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This powerful rally was way overdue, but seeing what was going on with the Financials today made me feel just like the opposite of the insanity that prevailed in late November and early March. Irrational exuberance? It is hard for me to imagine that we will unwind all the stock market and economic pain that has been endured in just a few months.

 

Personally, I have been selling stocks that offer the least potential vs others in my portfolio. This is mainly to repay debt that I have incurred in early March when I essentially went "All in". Margin at this point is ultra cheap and if I could find bargains as juicy as I had in early March to plow back in the proceeds, I probably would not repay it that quickly.

 

However, what was selling at 1 or 2 times earnings is now at 4 or 5. What was selling at 0.5 to 1.0 times net cash is now quite above net cash. There are still some stocks selling at these crazy multiples, but I detect issues which were not there in the early issues. We could be going back to regular Ben Graham where 70% of net-net working capital and P/E's around 3 means something. Or we are going to re-enter a period of deep pessimism in late Summer/early Fall where multiples will be slashed again.

 

Therefore, are you raising cash at this point, staying put or still finding enough new opportunities to rotate out of your cheap stocks into cheaper ones? 

 

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For what it's worth, I am selling just about everything and taking the summer off.  The market sell off took up too much of my time and I will use this opportunity to revisit my investing approach.

 

Sell in May and stay away!

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We have a 60%+ weighting to PD, & have been rolling out of common & replacing with option/T-Bill combinations. Near term we think it'll rise further ... but whether it'll stay there 3-4 months from now, we're not so sure.

 

Keep in mind, that the bigger problem is the rapid realized cash gain. The last time we were here, we scewed up.

 

SD

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I have been selling out my high strike price options and keeping the ones that are deep in the money.

 

i.e. sold some AXP $25 but have 15 and 20s still;  selling spy 85s but keeping spy 70s, 75s, and 80s.  Nearly all of these expire some time in 2011 so there is no urgency.  I just want the money available to reload should the opportunity present itself.  I am running low debt levels right now and intend on keeping it that way. 

 

It is my feeling that SPY 85-90 is probably the bottom we would retrench to.  It may not offer the opportunities we had in early March again, probably not for a few years now. 

 

I have also been moving Cdn currency to US in small amounts

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I will second the market action comment about financials today.  BAC needs to raise $35B, WFC needs to raise $15B and they both are off to the races.... what???

 

I might be jaded since I was fighting with folks in a lot of places at $20, $15, and $10 about why Wells was a great choice, and now it seems that no one is fighting it anymore.

 

The Short sale banning chatter and all this momentum just seems like the fix is in or something... Weird world.

 

I have no take, there is still a ton of cheap stuff available and the hard part is not holding out for March 8th pricing like it will ever happen again.  Wells Fargo preferred yielding 25%.  I pray every night that happens again...

 

Ben

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I will second the market action comment about financials today.  BAC needs to raise $35B, WFC needs to raise $15B and they both are off to the races.... what???

 

I might be jaded since I was fighting with folks in a lot of places at $20, $15, and $10 about why Wells was a great choice, and now it seems that no one is fighting it anymore.

 

Well, we thought Well's was a complete no-brainer at around $10 or less, and I let you guys know that at the time.  So in all fairness, since yesterday morning we own no Wells Fargo in any of our funds or corporate accounts...options have all been sold as well. 

 

Had no idea about the $15B stress test shortfall till this morning, but we think Well's will do fine long-term.  Just that we have exposure to other financials which remain undervalued and Well's has gotten significantly more expensive relative to them.  The cash hoard is growing nicely in every account till the next big idea!  Cheers!   

 

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Ben, To any market watchers like ourselves who have been at this a few years this is a fascinating real life chance to see how markets behave.

 

What the stress tests provide is clarity.  We now know what the supposed bad case liabilities are.  So the fear mongering of Taleb, Roubini, and their ilk takes on less meaning.  The markets love clarity even if its bad news.  The other effect is the less bad than last year/last quarter effect.  Somewhere in there the markets are pricing the stimulus packages as well.  Since the markets tend to generally predict economic movement (in part because more money is available from profits) we can surmise some kind of economic recovery is coming. 

