Top picking

There's no shortage of bearish calls out there. There's even comparisons of the market to 1929 based upon a chart overlay. That's a joke. Yes, there are some signs of froth namely the IPO market - the Candy Crush IPO seems ridiculous.  I read a report that said about 75% of announced IPOs in the US were money losing companies which is about the same percentage as early 2000 near the peak of the tech bubble. I suspect the social media and cloud computing space  is largely responsible for a lot of this froth. These types of studies are worrying people - even Cramer is concerned! However, there's no comparison between where are now vs early 2000.  Economically speaking, the US economy was running at full steam with record low unemployment in early 2000. The Fed was concerned about overheating and was tightening rates to the point where the yield curve was inverted;  a condition that always precedes a recession and major bear market. Optimism in general was palpable with consumer confidence at record highs. There was also this notion that we were in some sort of new economic paradigm thanks to the internet and the market as a whole was historically very overvalued on pretty much every metric you can think of. We are nowhere close to the conditions that existed in early 2000 or the start of other major bear markets. Monetary conditions are still very accommodating even with tapering. The economy is expanding but only modestly, unemployment is coming down but is still at unwanted levels and widespread optimism in general is non-existent - consumer confidence is still well below 100.

Another thing you will tend to see near the peak of a bull market is how most people embrace or find reasons to justify what appears to be froth as opposed to looking at any sign of optimism or froth as a contrarian reason to be worried as is the case today and in recent years as well. Take Cramer for example. In February 2000 he posted an infamous article about how you had to own  these 10 "new world "  names  (high flying  internet stocks) if you wanted to make money in the market. He was not alone. I remember how in 2000 practically every equity mutual fund in Canada had Nortel as a top holding. At its peak Nortel made up a ridiculous 1/3 of the TSX. You see, retail and many of the "pros" embraced the market and eschewed logic. They made justifications for the nose bleed valuations (the internet will spawn a new era of massive growth and so traditional valuation metrics are not applicable). Can you honestly say that this sort of sentiment prevails today? Hardly. This time around Cramer is siding with the bears pointing out the froth in the IPO market instead of embracing it  and other skeptics are not in short supply. Sure, there's more optimism out there vs a couple of years ago but that's only natural after a bull run like this. And let's face it, you, me and everyone else still has 2008 fresh in our mind and worry of a repeat anytime there's a problem. A lot of people out there are also still convinced that the this bull market is "artificial" in that it's all due to the fed.

So, the bottom line is that despite the signs of froth out there (specifically the IPO market),  there's no comparison to 2000 or 1929. The unwinding of this froth could lead to a correction but unlikely the death of the bull market. The fact that's there's so many top watchers still out there suggests to me that there's still a LT wall of worry out there. I think it's also indicative of sour grapes. A lot of pundits out there were reluctant to embrace the bull market and largely missed out on it and so now it seems they want to make up for it by nailing the top. Too fucking bad.

As I've been saying for some time, the correction when it comes will be elusive. Many people, including LT bulls like me, have been on guard for it for several months and all we've seen are rather minor dips. These kind of situations are rather frustrating but I still think the best course of action is maintain your positions in high conviction names and keep your standards higher than average when it comes to adding new longs while maintaining a healthy cash reserve. I'm not outright hedging with puts/shorts at this time, but you do whatever you gotta do.

Personal circumstances

Nothing much has changed in regards to market action since my last post. The market continues to frustrate both bulls and bears. Both camps have been expecting the market to have a sizable correction for some time now but it hasn't happened. This watched pot never boils syndrome is nothing new, we've seen this situation happen many times since the bull market began. As it turns out, the correction tends to happen a lot later than most expect and only after maximum frustration has been reached.

Switching gears now. I've often said that the greatest obstacle to success in this game can be yourself. Mental/emotional mistakes will significantly prevent you from reaching your potential and at worst can do you in completely. One of the biggest roadblocks to success is that people often make buy/sell decisions based upon their own personal experiences or circumstances instead of the fundamentals. Let me explain what I mean. Let's say you have a twin brother with the exact same skill and mindset as yourself who is on vacation at the moment. You discover a very undervalued stock with great risk/reward qualities that trades at $1. Instead of buying it right away, you decide to just watch the stock  for a while to see how it does, and it moves up immediately. A month later it's at $1.40. You still view the stock as undervalued but chances are, if you're like most people, you will have a hard time pulling the trigger at $1.40 because you discovered it at $1 and feel like a idiot chasing it at $1.40 when you could have bought it for $1, but like most people, you would be willing to buy it if it dipped back to $1.20-$1.25.  Your brother returns from his vacation and discovers the same stock. Like you, he thinks the stock is a great opportunity but unlike you, he's not anchored to that $1 price it was trading at because he was not around when it was trading there. Your brother has no problem pulling the trigger at $1.40 while you still hesitate because you are still anchored to that $1 price. No matter what the stock does from this point, your brother's action is correct, while yours is not. You are basing your decision upon your personal experience with the stock and mental hangups rather than the company's prospects/fundamentals. The market doesn't give a rat's ass that you discovered the stock at $1. Second of all, if you see a very undervalued stock that you believe is worth multiples of it's current price, you shouldn't wait for a dip in the hopes to buy it a bit cheaper because in doing so you risk missing out on the big upside that it's likely to have - the risk/reward scenario in waiting for a dip in this case is very poor.

