Tuesday, October 7, 2008

I'm back.

I'm back from my weekend at the beach and feeling better than ever. I barely made a dent in Warren's book -- knocking out 100 pages out of 1,000.

It would appear that the Dow has now fallen 1,400 points in the last five trading days. This isn't to say it is safe to short in large quantities, though. We still don't know exactly how Congress will behave in the final weeks before the election. The thing is, it only takes a slight uptick - especially when hedge funds are imploding - to trigger the mother of all short squeezes. An event like that would throw us into bizarro world, where the good stocks plummet and the terrible stocks squeeze upwards 50% in a single day. It doesn't change anything as it relates to the long-term condition of the economy, but what it can do is trigger margin calls from your brokerage. You wake up confident in your short positions only to find yourself kicked out of all your holdings and receiving an additonal bill of $100k for margin calls.

It is for this reason that I am taking things slow and steady. I am more confident than ever in my understanding of this environment - I am now ranked 78th out of 62,444 investors on TMF's CAPS page - but I am as nervous as ever operating in it because of the volatility. A CAPS portfolio doesn't suffer margin calls. Over the weekend, I realized it is time for a new investment philosophy. From here to election day, I will retain my short positions in MBIA and ALD, but I will only make new investments during extreme movements. During massive plummets I may look for things to buy, and during enormous short squeezes I will short new stocks. Outside of these two outliers, I will sit patiently while Congress does not.

1 comment:

Anonymous said...

Hello Rick,

Hope you had a good weekend. I was just wondering if you had a chance to look at my email? (eboroian@gmail) I would very much appreciate hearing from you :) E