Double Journey

As I write, the Nasdaq is down 2% which makes the short position I took yesterday up 4%.  Not bad for a 1 day trade.  I will probably try and close out the position today and I might even take the exact opposite position and go long the market for the short term.  Why?  Did I suddenly become a bull?

No, I’m still negative on the market.  But I think at this point, it is good to reverse position for two reason.  First, the volatility of the market makes swings more likely.  I’m just trying to play the gyration of the market.  Downdrafts are followed by upswings because nobody knows which way the market should be moving.  Second, I think it is more likely that the Senate will pass the bailout plan tonight.  This should cause the market to move up sharply as soon as it happens.  I think the senate will do whatever it takes to pass the bill.  I think they feel pressure to do something.  The problem with this plan is that congress wants to pass something, so they look like they are doing their job. However nobody wants to vote for it because given the overwhelming sentiment against the bill.  So congressmen want it to pass,  they just don’t want to be voting for it.  Given the House voted it down, this will probably put additional pressure on the Senators to vote for it.

We will see.  Watching the markets closely right now trying to figure out when to close out my position and go the opposite direction.

I’m not sure about the logic that is being used by some that more regulation can fix the problems that regulation created in the first place.  As I posted earlier, many of the problems we are now facing can be traced back to policies our own government made.  Now there are proposals on the table which call for even more government action by changing banking requirements, allowing the government to buy different assets, and otherwise just mucking more with the system.  I just can’t wait to see the new proposals on the table that the guys in Congress will throw out when they reconvene on Thursday.

As a side note, I decided to put my money where my mouth is.  I actually haven’t made a trade in several months.  The market, with its current volatility, is a scary place.  That being said, I decided to try and make some money off of this.  The stock market had a huge run today, its biggest up day in several years.  Of course this followed the biggest down day so it kind of needs to be put in perspective.  At the very end of the day, I shorted the Nasdaq by buying QID.  I think this was a short term bounce and fully expect the market to reverse course again in relatively short order.  I’ll get out quickly if I think the market turns and limit my losses, but I definitely think we are heading down until the government does something stupid.

My prediction on the market turned out to be prophetic.  The Dow took a 500 point plunge today.  Considering the heavy selling at the end of the day, this pattern looks to continue in the morning.  How did we get into this mess?  We have just seen Lehman Brothers, a company over 150 years old, a company that survived the Great Depression, just declare Bankruptcy.  How does something like this even happen?

Leverage can be great.  In financial terms, leverage allows you to greatly magnify the effect of a given asset.  Leverage is what allows you to buy a home with a 20% down payment (not that anyone does that anymore).  You put down $2, the bank loans you $8, and you are able to buy a $10 house.   You just levered your $2 into $10.  Now imagine the house appreciates 40%.  The house is worth $14.  You still owe the bank just $8.  But you just got a $4 gain off of a $2 investment, a 200% gain on your initial investment!

Now lets work the story in reverse.  Imagine your house depreciates in value.  Something we have seen recently in the housing market.  Your house depreciates 40%.   The house is now worth $6.  However, you still owe the bank $8.  You don’t even have your initial $2 investment as you put it in the house.  You have an asset that is worth $6, but owe $8 on it.  If you are able to sell the house for $6, you would net lose $4.  You just turned $2 into -$4, a 200% loss on your investment!  However, unlike a house, the people who are loaning Lehman and other financial institutions money have a right to call in the loan at any point.  So now you are scrambling to find capital to pay off the loan.  You are selling assets to come up with the money.  But when you are a big player, your selling moves the market!  So you are causing the very thing you are selling to lose value!

Now multiply the above example by about $100 billion, and you have the problems we are facing now.   When things were going great, all these financial institutions attempted to turn their $2 billion into $14 billion.  They just didn’t see didn’t know what to do when the music stopped playing, and the chairs were all pulled.  The scary thing?  We are only in the 5th inning of a 9 inning game.

Before you freak out that I lost my job, I haven’t.  My company however did just have a round of layoffs.  I’ve been part of a company that was a slowly sinking ships and went through many rounds of layoffs, so this is no big deal for me.  In fact, I’m not at all worried about my own job or the financial health of the company.  Perhaps that just comes with having seen much worse happen.

It is funny how companies react to layoffs.  There are many concerns that companies go through.  One of the toughest is dealing with those left behind.   You have to deal both with survivor’s guilt and with survivors jumping ship.  Survivor’s guilt is the reaction of those who are left behind.  There is a natural tendency to be sad for those who didn’t make it but relieved that you were not affected.  This can actually have a singnificant psychological effect and hinder employees ability to work.