It's this type of thinking that also makes us sell our winners far too early which is something I continue to be guilty of doing. Rather than selling based upon the fundamental factors of the company, most people will incorrectly sell largely based upon their own personal circumstances such as how much profit they have or how large a percentage of their portfolio the stock is (rebalancing). I'm 100% certain that anyone who's been playing the market for some time has make this mistake. It's probably the biggest detterant to making a killing in the market.The saying "you can't go broke taking a profit" is bullshit. If you want to travel the path of mediocracy then by all means follow that advice.

The right way to play the market is to make your decision based upon always looking at the stock with "fresh eyes". When the stock in question has make a good move up ask yourself this, if you had just discovered the stock that day, would you still consider it a buy? That answer should be the primary factor of your decision to buy or sell. Forget about the past or what your avg cost is. That means fuck all in terms of where to stock price is likely heading in the future. The only time you could justify selling a stock "prematurely" is if you uncover an equal or more compelling opportunity.

It is very difficult for even the great investors out there, to avoid the dreaded mistake of taking profits too early. As Livermore said

I've known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine--that is, they made no real money out of it. Men who can both be right and sit tight are uncommon.

I have made this mistake with hwo.to. The stock now trades at $4.50 and I sold out 92% of my position at an average price of about $3.20 leaving big gains on the table. Although I rationalized my decision to sell with some fundamental factors, a large part of the reason I sold was due to my personal circumstances. My avg cost was $1.45 and I collected nice dividends along the way and so I made out well, but I obviously could have done a lot better. I could be a little hard on myself here because although I believe it's a mistake to sell based on personal circumstances, my situation was unique in that I had made a large initial investment  in hwo and I did the same with gre.v and so I had 80% of my portfolio in just 2 stocks. I think I had bitten off more than I could chew and didn't feel comfortable being exposed this way. So I think in this case, making a trade based on personal circumstances may be at least partially justified because I made such large bets which I normally don't do, but in any case, I don't think I handled hwo.to properly. I sold too much of it even though I was exposed the way I was. I should have sold some shares, but I overdid it and I lost my nerve.

There's a lot of delicate balances to keep in order to have optimal success; I've said this before. Discipline vs conviction. But I will say this: If you want to make big money you gotta have the balls to bet big when there's a golden opportunity and you gotta have the balls and the patience to ride that mofo to the point where it's at least fairly valued. If you try to ride the whole thing from undervalued to overvalued then you're being greedy. Again, delicate balances.

New all time high...again.

The market has managed to make a fresh new all time high once again foiling the burned, likely suicidal bears who thought that January decline was the start of something really nasty. Naturally, there has been a surge of inflows and a sharp rebound in bullish sentiment which suggest that the easy money of this rebound has been made and that one should be alert again of a top but not be over anticipatory. As I've always said, you have to be respectful when a market is making a fresh 52 week high and especially respectful of an all time high for it signals strong momentum which leads to further gains. That's not an invitation to go all in long, but rather to refrain from going short. I think status quo is a good move - maintaining core longs with a nice cash reserve. It will be interesting to see how the market reacts to the "Russian invasion" news over the weekend. As I've always said, these types of one offs don't derail bull markets; they only cause short lived dips at best.

This weekend Buffet released his annual letter to shareholders. You can read it here. For any aspiring value investors pages 16-20 are a must read. I have advocated many of the points he makes here on this blog. Buffet is a very knowledgeable and intelligent man but like he says in his letter, you don't need to be expert or have superior intelligence to achieve great investment success. There's many lessons Buffet teaches; some key ones are these:

• Be very patient and wait for that fat pitch before taking action. Look for those no brainer situations whereby the price you are paying is so cheap relative to what a conservative estimate of long term earnings will be, that it's not even necessary to know much about the actual operations of the business. 

• Buy stocks the same way you would buy a private business which means you don't care what the "market" values the business on any given day aside from the day you are buying it; all you care about are the cash flows the company is generating and the return on your investment from these cash flows - not from your ability to sell to a greater fool. This means that you shouldn't be looking at the value of your stocks every day.

• Stick with predictable businesses whereby you are reasonably sure that their products are going to be around many years from now and not be a victim of technological obsolesce. This allows for good earnings visibility in the long term and thus allows you to have conviction with your risk/reward analysis. This is the reason why Buffet loves insurance, bank, food/beverage, and utility companies and pounces on them when they sell at a discount due to a panic or general economic downturn.