AT WHAT POINT DO YOU KNOW YOU ARE WRONG?
There isn't a position I take without being able to answer this question. It is a question that should be at the core of any investment or trade in any portfolio, regardless of experience or pedigree. Regardless of whether the position is a hedge, outright long, short or investment that you plan on holding for a decade. There is always a point when the original thesis that caused the investment to be taken will get blown out of the water. It is the job of every individual who gives a damn about wealth preservation to know that exact point. The mistake made by so many investors who choose to follow the fundamental creed without regard to price is that they can't give you an answer to this core question. The reason is that price leads fundamentals. By the time the reason for the decline in price morphs into tangible fundamental evidence of a problem, the stock has declined way past any reasonable point. It is the reason why few value investors make it through tried and true bear markets. The philosophy of buying into price declines that chew through every point of technical support, but are justified by valuation ratios that placate any concerns will eventually lead to fatal ruin. An anomalous period will come along that carries prices through concrete floors of value once thought impenetrable, burying investors under a suffocating ash of fundamental data that fails to quantify downside. It is the reason why you see that I have actual losses posted in well researched positions that have failed to move as expected. The opportunity cost and monetary cost of sticking with positions that move contrary to expectations is simply too great. The exact same philosophy applies to hedges that are initiated in the portfolios, similar to the hedge that was taken in TZA this past week. I know exactly what the market should do here in order for my hedge to be validated. If the market behaves contrary to my expectations, I will assume that my understanding of the situation is not as clear as I thought. If my understanding of any situation lacks clarity, I then lack reason to risk capital in that position. Here is what the market should do over the next 1-2 weeks according to my work: click chart to...
THE ROTTEN COMBINATION OF BIKINI CLAD BULLS AND GRUMPY OLD MEN
In an effort to keep readers apprised of the latest in a series of thoughts that would be impossible for me to categorize if it wasn't for this website, I would like to present a long-term look at the S&P 500. This will clarify exactly why I believe the resistance level we are facing (in the form of an important trajectory) is significant within the overall bull trend. Furthermore, we are banging heads with this resistance area as busloads of bikini clad bulls are taking great comfort in what seems to be the 2013 version of The Endless Summer. Unfortunately, this is not 1966 and there are no surfboards or exotic locales in the stock market. There are only grey buildings occupied by grumpy old men that want nothing more than to see you walking around with rabbit ears, a tattered blanket and a cup that jingles. Your money becomes their money the moment you sink your teeth into the belief that what is being said by the majority cannot be wrong. If we were rising against a wall of great worry as we were just two months ago when I was touting the benefits of bullish perfection I wouldn't be nearly as depressing a host. There is, however, reason to become defensive. Not bearish. Defensive. My personal version of defense started this past week with the initiation of a medium sized hedge. Here is a long-term look at the resistance level the S&P 500 is sitting on presently: click chart to...
5 ELEGANT REASONS WHY THIS IS THE TIME TO HEDGE LONG EXPOSURE
I am neither a glutton for punishment or a sadist as many of those who frequent these parts seem to be. I do not believe in jumping around bull markets for fear of every dip, thinking I am smart enough to avoid any pain and brilliant enough to participate in only the pleasure. Bull markets should be left alone to create wealth in portfolio positions that have potential far beyond the opinion of any market pundit who cannot see outside of his or her grey box. There does come a time, however, in every bull market where overwhelming evidence combined with an undeniably well-defined risk/reward scenario makes taking the other side of the trade too irresistible. By taking the other side of the trade, I do not mean getting short to the point that I can recite the posts on ZeroHedge while waiting for the world to descend into Viking rule. I also do not mean liquidating any of the long positions that continue to have upside potential that is unrealized by the market. Both of these options are too froggy for my taste. Jumping around excessively is a sign of a lack of understanding regarding the structure of your portfolio and the markets as a whole. It may be time though to take a step back from an aggressively long position and hedge exposure to protect the gains that most investors seem to be sitting on early in 2013. I did just that at the close and a little bit afterhours, by initiating a hedge in TZA. The last time I put on a TZA hedge was on October 10th to a ringing chorus of boos and hisses from the studio audience. Most of you who have been following along know that I control risk in the portfolios in a 100% systematic manner. All of (or most) of the hedges I have put on over the past couple of years have been a result of the system spitting out an instruction and my following the orders regardless of opinion. This hedge, however, was not a result of my system. All of my trend indicators are still quite a bit away from turning to the bearish side, although they have started to deteriorate this week. Here are the reasons I am uncharacteristically early in initiating this hedge: 1. The 1520 area on the S&P has been something I have been discussing in the weekly reviews for a couple of weeks now. It was first mentioned on January 27th. And again this past Sunday. What I didn't have at that time was a reference as to whether the market saw this as an important inflection...