The second problem is a significant one.  People don’t like being part of sinking ships.  Those that are most talented, and thus the least you can afford to lose, tend to start looking around for another job.  Dealing with this situation is extremely tricky and I’m not sure if there is a right way to do it.  Most companies will try to get employees to focus on the positives and start talking about all the initiatives that will bring the company back to the growth curve.  However, this can often feel like a sell job and smart people really don’t like being “sold” to.

I believe the best way to handle this is to be short and breif.  Acklowledge the difficult situation, but then let each person deal with it in their own manner.  In these types of situation, there is often time a grasping for the right thing to say.  But therein lies the problem.  There really is no right thing to say.

Lucky for my company, I still have no plans to leave.  I actually don’t mind dealing with difficult situations like this.  Sure, there is greater risk that I might someday lose my job and the company goes under.  But with greater risk comes greater rewards.  It’s kind of like value investing.   The best time to get into a company is often when it is at it’s lowest point so long as there is not a structural problem.  In such a situation, the only direction is up, and if you can be part of that, the rewards can be good.  It’s probably one of the reasons I consider myself more a value investor than anything else.  It may also explain why I’m starting to think the market looks good in places given it has been so beat up in the last few weeks.

I’ve been out of the stock game a little longer than I have wanted to be due to competing priorities.  However, I’ve finally been able to put a lot of that under control and I am now looking around trying to figure out what I’m going to buy.  The hiatus I took was probably a good thing.  The market has been ugly for most investors.  Not only has it gone significantly down, but it is extremely volitile with up 2% days followed by down 3% days.  It’s almost impossible to buy something and not feel a little uneasy.

Given the fact that I need to warm back up, I’ve given a lot of thought to the type of investor I am and the type I want to be.   At it’s simplest level, most people probably fall into one of three categories.

1.  Index investor - This is the simplest type of investing and the one most appropriate for the majority of people.  The strategy is simple.  You don’t have time to figure out which stocks to buy, so you buy them all.  It used to be that the best way to do this was to buy an index mutual fund that tracked the market.  The best of these were from the Vanguard Group founded by the index investor guru, John Bogle.  You can now do this almost as easily through various ETFs like the SPY which track the market but work like stocks.
2. Growth Investor - This is the type of investing most people think about when they think about getting rich with stocks.  Can you find the next Wal-Mart,  Microsoft, or Starbucks before anyone else?  This is the category of stocks with the most explosive upside potential.  You can find stocks that have returned 100x or even 1000x for their investors.  If you find one of these, you can be set for life.  This is the investment strategy of such notables as T. Rowe Price and Phil Fisher.  However, there is a catch.  Growth stocks, for all their explosive upside, also have explosive downside.   Sooner or later, too many people pile into a stock.  Eventually, the bottom falls out, and it is a free fall for these stocks.  If you get in at the top and don’t get out fast enough, you are screwed.
3. Value Investor -  Who wouldn’t want to pay $0.20 for a $1 bill?  This is the philosophy behind value investing.  Sounds easy right?  It isn’t.  It is perhaps the hardest way to invest.  Why?  It’s against human nature.  Buy low and sell high sounds easy in practice, but when the stock is running in the opposite direction you want it to, human nature makes you do things that don’t make logical sense.  People like Warren Buffet make it look easy.  History has even shown that value investors outperform growth investors.  But its hard.  Take now for example.  Nobody wants to buy financials.  People are avoiding it like the plauge, and for good reason.  While they are beaten down, they can easily go further.  Worse, a lot of these companies will go to $0, wiping out your total investment.  But if you have the courage, and can find the right stock, the returns can be fantastic.

Now, I’ve liked to think of myself as a Value investor who occasionally looks for growth.  So far, my track record hasn’t been the best.  In any case, I’m probably going to do a little bit of all three.  I recognize now that I don’t spend the time I should pouring over the stocks like I should before I buy.  If I attempt to trade in this environment, I will get crushed, no doubt about that.  So for now, I’ll probably look to play some ETFs and try and play the market.  Market still has a ways to go down, I have no doubt about that.  But picking bottoms is very hard, so it might be best to just pick a buying point and go in.

I went to an all you can eat sushi place for dinner tonight.  I was determined to get my moneys worth so I ate and ate and ate.  All told I had about 10 pieces of sushi a Rainbow roll and a roll that consisted of a spicy tuna/shrimp roll topped with Salmon.  To give you perspective, my girlfriend, who normally probably eats as much as I do, had the same Spicy Tuna/Salmon roll and was quite full.

