some extraordinary volatility in the portfolios I managed at the time, as a result. The opinions would turn out to be correct, but the path in getting to the point of profitability was filled with too many potholes, in hindsight. It was actually during the 2000-2002 that I became extraordinarily bullish on gold. I remember gold was so hated at the time that Jim Cramer kicked Don Luskin off TheStreet.com just for saying that gold stocks were a good investment. That was when gold was trading for about $300 per ounce. It turned out that Don Luskin was correct and Jim Cramer is now a popular Wall Street caricature. My mentality in the early 2000s was much different than it is now. I couldn't hold onto investments for years at a time waiting for my scenario to play out. My allocation model wasn't refined. I didn't make nearly the level of returns I should have during that gold run. It reminds me of one of my favorite market quotes: "It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find...