Friday, July 25, 2008

Even dead cats bounce.

I got a call today from one of my closest friends, who is also a business associate. I'm never happy to see his name pop up when I'm on vacation. He helps me by monitoring a certain list of companies of interest while I'm in the wilderness, or in a foreign country where it is hard to stay connected. If he's calling me while I'm traveling, it usually means catastrophe has struck one of the financial markets, or my personal accounts.

Today it was my accounts.

For no reason at all financial stocks have rallied, with most up 50%. Given that I'm heavily short financials (because I'm so bearish on the economy), this is one of those one day swings that tests your mettle as an investor.

I'm in a weird spot blogging about investing because this blog is not anonymous, as most "I have this much money" blogs are (and should be). I have a lot of friends and family who have been reading since the beginning, so it isn't as if I could have converted this into a newly anonymous blog. I don't want to speak about dollars, but it is pertinent to the discussion and the lessons. So what shall I do? I still haven't decided exactly how I will handle this issue, and my inner monologue still antagonizes me as I travel and think about what to say and how to say it, so for now I will just speak in more general terms.

Since Old Faithful last erupted, I've lost an amount of money equal to my first year's salary out of college. Given that I only ever worked three years, it is not a fun sum to lose, but I'm not worrying about it. For one thing, my first year's salary is not equal to a third of my portfolio, so on percentage terms it doesn't hurt that badly. It's just a disappointing number to watch evaporate.

But a more important reason I'm not worried is because I am not a day trader. I'm comfortable in the investments I've made. I know my reasons are sound, and what the market decides to do from one day to the next does not instruct me in any way. It only serves me. It offers me an opportunity to buy or sell at today's price, but it in no way instructs me as to the future conditions of the market or any individual company. One year from now, these financials will be trading at a small fraction of where they stand today. They will continue to lose billions of dollars for the next year. No market capitalization can hold up to that.

This moment right here is what seperates the big boys from the kiddie table. Most people can't handle days like today. Warren Buffett has mentioned this numerous times. He notes that once you're smart enough to handle the basic math, being smarter doesn't make you a better investor. Ph.Ds (especially in math) often make terrible investing decisions, and they do it because they're guided by emotion. Once you get to a certain I.Q., what helps you most is temperment. Good investors have the proper, calm temperment. Bad investors (and most people) have an unstable temperment when it comes to money, and they are guided by emotion.

Financial stocks can rally hard for the next three months and I won't worry. I've seen temporary losses this big before. The market is unstable and it is weak. It will continue its collapse for the foreseeable future. This is what we value investors call a "dead cat bounce." Who knows how long people will be irrational and think the recession is over. How long did they continue to overpay for houses in California thinking the bubble won't pop? You can't change people. All you can do is sit behind them quietly, watch what they do, and wait. When they give you a price you like, you sell to them. Until then, you hold and remain calm.

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