 

The housing behaviour is a different bird.  People confuse housing prices with housing inventory.  Prices can still drop but inventory will get sopped up and the economic recovery associated with more building then starts to take effect. 

 

Wells should be able to easily raise a few billion in the preferreds market and some bond debt at reasonable levels, and make up the rest with cash flow.  But it is certainly not a deal it was when we bought.

 

The one I am really exicted about other that FFH is my GE call options I bought - strike 7.50 - 2011.  It is taking everything in my power not to sell these.  I figure GE will come out of this prior to Jan 2011 in the high 20s. 

 

 

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Check out the local or community banks -many are doing quite well.  Most dodged the bad loans that the biggies got into (not all but most). Look for banks in your area as you will be more able to evaluate their reserves and you will be more familiar with the local real estate market.

Don't expect the real estate market to turn around over night. when Alaska had it's crash in the 1980's it took almost 15 years to get back to where it was prior to crash.  Watch the small home builders, they seem to lead the charge.

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Guest Broxburnboy

I continue to believe that we are witnessing a bear market rally.. albeit an impressive one. I can't help but feeling however that it has been orchestrated

by government and banks (or should I say by Wall Street who seem to pulling the strings with government at the moment). The rally seems to be based

on that things are not as bad as have been advertised. Banks don't have to raise as much capital as feared. There was a time when news of equity dillution

would have brought a rash of selling... but here it has brought on wild euphoria! Implied larger government deficits were once considered a bad thing, as were

rising unemployment numbers, falling home prices, lower exports and record low interest rates (which implies continuing asset price deflation).

Congratulations to all who have had the courage to trade into this rally, but I continue to believe that this puppy is going south, probably real quick.

 

Insiders seem to be stocking up with cash for the long term:

 

http://pragcap.com/more-on-insider-selling

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Oh well, if would take a look at my stock portfolio since one year, you might find it one of the most boring on earth (very, very low turnover, very very few holdings).

 

Regarding the actual state of the market, especially in financials, is it a suckers rally or will it last? I don't know. I can't predict these kinds of things and I can't say if the financials are overall cheap, since several are outside my circle of competence.

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I think people who were having trouble sleeping when the market bottomed out in March have been given a wonderful opportunity to make some adjustments.

 

My read is that this is a dead cat bounce (perhaps similar to 1930).

 

My porfolio is 75% cash with ORH currently being my largest equity position. If markets continue to rally, ORH will do phenominally well. If markets drop I have the cash to once again get aggressive. If markets go sideways ORH simply does very well. Risk/return tradeoff works for me.

 

I still believe that capital preservation continues to be the priority. It will take years for this mess to play itself out. I expect extreme volatility to continue and over time expect that this is what will finally cause the avg investor to bail (i.e. stop the pain as their gains keep turning into worse losses). Until I see clearer signs of capitulation I will continue to be cautious. With patience I am confident another fat pitch will come along this year...

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Sold some but only because discount to IV is much lower now. If I wanted to hold $xxx amount of something at 40% of IV, I would want to hold a little less at 60% of IV.

 

That said, I also want to free up some cash cushion to take advantage of any "shooting dead fish in a very shallow barrel with water drained" kind of opportunities that may come up. Portfolio at an allocation such that I would be happy to see either a 50% up or 50% down move.

 

Vinod

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I think people who were having trouble sleeping when the market bottomed out in March have been given a wonderful opportunity to make some adjustments.

 

My read is that this is a dead cat bounce (perhaps similar to 1930).

 

My porfolio is 75% cash with ORH currently being my largest equity position. If markets continue to rally, ORH will do phenominally well. If markets drop I have the cash to once again get aggressive. If markets go sideways ORH simply does very well. Risk/return tradeoff works for me.

