Category: Finance

David Merkel writes an article he titled “The Future Belongs to Those with Patience“, but the summary explanation is about how peoples’ expectations drive asset values. Waiting for when expectations are low and investing will generate superior returns. Easier said than done.

The article he wrote contains very powerful information and is well worth reading in entirety (along with most of what else Merkel writes), but is probably too abstract for those that are not in tune with the marketplace to understand. I believe it was a Warren Buffet quote that said “There are no called strikes in investing”, and using this analogy, it is if you are playing a game of baseball and every (investment) “pitch” equates to every security you end up researching. The only difference is that in a real game of baseball you’re out if you receive three good pitches and don’t swing, while in the investment world you can still wait for that perfect pitch.

Since the third quarter of 2011 I have been averaging at about a 70-90% cash balance. I started deploying this late in the second quarter of 2012, and am currently sitting on around 30% cash. I don’t know of many people that can keep large cash balances for a significant length of time – it is easy to get “itchy” and take a swing at some marginal bets. This is how you lose capital.

I always get puzzled at articles that claim that retail investors are getting turned off the market because of high frequency trading.

If you are an active trader in the market (i.e. your sole method of generating returns is through the relatively frequent buying and selling of stocks) then I can see how that is the case. You are perpetually front-runned by computers and it is the financial equivalent of getting bitten by mosquitoes.

For most investors, computer trading doesn’t make a difference at all. The only two impacts are if you are trading on margin and some sort of “flash crash” triggers a margin call on your account, and the second impact is if you are planning on making an entry below a certain price or an exit above a certain price and you get your limit order hit.

When establishing positions in less-than-liquid stocks, however, getting front-runned is a pain in the ass and is an unavoidable cost of trading. My suggestion would be to keep order sizes microscopic to average volume and accumulate when somebody is distributing (or vice versa if your task is to exit). Another method is to wait for the company to have a poor quarterly earnings report (that does not reflect a fundamental change in your perception of the business) and when the stock gets hammered, start accumulating in measured steps. There is no science to this – the shares you want to be accumulating at the bid, somebody wants to be selling to you at the asking price and there are times when you see a ask of a sufficient size that it is just worth putting in the limit buy order at the asking price.

In general, unless if you are employing some sort of mechanical algorithm, people that trade more often than not will have worse performance.

July was a fairly active month in terms of deploying cash. In addition to the two names mentioned on this site previously, there were four other candidates that came into buying range. I have taken the liberty to accumulate and am sitting at around 37% cash at present.

The portfolio looks schizophrenic at present – there are a bunch of deep value plays (under book value with a low projected P/E) and the other half are clear growth picks – one undervalued gem has two business segments, one took a significant revenue reduction for legitimate reasons, while the other segment (which is most of the business) is growing significantly faster. The automated screens out there aren’t picking up the growth because you have to do a little homework to dredge out this information. Once the market figures it out (after some quarterly results) there should be a P/E expansion (not to mention the actual EPS will be increasing as well).

My YTD so far is roughly flat, but when I do my own valuations on what I am owning in my portfolio, I would expect to see some positive gains that will outdo the indicies. Just a matter of being patient.

One other side note is that I am increasing my US dollar exposure. Most of these companies trade in the USA.

“Stocks Might Be 50% Lower Without Fed”

They posted the following chart:

Clearly, the S&P 500 would have gone to zero (as indicated in the chart) if the fed had not pumped as much liquidity in the system as they have.

The reality is that fed money pumping probably had some positive impact on equities, but how much remains a question that will be impossible to verifiably answer. My guess is that it goosed up the US treasury bond market more so than equities.