PORTFOLIO UPDATE: HEDGES ARE CALLING
Shortly after the market close, I tweeted the following: I will have a full analysis of this decision in a post to come shortly. Coming into today, the portfolios were sitting at roughly 85% long with 15% in cash. The 15% was put to work in TZA, bringing long exposure down to 70%. Since I don't use margin, this is as exposed to TZA as I will get unless I begin trimming back positions, which I am not close to doing here. My maximum TZA exposure goes as high as 25% of total portfolio, if need be. Following this trade, the portfolio consists of WMIH, SPNS, PRXI, MITL, UPIP and...
5 CHARTS THAT WILL LEAVE YOU IN PEACE AND NOT IN PIECES DURING THE WEEK AHEAD
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JANUARY MONTH END PERFORMANCE SUMMARY AND LOOKING AHEAD TO FEBRUARY
*This is a copy of my letter to investors summarizing the month of January. December monthly report can be found here. 2012 Return: +58.61% Portfolio January Performance: +6.61% S&P 500 January Performance: +5.04% Portfolio YTD Performance: +6.61% S&P 500 YTD Performance: +5.04% Total Return Since Inception (1/1/12): +70.09% Portfolio Highlights For January - UPIP gained 68% during the month of January on an announced deal with Ericcson (ERIC) to essentially enforce their portfolio of over 2,000 patents and share in the profits of the patent enforcement. Essentially, UPIP has been given a portfolio of patents to capitalize on that is in addition to their already extensive portfolio of patents that belonged to the company when it was known as OpenWave. There is certainly a value that can be assigned to this portfolio, as certain patents are assured to bring in licensing revenue over the long-term for UPIP. The market, however, has not been reflecting the difficulty in valuing the portfolio, instead taking the route of being completely dismissive of the company all together. This dismissive attitude was fully reflected in the stock when it was trading at $1.20 to start 2013, valuing the patent portfolio at only $60 million despite assertions from those who had worked on the portfolio in the past that its worth was in the hundreds of millions of dollars. Ericcson entering the picture is as a big deal as the appreciation in the stock price for the month of January suggests. It certainly caps the downside, making the $120 million market cap that the company started the year at seem ludicrous given the exponentially increased potential for both licensing revenue and potential settlements as a result of enforcing the patents. I am hard pressed to see the company trading anywhere below $1.50 per share (valuing both UPIP and ERIC patent portfolios at only $90 million), clearly defining risk at roughly .50 cents per share from here. Despite my bullish feelings with respect to UPIP, no additions were made during the month as I am content leaving total long exposure right where it is currently. I will get to that later. - SPNS gained some well deserved recognition during the month in the form substantial buying in the name. The company share price increased 25% during the month of January on substantially greater volume than average. During January the company announced that they expected $135 million in revenue for 2013, representing a 20% increase versus 2012. They have also announced a new product for the financial services industry named DECISION, which, based on initial indications has received significant interest, creating potential to ramp revenues at a greater pace than expected...