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What did you learn from the Crash and rebound?


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Well for me the crash and rebound brought home Munger's point:

 

Experience tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical thing, will often dramatically improve the financial results of that lifetime. A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables. And then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available as a result of prudence and patience in the past.

 

I am way, way more selective now about what I buy and keep plenty of "dry powder" available for when I get greedy!  (I also learned yet again how much smarter Buffett is than I am.  I went into the Wells' preferred and he was in the common. I still like my coupon though. And I am happy with my buying process on the preferreds.  The outcome was great--and not as important as the process anyway--and I don't need to feel humble and compare myself to the great one! I am happy to have survived the episode.)

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What did you learn from the Crash and rebound?

 

Have the right mentors, otherwise one mistake can wipe out years and years of success.  I'm eternally grateful that I have the likes of Prem & Francis as my mentors.  Not only are they great businessmen and investors, but they are exceptional human beings.  It certainly helped form the correct framework (both intellectually and culturally) when Alnesh and I started our own firm.  There is no other way we will now behave for the rest of our lives after experiencing this period.  Cheers!

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What did you learn from the Crash and rebound?

 

I learned how much I love investing when price are deeply depressed.

I learned I can handle a portfolio value decrease pretty well.

I learned the power of cash.

 

BTW, I never knew what value investing was before the crash I was investing in Index Funds and that's all. The crash deeply sparked my interest for real value.

 

BeerBaron

 

 

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I learned that a value investor with a desire to justify a valuation as cheap can easily delude himself, only to find out that the definition of cheap was not nearly conservative enough. If you combine that with margin, it gets even worse. So I guess the biggest lesson is that overconfidence is a very hard bias to overcome.

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I learned that "luck" exists, sometimes in abundance.

 

I learned that it would be interesting to learn if board members align themselves more with value investing in line with the true mindset concerning deep discount investing?

I know I have. I'm quickly becomming a proponent of KISS! (Keep It Simple Stupid)

I have totally liquidated my registered and non-registered accounts and until a fat pitch comes along will remain this way. Intuitively I know it will be more profitable, even though I'm up approx. 50% since 2008Jan01.

I have learned that what I thought was a good discount really isn't.

I actually find this kind of liberating.

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The investing game is diabolical :) Even if the best buying margins are in a big financial crisis, that crisis may come around once in fifty years or not at all. Many people have this belief that 2008 was predictable and bound to happen - but that is an incredible dose of hindsight bias. The crisis, hard as it may be to believe, may not have happened and prices and asset values may have stayed at those levels forever or much longer anyway. So even if we believe the best values are in such a crisis, we may end up holding cash for decades? Somehow there has to be a balance between the two. It almost seems to me one should expect to just go through these events either partially or fully invested and almost expect never to have a cost basis at the exact bottom, which is impossible.

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Interesting topic as I have been thinking about what has happened in the markets and the decisions that I made.

 

Bottom line is I am not sure, yet, what the lessons are. I think we are still in the middle of this thing with more surprises to come.

 

here are a few thoughts:

1.) Don't lose what you got. I have been very skittish the past couple of years, holding large amounts of cash and this paid off in that I experienced very little down side.

2.) Be greedy when others are fearful. I was greedy, but not nearly greedy enough (this is perhaps the greatest lesson I will take away from recent history)

3.) Patience. Wait for the right opportunity in your circle of competence... it will happen. Also, with overall valuations so much lower I may become more of a buy and hold investor and less of a trader :-)

4.) Keep learning. I have been slow to add a few new tricks to my bag (i.e. leaps) and this has cost me a couple of points of return.

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Knowing that hindsight is 20/20 I keep mulling over what I would have done differently.  I took a major hit in the second phase of the crash in March.  Most of the damage done was due to a single stock - FFH - falling $100 in a matter of days after the report of record 4th Q earnings.  This forced me to sell all sorts of other positions at losses.  However, I dove right in and bought higher up the quality curve.  This year will be tax neutral and portfolio positive as a result.  I still hold roughly the same amount of FFh with the same relative durations of Leaps as I did last Feb. 

 

I cant say then that I learned a whole lot except to make sure I manage my margin debt through hedging or minimizing the debt. 

 

What we had was probably a once in a lifetime event.  So, I dont want to get anchored to those low prices, otherwise I will probably never buy another stock.  This is what happened to so many after the Great Depression and caused them to miss the super rally during the 50s and 60s. 

 

I am learning to sit tight until stocks are delivered to me, much like Buffett tends to do.  For at least a year leading up to the crash I was moving lower and lower down the quality curve.  It simply isn't necessary. 

