Tuesday, September 30, 2008

Congratulations to Allied Capital shorts.

Today was a big day for us. My largest holding by far (representing 75% of my holdings, actually) was in Allied Capital via fairly short-term puts. Today the stock collapsed, dropping 55% by lunchtime. I took this opportunity to to exit nearly my entire position due to the bailout issues. I know Allied Capital is worth $0 per share, I just don't know when it will happen. And with a Congress that is scared and 35 days away from an election, enough is enough. I am now almost entirely in cash, and will probably remain that way until the election is over. This was a big win, and congratulations to any of you who held ALD puts.

One of the major tenets of value investing is that you never give a damn about elections, but this case is unique in that the incumbent party is trying desperately to save face at the last minute. Their leader has the highest disapproval rating of any U.S. President in history, and as a result they are capable of almost anything right now. I don't trust them. Just as they are not really the party of budget discipline, they are also not really the party of free markets. There is a saying that "there are no atheists in fox holes." But I think the better saying is "there are no libertarians in market crashes."

I do still hold my somewhat significant position in MBIA, which I am shorting via puts, but they are deep-in-the-money ($20 strike price) and do not expire until January, 2010. I have time and room to watch that company collapse, so I will hold. I also hold a few $15 ALD puts which expire in January 2009. They are in the money as well, so I decided to hold a small stake. If these puts go to $0 it isn't the end of the world, but I think it is more likely they will double in value by expiry. If Congress doesn't interfere too badly, this will be a nice investment.

I was pretty steadfast in my convictions on my ALD positions back in July, but it was a trying time. There were large rallies which tested my patience. I'm convinced I would have 100% better returns than I do if I could be hit with a mallet, suffer amnesia, and forget I even own what I own.

If you purchased when that post was made, you're up around 250% in 2.5 months, but you went through a lot of Advil listening to policy speeches. I guess the lesson is, this market is no place for ad hominem investment decisions. You need to check your emotions, and know you are right because your facts and your reasoning are right, not because other people agree with you.

"Be fearful when others are greedy. Be greedy when others are fearful." -- Warren Buffett

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