 

I still believe that capital preservation continues to be the priority. It will take years for this mess to play itself out. I expect extreme volatility to continue and over time expect that this is what will finally cause the avg investor to bail (i.e. stop the pain as their gains keep turning into worse losses). Until I see clearer signs of capitulation I will continue to be cautious. With patience I am confident another fat pitch will come along this year...

Im pretty much on par with your thinking Viking. My holdings are not the same in % but I agree with the general statement.

BTW, I got my best sleeps in MArch! ;D

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Viking & Smazz,

 

Are you not basically betting very heavily that the market would give you a big opportunity again? What if market does not give you an opportunity to re-enter at a good price? Why would you forgo an attractive opportunity at a high confidence level, which is what would be possible with a strict bottom up value investing to a low confidence level macro bet that a very very attractive opportunity would be made available? Would it be fair to say you are making a macro market direction call?

 

Just trying to reconcile what has been repeatedly drilled by Graham/Buffett, et all to ignore macro and stick to bottom up with what you are proposing.

 

Just as a thought experiment, if we imagine that the stock market has played out a little differently since the market top in 2007. Say that from the time S&P 500 topped at 1565 in 2007, it had dropped only during the last few months to where it is now (900 odd), without the intermediate dive down to 676 and back to 900. Would you be investing now because of the 40% drop (without the mind being polluted by recent memory of 676)? If so, is this not a case of "Using the Market to inform you"?

 

I ask this not to argue but because every fibre in my body says, the market is going down, down, down and to sell so that I can invest at a lower price and I am resisting this temptation due to belief in Buffett/Graham, value investing philosophy and need for discipline.

 

Thanks

 

Vinod

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vinod1, your questions are very close to the same ones that I have been grappling with for the past few years.

 

My simple answer today is I know that I will never be a Buffett, Lynch, Watsa etc. However, they offer many great lessons that I can then overlay onto my psychological makeup, intellect and work ethic. And hopefully what comes out is an investment style that works for me (my long term return is just under 20% and last year was in that same range - thanks to FFH selling as low as $220 and then running to $400).

 

Here is what I have learned holding FFH since 2003. The stock makes simply enormous moves up and down. I am content to buy at 0.8xbook or lower and sell when it makes a big move up. Right now I have bought a chunk of ORH (it is trading at about 0.9xbook, is sitting on about $4.00 to 6.00 in unrealized investment gains, has a 5% tax effective yield and solid underwriting). If ORH was to suddenly move up 30% or 40% I likely would exit and book the profit. A hurricane will then hit the US, insurance stocks will get hit and ORH will again be selling at 0.8x book (perhaps 0.7xbook next time) and I will be happy to buy again.

 

I am not worried about 'missing' anything. I am simply waiting for fat pitches. And with the volatility we are seeing they keep coming month after month (i.e. some asset class gets taken out behind the woodshed). Perhaps in another 12-18 months as the current mess begins to clarify itself perhaps volatility will ease and buy and hold will become more important...

 

I also try to keep learning and to get better every year. The 'buy value and hold forever' strategy does appeal to me (way less work!). I am not ready to embrace it yet. But it keeps rattling around in my head, acting like my alter ego!

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vinod1, I have been trying to diversify the list of stocks that I would like to buy (and not rely so heavily of FFH or how concentrated I have been in the past). In March I did purchase Berkshire for the first time in my life, as well as Wells Fargo, GE, AMEX & Markel (all we would call value picks). All have been sold (some weeks ago) at a level I was happy with and, as I said earlier, ORH was then purchased (dropped to a price I liked) and is now my largest holding. Yes, if I continued holding all of mu original stocks my gains in aggregate would have been much higher today but I do not let that bother me ("Is there a lesson here" I do ask myself). My cash pile is now larger and I am up again at bat.

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Which weaknesses do you guys see in the following?

My thinking is that Market calls and the greater fool theory is different sides of the same coin..