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Guest Broxburnboy

That the laws of the larger economy and economic fundamentals eventually win out over short term, narrow focused, quantifiable analysis.

Also not to assume that the worst of the crash is behind us.. this rebound seems to be stalling especially if you consider currency adjustments... the risk has just been transferred from stocks and bonds to sovereign currencies courtesy of bail outs, gaurantees and yet more debt.... I remain skeptical that the worst is over and have hedged accordingly.

 

Cheers

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scorpioncapital:

I should add that 'balance' has always been an issue with me.

I've always been an 'all or nothing' type of bettor. This mentality combined with a bit of a 'market-timing' mentality hasn't really hurt me but I see where if I can't get a handle on the 'all or nothing' aspect it would better serve me when combined with a deep discount perspective.

But, I am glad to report that I am beginning to see the wisdom of being in the middle ground when it comes to losing money or missing out on opportunity. Long term 'balance' is important.

 

Viking: 1.) Don't lose what you got.

          2.) Be greedy when others are fearful.

          3.) Patience.

          4.) Keep learning.

 

1.) I'm doing OK.

2.) I've got the greedy part down pat.

    I've always been a 'big' bettor (for me) so I think I have the courage part but I think it has to be tempered.

3.) Always have had trouble here.

    This partly why I went 100% cash. I decided at some point I had to enter the/my investment cycle totally in

    control of what I am doing. My investments had risen in mid 2009Aug to what I thought was fair pricing for

    what was happening in the economy. I figured this was a good time to liquidate and see if I could do nothing

    (recognizing that doing nothing is doing something) and practise 3.) and 4.), also figuring I'm practising 1.)

    not counting missed opportunity, and perhaps I will get a shot in the not too distant future to exercise point 2.)

    to a lesser degree than 2009Mar.

4.) A must. Stay focused. For me - No 'tricks' no margin, no options, leaps etc.

    I don't think they are necessary for my personal goal(s).

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What saved me was having most of my assets in two deep value

situations where the mainly financial assets held by these

equities were not exposed to market risk and the underlying

businesses little affected by the downturn.  Both of these

businesses are run by founders with great track records, nearly

perfect alignment with shareholders and almost paranoid

concern for avoiding market risk.

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2.) Be greedy when others are fearful. I was greedy, but not nearly greedy enough (this is perhaps the greatest lesson I will take away from recent history)

 

Viking,  

I was also greedy in March, but not nearly greedy enough.  However, the outcome since March 2009 could have been different. A few wrong moves by governments around the world could have restricted credit and trade. Protectionist tariffs could have been introduced and tit-for-tat retaliation set in. It's possible those actions would have led to a much worse outcome. If that had happened, I would be happy that I tempered my greediness with some caution.  

 

In hindsight some of those March 2009 prices may have been discounting the worst possible outcomes.  In that case, I guess my lesson was that I should always be mentally prepared to take action and to know what I would buy at what price.  This is a natural outcome of improving my circle of competence.

 

 

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Like Uccmal we wouldn't have done much different. We had the basics right, in reasonable quantities, and at about the right time.

 

We learned that portfolio size is seductive. Walk into a casino with $100, turn it into $1000, feel like a hero, then lose; you lost $100. The wise man who took 1/2 the stash off the table; walked away up $400. Money is the servant, not the master.

 

We learned to change with the times. Trading the FFH BV multiple has been very rewarding, but all good things come to an end.

 

SD

 

 

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I bought hedges last week -- something I never did before.  Dec 2011 at-the-money SPY puts.  They expire in 24 months, will decay relatively slowly for the first year, I will likely close them out a year from now. 

 

I am doing this because of:

1)  warnings of an impending CRE debacle

2)  warnings of dollar carry trade unwinding

 

My hedge is 40% notional of my net worth.  I also pick up some hedging by proxy via my 50% FFH position.

 

I was one of the people who poo poo'd the impending financial bubble crash pre-2007.  I was lucky that some responsible people at HWIC hedged on my behalf.  Now I'm going to be a big boy and take care of myself going forward.  I aged a decade over the past two years.

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Just a thought for you Eric.  I have been buying June at the money puts.  My rationale goes like this:

1) They are alot cheaper than the Leaps

2) If markets go up significantly from here the ones I hold will become worthless but I can lengthen the time out and buy a higher value put.

 

Of course I will have to reload by June but my thinking is that I will have sold them all at a profit long before that. 

 

I am re-reading Security Analysis and on the first pages there is a graph showing the assorted indexes of the day and the industrial production.  There is a very clear lead on the indexes ahead of industrial production.  Since production has picked up and employment is picking up, but not vigourously, I am figuring we are in for a market correction before any further leg up. 

