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The last 3 quarters of 2009 have been rough for fundamental investors. This first quarter has been more realistic, but the markets are still trading at low volume and it appears news and innuendo are moving equities more than revenues, liabilities and assets.
I would like to remind all of the mindsets that I have used that, although far from perfect, have allowed me to outperform the broad market and most asset managers.
- Read all practically available research thoroughly and explore both the pros and the cons of the argument - from as objective a viewpoint as possible.
- Maintain your investment criteria, and don't attempt to go along with the crowd. If you are not a momentum trader, you should not be trying to switch direction midstream.
- Place small amounts at risk for each and every thesis. When using volatile instruments, assume the worst case scenario in terms of recovery.
- Take profits regularly and often. This is very important to me. I took a 39% loss in 2009, but that was off of a 400+% gain for 2008 and 55% annualized gain in 2007. Netted out on a cumulative basis, it allowed me to stay way ahead of the pack (on a total return basis) than those that got hit in the crash and rode the rally halfway back up. That being said, the pain of any significant loss causes one to take a distorted view of reality, which leads me to the next point...
- Judge the numbers, and not your feelings. Although I have outperformed by far, the inherent human desire to view short term occurrences over long term performance effects even me and I am the one that came up with these tenets:-). The Janet Jackson song, "What have you done for me lately" really shouldn't apply to my investing, or anyone else's for that matter. I have a two year investment horizon. It is very difficult to hang on to when things go against you for quarters at at time, but quarters are very, very short time periods in a fundamental investors horizon. This is the hard part, separating subjectivity from objectivity. When things look as if they are going to far against me, I go to cash to re-evaluate my investment thesis, and change it if it turns out that I was wrong.
- Don't be afraid to admit that you are wrong, but don't confuse being wrong with inappropriate timing. I have no problem admitting that I am wrong. I also admit that timing can be difficult, particularly in manipulated markets, which I believe these current markets may be when trading at low volume. This is the reason why I don't offer buy/sell recommendations or trading advice on my blog. It is more than hard enough to get it right myself.
- Hedge your positions. I spend a lot of resources in releasing market neutral strategies that were aimed at preventing significant losses when the market lurches against your positions. As an investor in volatility, one actually gains the more the market lurches, in either direction. Even if one were not inclined to put on a relatively complex market neutral combo (which is quite understandable), I simply by S&P call options to hedge against upward surges against my selected shorts.
- I am still strongly convinced that the fundamentals of the market will cause it to head downward. The reality of the situation is that it moved up significantly recently. The reality is also that the sharp upward move is only a portion of the downward move that I illustrated, and all things remaining the same, those who road the downward move and got hurt in the upward move are still significantly ahead of the broad market an most investors. Unfortunately this may not apply to those who only caught a portion of the moves, but this may apply to any time period selected.
Good luck to all.
