POST OF THE DAY
Mishedlo
In Reply to: Market Rant

Format for Printing

Format for printing

Request Reprints

Reuse/Reprint

By deanwoodward
June 25, 2002

Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light. How are these posts selected? Click here to find out and nominate a post yourself!

Wow. I have lots to respond to. Here goes:

To those of you that are short, you obviously have a lot more confidence in your abilities to time the market than I do. I would love to be able to time the market, but I've been wrong every time I try, so I've given up. Not to say that I haven't tried to minimize the amount of risk I'm taking per unit of expected return, but shorting isn't really an option for me anyway. Most of my investable assets are in retirement accounts, where shorting is not possible. So, I use mechanical investing to select stocks for me, and try to maximize the Sharpe ratio of the overall portfolio.

As to my company retirement account, I hope that dollar-cost averaging over the long haul bails me out. I have mostly Fidelity and Vanguard funds, and this money can't be touched for about 25 years, so I'm letting it roll. Again, I'm betting that the market as a whole will be a lot better when I retire than now. I'm not aware of a 25 year down period to have existed in the history of the U.S. stock market. Hell, wasn't it only 3 years ago when everyone was saying how great the market was?

Yes, we could be hit by terrorists again. Yes, Pakistan and India could go to war. Yes, we could have another year or two of more revelations of lying, cheating, and stealing on behalf of the Wall Street Elite. Personally, I'd like to see some of those shysters be sent to Gitmo to be cell mates with Joe Taliban. But, I realize that I am a small fry investor, who is unable to make markets, and unable to steal enough to get away with it. Funny, but if you mug someone for $100, you go to jail, but if you steal $100 million from your company, then you get a slap on the wrist, sending your sleazebag lawyers to protect it all from the SEC and/or creditors. You do your time at the white collar prison where tee times are strictly enforced, and then you get to live off what you stole. These b... and their lawyers and accountants deserve an extra hot place in hell for what they're doing. (Note: I am a lawyer, but I believe that 99% of them give the rest of us a bad name.)

So you can tell I'm angry about the state of affairs. But what can I do? I hold my stocks and mutual funds not out of patriotism or belief that any analyst would tell me the truth, but because I would sell at EXACTLY THE WRONG TIME. I don't know WHEN the market will go back up, but I know that it WILL. And I don't see short sellers as evil, unless they try to move the market by illegal or unethical means. If someone knows more than I do, and is willing to put their money behind it, good for them. I mean that. Short sellers have to be short term oriented, because the long term direction of the market is up. Yes, short sellers can cause my portfolio to go down temporarily, but generally can't affect the overall U.S. market, because rising earnings will eventually drive stock prices up.

That doesn't mean that short sellers can't drive a company out of business unfairly. A company with a falling stock price might be downgraded on its debt, which could result in a death spiral. However, I believe that companies should be conservative for this reason. Play too close to the edge, and someday you might fall off. Unfortunately, CEO options have resulted in 'bet-the-company' strategies, which only now are unfolding to the detriment of investors. I believe that CEO options should vest over 20 years, STARTING three years after the CEO leaves his post. Then we'll see some changes that align the CEO with the average investor.

So, I don't see any problem with short sellers in principle. They kill off crappy companies faster than they normally would be, which is generally a good thing. That said, I can't really do much in the way of short selling, because I don't follow the markets closely enough, and don't have enough discretionary investable capital to make shorting part of a balanced breakfast, er, portfolio. But that doesn't mean I dislike you guys for having the guts to put your money down for your beliefs. More power to you.

Sure, I'm mad as hell about the PREVENTABLE parts of the current malaise surrounding the market. And changes do need to be made. And some fat cats need to be led away in handcuffs to prison. Not the country club, not jail, but PRISON. For a long time. Then, I think we will see a change in investor psychology.

I don't know whether the economy is in bad shape otherwise. From what I hear, most of the economic reports are positive, or at least less negative. I think the biggest problem is the trend, caused by the psychology.

That is why Buffett is holding puts on the S&P. It's my understanding that he's not actually selling, but hedging. I could be wrong. If he is hedging, he's decided that the cost of the hedge is minimal compared to the potential downside risk to his overall portfolio. Two things to consider, though. One, cost is not an issue for him or Berkshire. It is for me (I have a lot less to lose, too), so I don't buy options. Two, he has stated that he believes that we are in significant danger of a terrorist attack, though he didn't specify a time.

Let's also realize that while Buffett is a certifiable investing genius, he's not infallible. I'm hoping he's wrong in this case. But I'll admit he's being prudent in protecting what he's earned.

As to five stocks I'm interested in. Again, I'm mostly investing in mutual funds through my work retirement account, and in mechanical strategies for my Roth. That's about 95% of my investments, and it's locked up for 25 years. But I have small positions in TYC, REI, and ILA, which I picked up recently, thinking that they had been bashed down enough, given the fundamentals. Yes, I'm underwater on all. TYC is down 30%, REI and ILA on the order of 15%. Yes, it sucks. But I think they will come back.

I also own some CKFR, from when I used to work there. Yes, it's underwater, too, but I think they will continue to own the online bill payment space, which I think will grow substantially in the next 3-5 years. Whether they actually make any money on it is a different story, but I hope so.

Somebody also asked how I would feel if I weren't invested for 25 years. Well, I think the key to investing is to find strategies that you can understand and use, and still be able to sleep at night. I believe it's much more important to know yourself than to know the market. After all, you have to be able to ignore a hell of a lot of noise generated by analysts, financial planners, etc., that see clients as sheep, not partners. Not to say that there aren't good planners out there, but many are driven by commission, and many fee-only planners don't justify their fees. So, I think it's up to each person to find their risk tolerance, and to keep their portfolio within it. Some people want others to manage it, and that's fine, but they need to know that they are taking on additional risk (such as the planner stealing from them, because it happens), and probably losing significant return in the process.

I expect to lower my portfolio risk, as I get closer to retirement. It's just common sense. But I don't think I'll ever abandon stocks. Again, it's not because I trust analysts any further than I can throw them left-handed into the wind, but because I believe that the stock market is the place to be for the long haul IN SPITE of them. Yes, I could make more if I could time the market, but I can't. Yes, I wish there were fewer thieves on Wall Street and in the boardrooms. But given the constraints I have, I don't see an easier way.

This is a good thread. Please feel free to take issue with any misstatements or if you think I'm full of crap.

Dean


Become a Complete Fool
Join the best community on the web! Becoming a full member of the Fool Community is easy, takes just a minute, and is very inexpensive.