“What do you call a stock that’s down 90%?
… A stock that was down 80% and then got cut in half.
– David Einhorn
Over the past month I’ve received some encouraging feedback from readers. Some have told me that they enjoyed receiving this letter, while others thanked me as they copied some of my trades and profited. I’m grateful and in return decided to make a major overhaul to the newsletter. I think you will enjoy the new format which includes some additional sections.
My commentary will be found here on the front page with my real money strategy performance on page 2. A review will be found on page 3. This review may be of a book I read, a website I saw, a newsletter I read or any other source which I believe may be helpful to my readers. Items of interest will be found on page 4 under “Check This Out!”. This page will obviously contain practically anything. The computer from the movie “2001 Space Odyssey” (IMDB link: http://goo.gl/tC6G ) inspired the title “Hal 9000 Investing” to the section on page 5. Here I will present a model or screen, and may also run the screen for your convenience. This does not mean that I recommend the output or that I have checked the integrity of the data. This will be up to you to investigate further should you so desire. Page 6 will have a contributor article or some type of similar article where a fellow practitioner(s) discuss almost any topic. In this issue my good friend and brilliant economist Richard Segal has provided a piece on Greece. The final section will list my trades for the past month.
After an excellent 2014, the portfolio continued to perform well in January with a -0.8% drop versus a -3.1% for the S&P 500. The best performers for the month included Alaska Air (up 14%), Apple (up 11%
since the early month purchase), and the short position in Keurig Green Mountain (GMCR) which dropped another 7% for a second month in a row. GMCR is the only short position in the portfolio at the moment but I expect that I will be adding additional shorts this year. GMCR is a good example of how selective shorts can help enhance returns even a bull market. The worst performers included ACCO (-12%), COF (-11% but is any bank stock doing well these days…), HPQ (-10%) and SANM (-10% which I added to on the exaggerated move down).
2015 started with another down month for January. This brought out the bears last year who quoted the January Barometer which predicted a down year. This year, not only do we have the January Barometer against us, but also
the “Super Bowl Market Predictor”. This states that if a team from the old American Football League wins (as the Patriots did on February 1st), the market will fall that year. And apparently it’s got an 81% success rate (http://goo.gl/t6NirD). On the other hand we are in the third year of a presidential cycle. This indicator would suggest that the market will close up. Now what does this mean for us? The truth? Nothing at all. It’s all history and play with numbers. Sure it’s fun to know and I enjoy following these predictors, but we don’t invest based on spurious correlations. We invest based on research, opportunity and risk.
Now please go back and read the opening quote from David Einhorn. So simple but yet ignored. Investors look at a market that is down and think it can’t fall any further. They try to bottom pick. This has been seen repeatedly in stocks but also in broader markets (eg. Europe, Greece, Emerging Market, etc) and asset classes (eg. bonds, commodities, currencies, etc). People feel comfortable with what they now and that is closer to home. This may work if you live in the U.S. and you decided to buy some shares in your health care provider that happens to be a multi-billion dollar market cap company in the S&P 500. But if you live in almost any other country then the result can be shocking. How do shareholders in Greece feel after the recent devastating drop? Or how about those bailed in banks in Cyprus that saw their shareholders wiped out? So my advice is to ignore the past and study the current situation and valuation. Furthermore risk is critical to evaluating the asset allocation. Just because you may feel strongly about an investment doesn’t mean you go all in with your portfolio. But it’s not just individuals who act recklessly, it’s also funds as some poor investors found out after the move in the Swiss franc wiped out $800m in investor money (see: http://goo.gl/OQZrLx)
Kipling had an article entitled 30 smart ways to invest $1,000 (see: http://goo.gl/TyFBKm). One example was to build a high yield ETF portfolio via buying the HYG, PFF, and VNQ. Personally, I have recommended to friends who want to start investing in a small way to look at some indexing choices. However, I would like to warn investors that they need to take note of the costs involved. For example, if you put on the Kipling trade and use a $9.99 broker then it will cost you almost 3% in commissions just to buy! Then you may incur annual account fees. For example, my broker charges $10 a month minus monthly commissions, which means that if you just buy and hold then you may end up with 12% in account fees a year with a $1,000 account! So the size of the portfolio is important. And it works both ways. If a fund is too big then due to size the investable universe shrinks. This means fewer opportunities and thus again lower returns. If feel that investing is exciting then be prepared for loses. This is serious stuff and “good investing” is a lot less fun than it looks on Bloomberg and CNBC.
Subscribe in order to receive the newsletter at the beginning of the month. Here it is posted with minimum one month delay. Click here to read entire letter.
