What I learned about investing in 2008

In case I forget, here are notes from my current to my future self. 

 

Stocks don’t always go up even over the long term.

I bought the idea that you should buy and hold for the long term.  Keep putting money into your 401K, buddy – you’ll get a tax break on all that money you lose; meanwhile, we’ll pay out $20 billion in bonuses to Goldman Sachs (2007) and the government will rescue them when they crap out.  Your money at work.

 

2008 taught me that the investment system is gamed by financial people and that, in addition to buying low, I need to sell high.  How can I know what is “high,” though?  Didn’t Peter Lynch tell us that we’ll never get rich if we sell our “nine baggers” too soon?  How can I know when to sell? 

 

Note to self:  watch what the financial people are doing.  Lock in profits when they’re selling and buy back shares at a lower price.

 

When investment bankers are selling, sell.

I used to play in the same sandbox with a kid named Gary Parr.  Literally, the same box of sand when we were kids.  He has gone on to become a wealthy investment banker and I have toiled to create new businesses.  Too late to fix that decision.  He’s now vice-chairman of Lazard (LAZ), whose shares  I bought, but I should have sold when Gary and other Lazard insiders registered to sell $300 million of stock on September 3, 2008 at $37.  Five months later, the stock is at $26.  The Lazard honchos understood that they had better sell while they could;  I didn’t get the message.

 

http://www.breakingviews.com/2008/09/02/Lazard.aspx?e=c0iW-4cCQ2pm6sd

 

Similarly, I should never have bought Discover Financial Services (DFS).  I like the Discover Card.  They have great service, great online systems and are generally a terrific company.  I can’t understand why anyone would pay for an American Express card just to impress the kind of people who are impressed by American Express cards, or why everyone does not pull the Discover Card out of their wallet first.  But it was a bad idea to buy stock in Discover Financial Services.

 

On July 7, 2007, Morgan Stanley spun off DFS at $28.55 a share.  I bought in at $14.60, and the stock has since been kicked down to $8.71.  If Morgan Stanley, a company full of financially astute people, is selling, why should any of the rest of us buy?  If it were a good bet, they would have kept it for themselves. 

http://www.fool.com/investing/value/2007/07/16/is-discover-a-mastercard-sized-opportunity.aspx

 

Investment bankers are always operating for their own accounts.  Note to self:  if investment bankers own the asset themselves and are willing to sell it, run away.

 

If the company is small, sell when insiders are selling.

This may be true for all companies, but I learned my lesson at LoopNet (LOOP), a company recommended for many of the right reasons by the Motley Fool.  Loop shares are down from $25 to $7 even though the business seems like a good business.  Loop insiders and early investors like Stanford U have dumped so many shares that Loop has stopped reporting through channels that used to be trackable by Etrade.  However, if you search, you can still find info like this page – http://finance.yahoo.com/q/it?s=LOOP – which shows sales of $241 million over the last two years;  LOOP now has a market cap of just $233 million.

 

The strange thing is that LOOP might be a better investment right now with cash in excess of $100 million.  However, I’ll never again buy a company with a market cap of less than $5 billion where every bozo on the inside is running for the exits.  The stock can never succeed as long as they sell against every uptick, and, anyway, there must be something fundamentally wrong if all the insiders are selling.  Note to self:  insiders have more information than I have; don’t bet against them.

If the leaders of the company cash out, cash out, too.

 

Geez, how did I miss this?  On Jun 4, 2008, Joseph Steinberg, the president of Luecadia (LUK) and David Cumming, the Chairman of the Board sold shares worth $19.6 million and $31.8 million.  This wasn’t the usual three hundred thousand for a new Maybach;  this was an S.O.S. to anyone listening:  the president and the chairman are taking $50 million off the table.  Who wants in?  Since then, the stock has dropped from $48 to $20.

 

Note to self:  if the leaders of any company take a sizable chunk of cash off the table, sell.  They aren’t selling because they need the money.

 

Cash is eventually valued.

OPTT, a stock I’ve liked for its alternative energy potential, was getting so trashed that I put in a buy shares at $5.10.  The company had $9 a share in cash, and, even though it had a modest “burn,” $5.10 was still a good bet.  After bottoming out at $4.60, the stock went back up and is bouncing around between $6 and $9.  When inflation or demand or both kick oil up again, OPTT shares will climb.

 

Note to self:  believe your eyes.  If you can buy well below the cash value of the company, and the company is not hemorrhaging cash, buy.

 

Believe your eyes:  the emperor is naked.

About a year ago, I attended a dinner in New York and was seated across from a guy who specialized in creating derivatives.  He would sell you anything that you wanted to buy.  If you could imagine the risk, he would create it.  It seemed to me that this was creating a self-referential, self-defeating system.  It reminded me of what a man who ran dumps once told me:  that you can line a dump with plastic to contain all the toxins, but that the rain comes down and washes the toxins into the drainage system, and that what you end up with is just very highly concentrated toxins.  The toxins are still there;  now where do you put them? 

 

Risk doesn’t go away;  it gets disguised, and then people like to forget it exists.  We’ve been shown the Emperor’s New Clothes by the “quants” who are not smarter than anyone else – just better at making simple ideas complex.  Note to self: if the emperor is naked, stop hanging out with him.

 

If the derivatives market reached $596 trillion in 2007, how long will it take to un-wind?  Some reports say that, on an inflation-adjusted basis, we have already spent more than the cost of World War II.  http://www.ritholtz.com/blog/2008/11/big-bailouts-bigger-bucks  We may have to keep plugging holes in the economy with new cash as hundreds of trillions of derivative positions vaporize.  Maybe that’s all we can do. 

 

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Published in: on January 12, 2009 at 2:50 am  Leave a Comment  
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