Have you been selling into the rally? What companies are you waiting on?

[bmichaud]

Some good commentary here on the market:

 

http://www.ritholtz.com/blog/2012/08/bearish-on-stocks/

 

http://theshortsideoflong.blogspot.com/2012/08/global-business-cycle-in-charts.html

 

http://theshortsideoflong.blogspot.com/2012/08/copper-leads-global-growth.html

 

The author of the latter two links is good, as he correctly turned bullish at the bottom last year for example. And Zeal put out another note on how gold could perform in a coming bear:

 

http://www.zealllc.com/2012/goldstbr.htm

[Green King]

I'd bet if we translated all the warrants and options we hold to the equivilant loan+investment, many of us were in the negative cash territory.

 

Yup.  We're about 140% long notionally (non recourse), but have a lot of what I think is a close to but better than cash equivalent: BRK because of the Buffett Put. 

 

Interestingly, Benjamin Graham was over 200% leveraged in 1929 when the market crashed, but lost only exactly 70% of his fund's value by the time the market hit bottom in 1932, thanks to all the ways he arbitraged and hedged, compared to the market's losing 87% of its value.  He never went to cash.  By 1935, he was back up to his high water mark.  :)

 

Where can one learn how to do that ? :)

 

Graham was the first to develop pair trades, long/short strategy, convertible bond arbitrage and behind the scenes activism to release value for shareholders that had been hoarded by corporate managers for their own benefit.

 

These strategies are still mainstays of hedge funds and the trading operations of banks, but the spreads are small, compared to what they were in Graham's day.  :)

 

I've been thinking about this for some times. With a long short strategy where you short one stock in the industry and buy another. I know the market i relative more efficient now a days but i always have the problem when thinking about this idea of long short since my bet depends on market inefficiency  and this tools depends on eventual market inefficiency. what happens when the inefficiency continues or get worse ? for example What happens if the market become inefficient and the one you short increase in price materially ? (given your research is not wrong)

 

Also are there case studies i can read ? How did you learn those tools by photosynthesis :D, from your apprenticeship with experienced investors or trial and error?

 

[twacowfca]

I'd bet if we translated all the warrants and options we hold to the equivilant loan+investment, many of us were in the negative cash territory.

 

Yup.  We're about 140% long notionally (non recourse), but have a lot of what I think is a close to but better than cash equivalent: BRK because of the Buffett Put. 

 

Interestingly, Benjamin Graham was over 200% leveraged in 1929 when the market crashed, but lost only exactly 70% of his fund's value, less distributions, by the time the market hit bottom in 1932, thanks to all the ways he arbitraged and hedged, compared to the market's losing 87% of its value.  It's a myth that he was wiped out, although a modest but very important investment by Jerry Newman's father in law at the market bottom was a huge relief.  He never went to cash.  By 1935, he was back up to his high water mark.  :)

 

 

Where can one learn how to do that ? :)

 

Graham was the first to develop pair trades, long/short strategy, convertible bond arbitrage with rudimentary delta hedging and behind the scenes activism to release value for shareholders that had been hoarded by corporate managers for their own benefit.

 

These strategies are still mainstays of hedge funds and the trading operations of banks, but the spreads are small, compared to what they were in Graham's day.  :)

 

I've been thinking about this for some times. With a long short strategy where you short one stock in the industry and buy another. I know the market i relative more efficient now a days but i always have the problem when thinking about this idea of long short since my bet depends on market inefficiency  and this tools depends on eventual market inefficiency. what happens when the inefficiency continues or get worse ? for example What happens if the market become inefficient and the one you short increase in price materially ? (given your research is not wrong)

 

Also are there case studies i can read ? How did you learn those tools by photosynthesis :D, from your apprenticeship with experienced investors or trial and error?

 

Hedge Fund Market Wizards by Jack Schwager and his two earlier Wizard Books are a good overview of successful trading strategies.  :)

 

One reason Graham wasn't wiped out was that his arbitrage trades tended to converge even when the market was in a panic with a flight to safety.  For example, he would typically be long a convertible bond and short the related stock.  In the panic, the stock would lose most of it's value, but the bond would typically retain most of its value because Graham was usually very conservative in his selections of sound companies for investments.