 

 

I would rather not sell the carefully built up holdings I have, but would rather pay for the hedges in the off chance they will pay me back.  Its alot to explain on the board. 

 

 

 

 

 

 

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Just a thought for you Eric.  I have been buying June at the money puts.  My rationale goes like this:

1) They are alot cheaper than the Leaps

2) If markets go up significantly from here the ones I hold will become worthless but I can lengthen the time out and buy a higher value put.

 

Of course I will have to reload by June but my thinking is that I will have sold them all at a profit long before that. 

 

I am re-reading Security Analysis and on the first pages there is a graph showing the assorted indexes of the day and the industrial production.  There is a very clear lead on the indexes ahead of industrial production.  Since production has picked up and employment is picking up, but not vigourously, I am figuring we are in for a market correction before any further leg up. 

 

 

I would rather not sell the carefully built up holdings I have, but would rather pay for the hedges in the off chance they will pay me back.  Its alot to explain on the board. 

 

 

 

That's not bad.  I didn't tell the whole story though as to why I chose the Dec 2011 puts.  The story explains why I could just hold them to expiration without it really being any kind of drag -- in fact, I'm going to change my story and just plan to not try to sell the puts at all.

 

First, I went to 130% notional long in my portfolio

1) 20% increase from buying FUR:  I think we have a fair chance of astute investors finding a favorable buyer's market for CRE. 

2) 10% increase from buying WFC calls:  WFC volatility dropped off so I bought back the $30 strike puts that I'd written and wrote $40 strike 2012 instead.  I also bought some 2011 WFC calls $15 strike.

 

I didn't change my FFH weighting, which is still 50%.  So now I've levered myself by 30% but hedged it with a 40% put on the market.

 

TAXES:

1)  FUR is held in IRA/RothIRA accounts so yield compounds without tax. 

2)  FFH is held in taxable, but is 25% in the form of shares and 75% in the form of 2011 calls

3)  WFC calls held in IRA/RothIRA, $40 written puts held in taxable

4)  SPY puts held in taxable

 

Due to my use of options, the leverage does not cost me anything (no interest costs).  The SPY puts cost me 16% of notional (8% per annum).

 

So basically, the hurdle rate is 8% per annum, but I have more put protection (40%) than I have long over-exposure (30%).

 

I am betting that the 40% short position is ample protection against the 30% additional long position.  Now, we've seen certain issues fall much farther than the market, and given that I've got FUR and WFC there is reason for concern (strong names but standing near ground zero for a massive CRE debacle).  That's why the 50% FFH position is nice -- in the early 2009 crash  FFH merely declined in step with the market, and this time around it starts off with a lower P/B.  Additionally, the WFC calls with a $15 strike will show an increase in volatility premium as WFC declines (another hedge).

 

Finally, due to my use of calls and written puts I have a large cash position, my margin equity percentage is 100% so I don't need to distress over that.  Much of that cash is allotted to 10-yr TIPS for yield and CPI hedge.

 

CRASH:

Should the market crash in a major way, I do not want to be selling the SPY puts and paying tax.  Instead, I would rather keep the puts in place and buy some shares of whatever is cheap.  I will be able to allocate 10% without getting into a net leverage situation, but I would be happy to allocate 30% and be net leveraged by 20% if the market really coughs up the value.  Also, the volatility premium I paid will disappear as the market declines so selling the puts won't give me a full hedge against market decline anyhow!  So, I voted against selling 2011 puts after a market decline.

 

NO CRASH:

I believe each holding I have will earn more than 8% per annum over the next two years, and I get a tax loss for the SPY puts when they expire.  So I think my 40% position will be covered by gains on my 30% position overallotment without being a drag.  Everything I have in my portfolio is a long term position now.

 

I have peace of mind this time around.  My portfolio in it's present form generates enough income to fund my family's annual spending.  So I don't need to sell anything at distressed prices in order to eat.  That will make the next crash easier to handle -- that was one thing that made the last crash a little concerning for me as the "what if" scenarios wouldn't leave me alone.

 

 

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That I am not as brave as I thought I was. While I was willing to purchase during the decline I was unwilling to commit the last 30% of my cash. I went into the decline with a very large cash position( nothing seemed cheap enough and I was lucky) and bought stuff all the way down but when the March lows were made I was unwilling to deploy the balance of my cash. Many of the positions I held at the March lows have increased 500 to 1000% however my timidity cost me dearly, buying BAC @ 6 but not buying more at 3 buying Barclays @7 but not buying more when it was cheaper

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