Jump to content

Great Note From Adam Hamilton


moore_capital54
 Share

Recommended Posts

While buying fear isn’t easy psychologically, it is necessary if you want to buy low.  Fighting the crowd yields amazing gains over time.  Since 2001, during a tough sideways-grinding secular stock bear, all 591 stock trades recommended in our newsletters have averaged annualized realized gains of +51%!  We didn’t achieve this by buying high when it felt good and selling low when everyone was scared, but by doing the exact opposite. 

 

The bottom line is stock fear has a ceiling, and that is represented by a 50ish VXO.  While this ceiling won’t hold during panics and crashes, those ultra-rare once-in-a-generation events aren’t worth worrying about the vast majority of the time.  Normally whenever the VXO surges to 50, it is time to buy aggressively as fear has peaked so a huge stock-market rally is imminent.  This is true in secular and cyclical bulls and bears alike.   And just a few weeks ago, the VXO once again slammed into this effective ceiling. 

 

Fear was incredibly intense, with perma-bears, chicken littles, and pessimists coming out of the woodwork to call for a continuing stock plunge.  But market history clearly shows that expecting the stock markets to head lower after a fear-ceiling approach is almost never the right bet to make.  Extreme fear should always be bought!  

 

Adam Hamilton, CPA     August 26, 2011

Link to comment
Share on other sites

moore_capital54-Thanks for the post.

 

I learned this point from one of the board members here several months ago and was prepared mentally + hence braver in buying on this last sell off.

 

I am not sure mechanically how the VXX works but do you think that this theory will be as effective once every one is using it? ( i.e like the dogs of the dow-there was a period for a while when it did not work as well because everyone was using it.)

 

I am thinking if i am using or looking at it so is the crowd.

Link to comment
Share on other sites

I  actualy couseled a client yesterday that you have to start buying before fear gets to extreme levels because when the public fear gets to extreme levels you are likely to be infected by it as well. I can remember all too well the day the mkt bottomed in March 2009. I had 200,000 in cash undeployed in my RRSP I had spent the previous 6 months buying stuff on sale at progressively lower prices. Mr Greenspan had on the weekend written a piece that suggested that the nationalzation of the banks may be one way out of the crises which would have of course wiped out a good 20% of my capital at that stage. My rational thought at that stage was well if we really headed for a 29 scenario then 200000 could last a long time hence I could not bring myself to pull the trigger. The last 5 purchases I made before the bottom appreciated by an average of 500 percent over the ensuing 18 months.

Link to comment
Share on other sites

Thats why I only risked $16k. A friend owned one of their franchises and was very adamant about the fact that they would never go bankrupt, He bought a lot more shares, not to mention selling his franchise back to DTG for $20mm a year later ! :)

 

Luck is a mighty fine thing.  ;)

Link to comment
Share on other sites

In my case Luck probably played a part, although I don't often risk even tiny amounts like that on something unless I believe the risk/reward is tilted in my favor. With regards to my friend, his franchise was doing $4.5mm EBITDA so I don't think luck played any part in his ultimate sale. He built a great business.

Link to comment
Share on other sites

In my case Luck probably played a part, although I don't often risk even tiny amounts like that on something unless I believe the risk/reward is tilted in my favor. With regards to my friend, his franchise was doing $4.5mm EBITDA so I don't think luck played any part in his ultimate sale. He built a great business.

 

Don't get me wrong, not a big criticism, just having fun.  (Certainly no knock on your business friend's success.)  It was hard as nails to buy such blown out things at that time.  I did some, but not enough, buying myself.   

 

 

Link to comment
Share on other sites

The last 5 purchases I made before the bottom appreciated by an average of 500 percent over the ensuing 18 months.

 

You must have been in some pretty beaten up stuff.  Care to share the names after the fact?

  BAC was one name I sold it and I have recently purchased leaps another I was able to buy  was was my old nemisis JDSU I bought that at 2 and change it was selling below cash at that point, I could not even get myself to buy the net nets and they were numerous when the mkt was at its darkest.