Consider the following statements

 

  • It's ok to buy at a price higher than value, because you can always sell to a price even higher (you plan to sell to a greater fool).
  • It's ok to sell at a price lower than value, because you can always buy to a price even lower (you plan to buy from a greater fool).

 

Really, these statements seems to me to simply disregard value?

The statements can be transformed into a broader form:

 

  • It's ok to buy at a high price, because you can always sell to a price even higher (you intend to sell to a greater fool).
  • It's ok to sell at a low price, because you can always buy to a price even lower (you intend to buy from a greater fool).

 

In the broader form, it seems increasingly visible that the actions has little to do with value investing, and more to do with a belief in you being able to second-guess Mr. Market's behavior in the future (i.e. a "Mr. Market call" or just a market call  ;) ).

 

Of course, this is not to say that the action won't be (very) profitable.

 

 

Cheers

 

 

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The one I am really exicted about other that FFH is my GE call options I bought - strike 7.50 - 2011.  It is taking everything in my power not to sell these.  I figure GE will come out of this prior to Jan 2011 in the high 20s. 

 

 

 

Uccmal, why don't you just roll the GE calls up and lock in the gains?  I assume if you had 7.5 strikes you are sitting on a reasonable gain no?  The nice thing about GE is that the option spreads are pretty tight, even for leaps.  The 7.5 2011's bid/ask is 7.2/7.35.  So you could sell those and roll to the 15 2011 bid/ask of 2.86/2.95, for a credit of $4.  That way you lock in some of the gain, and keep the upside.  That's one of the advantages of LEAPS instead of stock is that it's easier to lock in gains and keep upside.  You could also look at buying 2011 puts to set up a synthetic rolled up call, but that seems more complicated to me, even though it's one transaction less..

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The statements can be transformed into a broader form:

 

It's ok to buy at a high price, because you can always sell to a price even higher (you intend to sell to a greater fool).

 

It's ok to sell at a low price, because you can always buy to a price even lower (you intend to buy from a greater fool).

 

This is actually incorrect.  The assumption is that the odds are identical and that the inherent risks are the same.  Historically, sentence one (high price) is the norm...inherent risk is higher while odds of success are lower.  Sentence two (low price) is the outlier...inherent risk is significantly lower than the median while odds of success increase.

 

Buffett used to make some very interesting comments when he was younger about the markets.  It is not like most pari-mutuel forms of betting...you don't have to play every hand and the odds aren't calculated before you bet.  You CAN CHOOSE to play only when the odds are enormously in your favor.  I didn't completely think about that earlier in my investing life.  The last year has made it perfectly clear to me how to invest for the worst case scenario and to protect investor capital...and it works like a charm!  Cheers! 

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You CAN CHOOSE to play only when the odds are enormously in your favor.

 

And that my friend is the key to investing to beat an index.  Easy to say, exceedingly difficult to implement.

 

Sold my Wells Fargo Calls - all of them this morning. 

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Viking,

 

There is indeed a strong case for tailoring the approach for our own individual psychological makeup. Especially when it is working so spectacularly!

 

I make much smaller adjustments, basically increasing decreasing individual stock allocations by a maximum of about 30-40%. Increasing allocation when discount to IV is high and vice versa.

 

Vinod

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Which weaknesses do you guys see in the following?

My thinking is that Market calls and the greater fool theory is different sides of the same coin..

Consider the following statements

 

  • It's ok to buy at a price higher than value, because you can always sell to a price even higher (you plan to sell to a greater fool).
  • It's ok to sell at a price lower than value, because you can always buy to a price even lower (you plan to buy from a greater fool).

 

Really, these statements seems to me to simply disregard value?

 

 

They are not the same! When you buy at a discount to IV, you have a margin of safety. You would do fine selling it a lower discount to IV. Say you buy at 50% discount to IV, you can choose to sell it when it is only at a 30% discount to IV and still do fine, but would not do as well as when you sell it close to IV.

 

When you buy at a premium to IV, there is no margin of safety. You are just hoping for a greater fool to show up.

 

Vinod

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