July 22, 2008
The Art of Buying Lower Lows
My trumpeting of Ten Favorite Financial Stocks in August 2007 has been widely and rightly (though often cruelly) reviled. I learned my lesson: never post your investment ideas on the Internet. (Just kidding.) The lesson is: never buy stocks that are in a downtrend no matter how much they look like “bargains” on paper.
Earnings collapse, massive writedowns are taken, dividends are slashed or eliminated — what looks like a good solid business with a long and sterling reputation of dividend growth can be crushed in a matter of months. I know this now. Many kind commenters and emailers tried to tell me (most nicely) that I was an idiot to like the financials, but as usual, I went my own way and got my ass handed to me.
My old friend VIX is still excellent at pinpointing extremes in sentiment, but I should have been looking to buy the strongest stuff in a weak market (energies, materials, etc.), not terrible junk like the godforsaken regional banks. Older, wiser, poorer… the same old story. :-)
Related:
A Good Time to Buy Financials? January 27, 2008 [YOU’RE A DOUBLE DUMB SUCKER, KID]
Discover the Chairman’s 10 Favorite Financial Stocks, August 1, 2007 [I’M A POOR SUCKER]
July 22nd, 2008 at 2:40 pm
Chairman,
how much of your equity was in this trade? 10%, 20%..?
Cheers,
Markus
July 22nd, 2008 at 5:26 pm
They say there’s no such thing as failure, just success and new feedback.. Not sure that person ever traded though.
So did you 10 financials generate any alpha? You might still be in line for some performance fees CM :)
July 22nd, 2008 at 6:43 pm
@Markus: It wasn’t a trade, it was an investment, and it was very big, around 20% of liquid net worth.
@Andrew: Alpha? More like Zeta (and not Zeta-Jones). I buried a lot of good people with those ideas and I’m deeply ashamed about it. (I’m definitely in the “there is such a thing as failure” school, though I try to remain optimistic despite repeated stupidity on my part.)
July 22nd, 2008 at 7:21 pm
Chairman, sorry to hear about that !!!
But whats all this “investing” business and then at 20% a pop all about then in the first place ?!?
Why not just view every speculation you enter as a trade, ie one accepts that it’s fine to be wrong more often than one is right, provided winners are larger than losers, etc etc.
Meaning every speculation is basically handled the same way, only difference is time frame, eg day-, swing- or position trades.
That way no really bad things will ever happen.
Just look at this like a 20% drawdown, not pleasant, but by absolutely no means lethal either, and just trade your way back up to the next high water mark again.
Good trading mate !!!
July 22nd, 2008 at 7:50 pm
@MarkusP: I like to separate trading and investing in my mind (short-term vs. long-term, price vs. value, etc.) but maybe it makes sense to approach everything as a “speculation” as you say.
July 22nd, 2008 at 10:52 pm
Kudos for the honesty CM.
Your blog has helped my trading and results, so hope you keep sharing everything, good and bad.
July 22nd, 2008 at 10:56 pm
Andrew: You can be confident that I will crow about every infrequent tiny victory while largely obscuring or completely ignoring my innumerable lapses and idiocies. :)
July 22nd, 2008 at 11:18 pm
Did you use fundamental analysis when making your investment decision?
July 22nd, 2008 at 11:59 pm
If you are viewing it as a failure, best not to dwell.
July 23rd, 2008 at 12:44 am
CM,
have you realized the losses or has your stop loss not been hit yet? I mean, is it still an open long term trade (you see I go with MarkusP) with a non optimal entry timing or is the trade/investment closed?
Cheers,
Markus
July 23rd, 2008 at 1:02 am
CM - I prefer “deferred outperformance”. =)
July 23rd, 2008 at 1:46 am
You are a slow learner. You did the exact same thing back in 2000/2001 with Internet Stocks. At the time, you equated buying YHOO to your ancestors backing up the truck on General Mills (or something like that) in the 1930s. I recall you writing that your wife even told you so, but to no avail. Sigh.
July 23rd, 2008 at 3:55 am
The credit crisis as it unfolded caught many off-guard by its size, more than one. Myself I have a note to learn more economics and financial history on my to-do list this year. As a newbie, I just learned how much a newbie I am this year.
July 23rd, 2008 at 7:22 am
@KC: Yes.
@Dan: I agree, but it’s even better to fess up.
@Markus: I don’t have stops on long-term investments … “non-optimal entry timing,” sounds like something you’d say to your buried clients (blind ‘em with bullshit)
@Lasw: You and the hapless Bill Miller. :)
@Piker: You’re right, I am slow and stubborn.
@bbc: I don’t think it caught anyone off guard who was truly paying attention.
July 23rd, 2008 at 9:05 am
CM: i KNOW for sure you can easily recoup the loss back easily. now i am waiting for the Chairman to roll up his sleeves and show this faithful follower his daytrade skill again.
July 23rd, 2008 at 9:29 am
brandon: Yes, I’m pretty confident myself, but it could be a slow start since I’m rusty. :-)
July 23rd, 2008 at 11:25 am
buying in a down trend can work if you have a stop and profit objective.
check out UNG, lost about 40% in few days, printed a doji-like candle today after almost touching the 200 day moving average on very high volume. You could buy it above today’s candle, stop right below it with a target near the declining 50 day ma around $55.
p.s. the other day i mentioned i bought WM in your honor after it broke down through $4. i got out yesterday at $6, 50% in a week. that was more dumb luck than anything, and it was a small trade, still shows that you can make money in down trends, just gotta plan it well and accept it as a speculation and not investing.
July 23rd, 2008 at 12:49 pm
Chairman, a lot of highly respected value fund managers (think Bill Nygren) also made the WAMU mistake and they are supposed to be experts at the accounting, analysis, etc. so I don’t think you can beat yourself up other than asking is investing really different from trading. I tend to agree with you that it is….so next question would be difference between value trap and major value - much harder question.
Anyways getting to the point…. just as there were a lot of traders making huge money shorting financials and real estate related stocks last 12+ months a couple years from now some good value managers will sift through the wreckage and buy as investments long term some of the surviving banks and insurance companies. They will make 1000%-2000% returns unleveraged over number of years.
That will be a great moment and as you regain your stake you can / could try again but this time with more DD. Would be a good project if you decide you really want to be an investor and not just trader.
-Soulek1
July 23rd, 2008 at 1:49 pm
Chairman,
I think I’m gonna buy some financials. You sound so frustrated, this could be the bottom ;-)
Cheers,
Markus
July 23rd, 2008 at 2:05 pm
@Soulek: Yes, Wally Weitz also got buried along with practically every other “value” guy, but I’m sure that you’re right: the people who know what they’re doing here could make a fortune buying certain financials, assuming they’re timing is right.
@Markus: Yes, clearly this mea culpa marks a major bottom. :-)
July 23rd, 2008 at 6:26 pm
Just wanted to add that I think it’s great that you share not only the good, but also the bad.
I trade for a living, but anybody else doing the same knows just as well that losing is part and parcel of speculating in whatever time frame you choose to do so; if you cannot handle losing you will never make it as a trader, and I for my part have certainly had drawdowns far worse than the 20% we’re talking about here, having drawdowns and dealing with them is, and there is no way around this, a significant part in determining how successful you will be as a trader.
Web sites full of winning trades may be entertaining to look at.
Problem is that entertainment is all they provide, they most definitely have nothing to do with the real life of a trader.
Good trading all :-)