RSS feedOriginally Posted on April 14, 2007.
The disappointing performance of my stock picks the last few months have taught me several new rules about investing that I can’t believe I didn’t realize earlier. Unfortunately, not being aware earlier has cost me rather dearly. I put in an order to sell my double inverse NASDAQ ETF - QID - after realizing that it has quickly dropped passed my 8% stop loss rule.
Why did I go so bearish over the last few months? Am I still bearish now? I do still believe that generally speaking the economy is much less sound than it was a year ago. There are clear cracks in the credit markets starting at subprime and there have been whispers of fallout spreading to the Alt-A segment. The housing market looks like its reaching a bottom, but this in and of itself isn’t good news as it having to bottom isn’t a great sign. What I didn’t realize, whether because of my general inexperience or ignorance, was that these headwinds are not necessarily signals in one direction or the other. One of the reasons I tend to play the market quarter by quarter is that I’ve never believed I could pre-empt the market and by going bear over the last quarter, I attempted to do exactly that. I guess I was drawn by the sexiness of playing shorts and winning. Doesn’t it sound glamorous (albeit a little dirty)? In all my hurry to reinvest and get winning quickly, I turned a blind eye to the fact that we’re looking at an economy of unprecedented liquidity. The hedge fund boom (for now) provides an unbelieveable support to the market as there are always buyers. Furthermore, private equity and historically rampant merger activity has also buoyed the markets during the this time of distress. The cautious almost bearish nature of analysts in and of itself has been providing an interesting counterbalance towards a bubble and continues to keep the markets on a bull run. Do I remain cautious? Yes. I do believe there are issues in the economy that eventually have to come to bear (no pun intended). But, I’m not quite as certain as to when this will happen.
So, what have I learned? Too much information can be a bad thing. After taking a position at an investment advisory firm and spending a lot of time reading about the markets (a disproportionate amount of it being alarmist material), I feel that my bearish bias may not be genuinely my own but more the result of conditioning by my boss and her investment proclivities. Hedging out your positions during a volatile market is not easy and the appeal of broad market or segment based ETFs, while providing a very valuable tool to do so, does not make it something that an average investor can necessarily do successfully especially if you’re only investing in one or two positions at a time. Pre-empting the market is not a necessarily intelligent thing to do unless you’re willing to stomach the potential for some pretty signficant near term losses. Such strategies are decidedly long-term and that is decidedly not me.
It’s time to go back to the basics. The investment tenets that I know best are those that have a month to month, quarter to quarter goal. Working trends is safer than bucking the trend and a market that is not trending in one direction or another is one that you can be comfortable not being in. I’m going to cash for now, but I will be looking for a good technically strong investment and hopefully get on the right track to finish out the year. There’s still almost 3-quarters left and I do think there’s time yet for me catch and beat the markets. Stay tuned!
Thoughts on May 23, 2007
Well, the portfolios are slowly turning around. I guess you could say they have bottomed. I think my back to basics approach has served me rather well, with the exception of a buy in Piper Jaffray, but that seems to be making some strides of late and hopefully will get on a run soon enough.
The market has been decidedly bullish and while the housing slow down continues to linger in the back of everyone’s mind, the chicken littles that propelled many of the fears about subprime and housing in general have quieted down quite a bit. Heck, even the predicted May correction has yet to really come to fruition. The S&P made a significant technical cross over by reaching an all time high and it looks like the dollar is turning around. There has to be a correction sometime. What goes up must come down right?
