RANDOM MUSSINGS (iii)

It seems to me that today everyone is a trend follower.  In 2009, everyone was macro economist. And both without apparent reason. It is clear today that the latter was wrong. At least, so far. I think that majority of the first will be trapped, too. Buffett is talking his book and eternal perspective and obviously he is right, so those who can afford to follow his advise, should definitely do that.  The rest at least has to be hedged.

I liked (let's call it) the battle of John Hussman and the Brooklyn Investor on the profit margins (a few additional dimensions on the subject - link). Frankly, after reading the Brooklyn Investor post I became hesitant, which means it is a must read. John seems like a strong statistician to me but as someone said owls are not what they seem.. Eternal perspective assumes that it is unclear what people will think when profit margins shrink, which is inevitable. In other words, multiple is uncertain. I still tend to lean towards a bias against high margins, which is now happening at the same time with a high multiple.

Graham with 50% in cash (link) is thinking in the same direction but instead of cash my hedge is a more aggressive bet (short of indexes).

A brief and eclectic stock update: INFU looks interesting below $1.40 (for a brief moment). Gazprom below $8.00, too. Gas reserves cannot cost 80x cheaper than at CHK for a long. However, Russian element brings some shiver in me. Umom Rasiju neponiatj (link - loose translation: you can't fathom Russia with mind). I do not have positions in both, yet. Of my holdings, LOJN looks cheap, trading almost at cash.

RANDOM MUSSINGS (ii)

Hugh Hendry issued a new piece. He is always an entertaining and highly recommended read. Especially, if his last opus was almost 2 years ago (he did not have what to say). One of the greatest contrarian thinkers at the moment.

What puzzled me is his love for “stop loss” (which also connects with my recent piece about “sell your losers and ride you winners”). I do not understand it. He gives as an example tragic death of Jesse Livermore, who was right on his macro call but market remained irrational longer than he remained solvent. Volatility killed him (by the way he was shorting the market around 1930) and his panacea could have been stop losses.

I would say that, from what I understood (disclaimer: apart of this article, I know nothing about Jesse Livermore), he was killed not by volatility but by leverage or maybe also asymmetric nature of shorting individual names.

Stop loss is a practical thing to say that I do not understand what I am doing.

If one operates with sufficient margin of safety, even considerable volatility should not scare. It is always advisable to have low expectations. You cannot time the market so that you will always buy in the lowest point. That is impossible. It should be comforting that premature accumulation is a sin of all the greatest value investors.

It takes time for intrinsic value and price to converge. I follow a general rule of 3 years (I took it from Pabrai’s “Dhandho Investor”), which should be enough for your story to play out and admit a mistake. Intrinsic value in most cases is changing slowly – definitely not like when you watch big daily plunges on the stock market.

Lehman produced many stories of 50% plunges and 200-300% recoveries in less than 3 years. I do not know how to be that smart and sell it after e.g. 20% drop, then buy back after 50% down (total) and ride it up 3 or 4x. I do not know people who bet the entire farm back in March of 2009. You are fooling yourself if you think that you will dare to move in the darkest hour.

RANDOM MUSSINGS (i)

“Sell your losers and ride your winners” – that’s what James Montier was proposing in 2002 and probably now would recommend, too. (This is, by the way, a great place of his highly recommended writings – Link).

This dilemma tortured me for a long time and I wanted to share my thoughts.  Losers are not always bad investments. Actually, they are one of the best. Nobody likes them, i.e. there are clear willing sellers and for all kind of reasons, psychological and economic.

As it’s written, it has a very absolute meaning, very undemocratic.

Averaging down is a good thing and I am doing it routinely. As per his most recent annual review, Prem Watsa also likes it and calls it “long term value investing approach”. (Link, btw, his liking of RIM still puzzles me – I admit that I do not understand the odds in this particular case). You just have to practice it deliberately. Know the misjudgment and make conscious decision.

New facts (not emotion, not mood, not liking/disliking) and intrinsic value should guide you and not your brain’s asymmetric treatment of pains of loss and pleasures of gain. Each stock has a price and value. When discrepancy is big enough, you can strike.