[Viking]

I am back to 80% cash and 20% invested. I have been happy to cash out and lock in returns.

 

Stocks are trading near a 4 year high. Why?

1.) Europe is entering a bad recession

2.) China is slowing

3.) The US is slowing; corporate profits are decelerating

In short, the economic backdrop stinks.

 

Europe debt problems remain; nothing has been solved and likely will not be in the near term.

Yes, US housing looks to have bottomed and the fact things are not getting worse is positive.

 

The only reason stocks averages are rallying these days is the 'smart' money is anticipating QE3. The worse the economic and profit news gets, the more the market averages go up. Bizzarre.

 

Of course if you find great companies trading crazy cheap you should buy them. The summer months is a tough time to invest as the volume is light. As we enter Sept and volume increases I think life will get interesting. It has been a great year already and I am happy to move back to cash and wait for the nexr round of bargains to be served up.

[PlanMaestro]

Imagine a large company with a 100 years history that is earning $3-4 per share (that no one seems to notice), has an average growth potential, and shows its strongest balance sheet ever.

 

Let's say this hypothetical company is priced at around $8 per share.

 

Are you really willing to sell just because markets may fluctuate (as they always do) when faced with an expected growing 40% IRR almost in perpetuity?

 

You do? Tough customer, willing to take the risk of missing such upside. But you must have your reasons.

 

OK, "no vengo a vender, vengo a regalar". Let's say I add a micro-managing leadership focused in costs and organic growth, that is finally showing success in integrating a decade of acquisitions in its core business with plenty of excess costs. I will be concrete, it is expected to increase earnings just in cost reductions by 10%. AND ... (you did not expect that did you) it will probably restart dividends and buybacks in 6 months, 18 months tops.

 

Really, you would sell?

 

Well, you are the customer. Let's continue with hypotheticals. I will give you all time low cheap non-recourse leverage maturing seven years from now. Don't tell me that you are still willing to sell.

 

Really? You are?

 

OK, how much more do you want.  Really.

 

And they call ME manic depressive.

 

[leftcoast]

I was waiting for you to throw in a free set of steak knives.  :D

[Viking]

Obviously, if you are able to find a great company trading at a great value (as defined by the buyer) you should buy it regardless of what is going on in the economy or stock market in general.

 

What I find interesting is how Mr Market's definition of value changes over time. From 1984 to 2000 the multiple got bid higher and higher.... in 1984 you likely bought value at a PE=8 and thought you were making out like a bandit selling a few years later at PE=12 (likely doubling your money). By 2000 PE's in the 20's were not considered excessive as stocks had run pretty much straight up for 20 years. And we were in a 20 year bull market.

 

Since 2000 the opposite has happened... the PE that is considered 'value' has been steadily coming down. My guess is the bear market is not over yet even though it has been mauling investors for 12 years. Watsa, I think, would agree (given how hedged FFH is). In a bear market, I will be happy to buy low and sell high (and repeat) and protect my capital.

 

At some point in the next 5 years my guess is the stock market will hit bottom and we will enter the next great bull market. That is the time to buy the best and hold tight for the long run. History teaches us that 'we are there' (the bottom) when stocks are hated by all. Clearly we are not there today.

[biaggio]

Leftcoast that is funny

 

Plan, that sounds obvious but its never as easy as it looks (at least that never works out for me). Its real tempting though.

 

How much of your net worth do you have in that 100 year old company.

 

40% IRR I would love to be all in but am too much of a chicken and am not that greedy.

 

I'm probably carrying too much cash (40% overall) but it sure makes for a good sleep.

 

My plan is to average in, i.e continued dollar cost averaging into good/great business/capial allocators like FFH, BRK, LUK, L, ALS when they "go on sale" as well as some of the favorites here like AIG, BAC...if market decreases will be happy to buy more, if it goes up will be happy that my holding have gone up.

 

At the same time trying to get out some of the value traps that I have fallen into. I have sold some of these lately.

 

Its these occasional value traps that are inevitable that make you overly conservative (carrying too much cash and not being real concentrated) but as someone once said if you re not making mistakes then you re not trying hard enough. I will never be accused of not trying.