Mid Week Pit Stop #14

Mistakes

Stock market is a place where you can't stop learning. In order to better your performances, you have to review your mistakes and not repeat them in the future. You can win the game once but you can't beat the game forever, remember this.

Let's look at how I have been performing so far and my mistakes.

The first mistake was holding on my shorts for too long. This is actually a mentality issue. I will briefly talk about the whole sequence. Firstly I was very negative. Well it paid off for being negative in fact. Oil killed the airlines and autos like AMR and GM. To some extent, the oil effect spilled over to the financials and kills the financials as well. At that point of time, a common sense play was to go short and I did. AMR was down below $5; GM below $10; Lehman, an example from the financials, was around $12. My whole portofolio was up for 90%, most stocks were down 50% or more in a month. Pretty good isnt it?

The problem came when I actually doubled my shorts (tripled/quadrupled on some, especially lehman). They were already beaten down so badly and at price down 60% from my first short, I went to short even more. Plain stupidity! The only way that my shorts would pay off, was a possible bankruptcy scenario. I admit that this scenario was playing out in my mind at that point of time but timing was wrong.

I did cover some of my shorts though. Fannie, Freddie, AMR and GM were the stocks that I covered actually. Somehow their prices are too low for me to keep holding them. That's just an instinctive play. Not really something to be proud of. All the financials were not covered. I don't have the portfolio statistics for that point of time anymore but Lehman was down 60% from my first short. You could infer the prices of other financials, it's not tough. The negativity helps me at first but also kills me in the end because I become too negative and ignore the timing.

Timing sums up my second mistake. I'm refering to two types of timing over here; timing of more shorts and timing of the plunge. The mistake for timing of more shorts was obvious. Shorting when the stocks are down, is fine. But shorting when the stocks are down badly, is not. If I have been more systematical with my shorts and spread them out at the price level like intervals of 10%, I will probably be much better than now. I'm having a negative portoflio now. Actually, I'm not very frustrated with this mistake, to some extent, shorting those stocks at such low prices was to prove a point that stocks that make new low can go lower. Obviously, they are already very low.

The mistake of the timing of the plunge was something that I'm frustrated with myself. If you remember, my plan at start was shorting into a stock market plunge that would be ignited by a catalyst and Fed meeting was set as the catalyst, either the July meeting or the 5th Aug meeting. Nothing was made out of the July as expected. But fear of high oil price crept into the market as oil continued its trememdous climb. Markets were down badly for many days and mortgages, an unexpected catalyst, began to capture the attention again.

This time it was Fannie mae and Freddie mac. Fortunately (the F word just can't seem to go away isn't it? LOL), I had a short position on Fannie mae. Things worked out well as I covered Fannie and Freddie (added it when it was up 20% few days back, suddenly I have become smart!) on friday as I believe there will be some news to save them by the Fed. Everything was spot on as I shorted Fannie and Freddie again on monday as they opened up higher again. Along the way, some financials were added. One day, it comes to a point where I think the Fannie and Freddie story is over, I infer from the prices and cover those stocks with AMR and GM as well. The unexpected problem begins to end.

The market plunge was premature for me to some extent. One, I think the trigger should be the Fed's meeting. Two, the cycle is completed. If I had drawn an analogy to Bear Sterns in March, I should be expecting a rally isnt it? Sadly, I didn't. Financials rallied strongly and I was beaten by myself and the market. I failed to refer back to my plans and draw previous experiences. Urgency was lacking in me. Even though a market downfall was expected but it was happening too early based on my own plans and I didn't adjust to it.

Comical way of looking at my performance

Actually when I come to think of it, the reason why I'm holding a negative porfolio is because of credit expansion. I shorted a lot of stocks, the gains gave me more money and more margins to play with. Shorted even more out of my comfort zone and the cycle repeated many times. The price of the market got so low and it was clear that it had to go up. I got caught as the prices came going up. Soon I filed for bankruptcy (alright, this is not true but I can't find a better ending to end the story).

If you replace shorting with buying, low with high, up with down, you get the idea of credit expansion and what we are facing now.


The current crisis is not only the bust that follows the housing boom, it's basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency

George Soros