Link to comment
Share on other sites

The last 5 purchases I made before the bottom appreciated by an average of 500 percent over the ensuing 18 months.

 

You must have been in some pretty beaten up stuff.  Care to share the names after the fact?

  BAC was one name I sold it and I have recently purchased leaps another I was able to buy  was was my old nemisis JDSU I bought that at 2 and change it was selling below cash at that point, I could not even get myself to buy the net nets and they were numerous when the mkt was at its darkest.

 

Yeah.  BAC was one of the beaten down companies we bought at the bottom.  Within a few months, we rotated out of them back into  our favorites like LRE and FFH.  We kicked the tires on JDSU, but didn't buy.  The crisis was so gripping,  we somehow missed a couple we had been following that had become microcaps, Crocs and Select Comfort, that bounced and became thirty baggers.  Sounds like a fish story, doesn't it?  The big ones that got away.

Link to comment
Share on other sites

We should start a thread discussing our best and worst investments.

 

My best in terms of dollar profit was Arizona Star, I built a significant position in the company right after 9/11 and held it until the buyout by Barrick. At the time we were purchasing shares at a valuation that implied less than $5 per ounce of gold in the ground.

 

Worst investment was WAMUQ, after Lehman, we had built a large position thinking it would not fail. We lost 95%. I still believe WAMUQ based on it's projected Loan Losses/ vs equity at the time should not have been allowed to fail and was stolen by JPM. Several weeks later TARP was announced.

Link to comment
Share on other sites

We should start a thread discussing our best and worst investments.

 

My best in terms of dollar profit was Arizona Star, I built a significant position in the company right after 9/11 and held it until the buyout by Barrick. At the time we were purchasing shares at a valuation that implied less than $5 per ounce of gold in the ground.

 

Worst investment was WAMUQ, after Lehman, we had built a large position thinking it would not fail. We lost 95%. I still believe WAMUQ based on it's projected Loan Losses/ vs equity at the time should not have been allowed to fail and was stolen by JPM. Several weeks later TARP was announced.

 

  My best were at times like now. BAC,C in early 1990s. PXD when oil prices were in the low teens and everyone thought they were going to go broke. DOX around the same time in the early 2000s. ACF around 2008. Also many futures contracts in the early 70s. Almost any of them because the Vietnam war was ending and we were starting a huge inflation surge because we hadn't matched any revenues to pay for it.

 

  My worst was 2007-2008-2009 were YRCW, TLB, WPSL, & XLF.

Link to comment
Share on other sites

  • 1 month later...

While buying fear isn’t easy psychologically, it is necessary if you want to buy low.  Fighting the crowd yields amazing gains over time.  Since 2001, during a tough sideways-grinding secular stock bear, all 591 stock trades recommended in our newsletters have averaged annualized realized gains of +51%!  We didn’t achieve this by buying high when it felt good and selling low when everyone was scared, but by doing the exact opposite. 

 

The bottom line is stock fear has a ceiling, and that is represented by a 50ish VXO.  While this ceiling won’t hold during panics and crashes, those ultra-rare once-in-a-generation events aren’t worth worrying about the vast majority of the time.  Normally whenever the VXO surges to 50, it is time to buy aggressively as fear has peaked so a huge stock-market rally is imminent.  This is true in secular and cyclical bulls and bears alike.  And just a few weeks ago, the VXO once again slammed into this effective ceiling. 

 

Fear was incredibly intense, with perma-bears, chicken littles, and pessimists coming out of the woodwork to call for a continuing stock plunge.  But market history clearly shows that expecting the stock markets to head lower after a fear-ceiling approach is almost never the right bet to make.  Extreme fear should always be bought! 

 

Adam Hamilton, CPA    August 26, 2011

 

Looking back this was spot on regarding fear. Hit 50 once and 49,xx later at market lows...

 

Definitely helped me pulling the trigger at the right moment.  ;)

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...