I seriously don’t remember ever filling so full as I did at the end of that meal.  I was full to the point of feeling a little nauseous.  It’s odd how people try to maximize something even to the point of their own detriment.  There was actually very little point in me to continue to eat.  The amount I was going to pay for the dinner was a sunk cost, there was no way my eating was going to affect the final price I paid.  I probably would have enjoyed myself even more if I had stopped two pieces of sushi earlier, but my consumer instinct told me to have that one last piece just to make sure that I got a good deal.

It was a completely irrational act but I did it anyway, and I’m sure I will do it again.  We all do.  Humans obsess over things that in reality have no bearing on the future.  The stock market is actually a pretty good example.  So is housing at the moment.  I held on to my e-trade stock, as well as a few others, WAY longer than I should have because I was so under my cost basis.  It was dumb.  My cost basis really had nothing to do with what the stock was going to do in the future, but for some reason, I kept thinking about it and refused to sell it when I should have.  It literally was a mistake that cost me a few thousand dollars.

Much like I figured it would, the market reversed sharply. At the beginning of the day, stocks started higher, but eventually fear took over greed and stocks plummeted.  Much of it can be attributed to the exact opposite reason that stocks went up.  There was hope that the financial sector had seen the worse of it.  This move down shows that the fear still exist that the worse is not over.

However, there was one bright spot.  Visa had its IPO and it was up about 28% from the open.  Now the good thing about Visa is that its market is actually growing and some would argue that it is almost recession proof.  You see, Visa makes money on its transaction fees.  It owns the largest credit card network in the world and makes money each time one of its cards are swiped.

Its actually a fantastic business model.  If you are like me you can appreciate it because you pay for everything with credit cards, even the little transactions.  What’s even better is that they actually don’t have liability for consumers who don’t pay their bills, that is the responsibility of the issuing bank.

So do I think its a buy?  Maybe.  Mastercard has quadrupled since its IPO, and Visa is the better company.  I still think its kind of dicey right now to be playing in the market, but if you want a good risk in a time when nothing really looks very good, Visa may be it.

Stocks had a better day than I expected.  The Dow was actually up while the Nasdaq came off its lows of the day.  This is probably in reaction to what is perceived to be a sure thing, the Fed cutting the rate very deeply.  Most are predicting a 0.75% cut.  Some even believe the Fed will cut as much as 1%.

But it is my belief that this is too little too late.  I really don’t think it matters what the Fed does at this point.  The Fed Funds rate is a blunt instrument and the economy is way to far in its downward trajectory for something like this to rescue things.

While I think the market will continue to go down, it is about the time you need to create a shopping list and start thinking hard about the companies you want to own 5 or 10 years from now.  My shopping list needs to be updated but I still think its a good list.  Actually, if you take a look at the list, all my stocks are doing well comparatively to where the market was at the time.  Some of them are doing great like Potash.

Google Closed yesterday at $486.44.  This represents a 4% drop from the previous close.  This despite the fact that the rest of the market saw a strong day with an up 1% day on the Nasdaq and a 1.5% up day on the Dow.

I’ve actually been looking for an in to Google stock since it originally broke and stayed above the $500 barrier in Jun of 2007.  It broke it a few times before that but could not sustain itself.  in August of 2007, it took a brief dip below $500 but recovered soon thereafter.

Now it has gone under $500, and I believe that will be a strong resistance point from now on.  If it can rally in the next few days and find a way above it, then perhaps it will stay there, but in all likelihood it will stay below.  It is never good when a stock like this, which has been a leader for so long, goes in a tailspin down.  Part of it up until now could be blamed on the overall market.  But when the market turns, and a stock like this doesn’t turn with it, you have to be concerned.

I don’t think it has much to go down from here, but I still don’t think its a buy.  Long term, I believe Google is probably a good buy,especially at a 30P/E.  Short term, $450 is possible, and perhaps lower.

Berkshire Hathaway disclosed a very large stake in Kraft yesterday. They are the largest shareholder and own a little under 9% of the cheese maker. I like this pick up because I too own Kraft. In fact it is one of the few stocks I do own. I have kept most of attention in the consumer staple area as I have believed for a long time that we were heading into a recession, and consumer staples will do well in this environment. In addition, I thought that a lot of value would be unlocked as soon as it split up from Altria.

I told someone else this and I will say it here too. Berkshire here is a good buy if you can hold on for several years. Stocks are getting cheap and Buffet is going to be like a kid in the Candy store. He is going to pick up some names that seem crazy in this environment, but his craziness has made him the second richest man in the world.