Monday, May 10, 2010

No Hope for the Weary

I sat next to someone on the plane from California over the weekend and I was struck, nearly dumb by his comments. He spun a tale of conspiracy, paid-off government, oligarchs, financial misgivings, bail-outs, smoke and mirrors, uprising, chaos, and civil war. By the time he was done telling his tale I only had one question: "Why do you live in the United States?"

Seriously, if our country is so horrible and terrible, which he attempted to convince me in under 10 minutes, then why live here? He then answered that, at least for now, Americans believed in the "Rule of Law" more than any other country and as long as the government can keep us in the matrix, then the "Rule of Law" will govern us, even as we're free to rebel and overthrow our government (which he thinks oppresses us and keeps us impoverished because the government is owned by the banks and the oligarchs, of which I get the impression he thinks Warren Buffet is one). I couldn't bring myself to learn more about his twisted view of our world and I really couldn't stand the thought of another 10 minutes of terror if I asked him to tell me just who the oligarchs are. He made mention of Warren Buffet's deal for Preferred Stock with Goldman Sachs (which I get the impression that he thinks was done with fire and blood in a dark room with everyone wearing robes and fancy handshakes) and that was enough for my taste.

I felt like saying something that you'll hear Guy Adami say frequently on CNBC's Fast Money: "So what's the trade?" Seriously, all this conspiracy stuff is great for movies (if you like that sort of thing) but how do you make money? If the world is going to fall apart, or we're going to have a genuine populous revolt, shouldn't their be a way to profit from it? I know that sounds terrible, but one thing I've noticed since I started managing money (professionally) 6 years ago was that I was able to reduce everything to dollars and cents. It has made me much less emotional and that's how I'm able to think in black and white regarding decisions the people I advise/manage/work with is by eliminating my emotional attachment to the subject and look at it objectively.

Jim Cramer is great at reducing any caller's question to one thing: "Is the stock going to go up or down?" "It doesn't matter what your cost basis is," is something we've seen him tell dozens of callers and write in his books. It only matters whether or not you think the investment (of any kind) will go up or down. If you know/feel/think/believe that it's going to decline or there is significant risk to such, then you just sell it and look to allocate your capital elsewhere.

"Hope is not an investment thesis," is something I've heard several times, from both Guy Adami, Jim Cramer, and many others. I had a call, just today, and I was told "I know that solar power doesn't really make economic sense right now, but I'm really hoping that in the future we'll have cleaner energy and I want to benefit from it financially." But, his thesis was ultimately that he would like to see clean energy be successful and so if his hope is realized, then the stocks of solar companies would indeed rise in value.

Unfortunately, no matter what people want the future to look like, when it comes to your money, that should never be part of the thought process. The only two things you want to know are Guy Adami's "what's the trade" and Jim Cramer's "is it going to go up or down from here". If you can answer these two questions, then I think you can be successful as an investor. Do not find yourself investing in what you'd like to happen; but rather, what you think will make you money. It's fine if you will not put money into companies that you think are morally reprehensible, but you certainly shouldn't make the connection between buying something like Massey or BP and wanting to the world to burn on the use of dirty, unsafe carbon fuels. It means that the stocks went down and they're tremendously oversold and represent very attractive investments because all the bad news of the two events and MUCH MORE are now "priced in" to the stock's price. That's it, with investing, it's about doing just that...investing...making money.

Bottom line on this story, when it comes to where you place your capital to invest in your future, try to ignore what you'd like the future to look like and try to think about what you think the future probably will look like, and go with the latter. Now, when it comes to your social causes, where you donate your time and money...that's when you get your big heart out and give back to the world you live in. When you are being charitable, it helps to get out a big bag of hope and spread it like salt on mashed potatoes.

So lets recap: 1) When it comes to making money, ignore what's said on the news, ignore your friends, please don't listen to anyone at the office, do your homework, and make sure you feel like it's going to go up based on what you learn from doing your analysis before you invest. 2) When it comes to hope, make sure you have a lot of it as this world is a tough one and you'll face many challenges ahead, but make sure you check your hope at the door before you sit down in front of your computer to trade because "hope is not a valid investment thesis."

PS. Stop watching the news, and try putting CNBC on mute for most of Power Lunch unless Steve Grasso or Fast Money is on and when the market closes, you can come back at 5pm to take it off for 2 hours.

Monday, May 3, 2010

They are Idiots.

Every now and then I talk to people who think that when you buy the stock of a publicly traded company, that you buy it from the company. Heck, it happened yesterday. So, the first thing I tell them is that a company only sells stock a few times in its existence...say 1/2 a dozen times or so...maybe more if it buys a lot of other companies. If it does this, by the way, you should be concerned. Read Jim Cramer's book: "You got screwed" about how Enron went down and you too can be worried about companies that endlessly acquire other companies (think Oracle...don't know if it's different in their case, but they are serial acquirers).

So, the bottom line of the above comments is that when you buy a stock, you buy it FROM another person or institution. That's right, you could be buying stock from someone on your very street that you live on...who just sold it to you. Now, why would someone sell you their stock if they thought it was going to keep going up? That's right, when you buy stock, you MUST assume that the person who sold it to you is an idiot. If you don't want to be that mean, you have to at least politely think that they are wrong, very wrong. Otherwise, the loser in the you. If you are wrong, and they are right, then the stock will go down and you'll lose money, and they'll laugh all the way to the bank.

This is where the title comes from. You have to believe that the people who sold you your stock are idiots or you're about to lose money. You're about to lose serious money if you don't have the guts to cut your losses and watch it go to zero. I know these are strong words, but I'm trying to help you avoid seeing your investments go to zero. It means that you have to do your homework. You have to listen to the conference calls. You have to watch CNBC, read books, and read company balance sheets and cash flow statements. You have to do all of that, or someone is going to make an idiot out of you.

Now that you understand how buying stocks works, you can understand how insane it is that everyone insists that Goldman Sachs should have disclosed to the buyer of the Abacus paper that John Paulson was on the other side of the trade. ARE YOU KIDDING ME? Name one time you bought a stock and didn't know who sold it to you. How about EVERY TIME! It happens every day in the market. The only one who knows who is who are the market makers who put the trade together and that's how it should be. Can you imagine if you knew every time who was selling and who was buying? You want to see some real manipulation, try requiring firms to disclose who is on what side of the trade. I have never heard of anything so stupid in my life! Look, everyone has the right to be angry when things are done wrong. Everyone should feel hurt when you're taken advantage of. But this Goldman Sachs case has gone too far. Do you even know what kind of money you MUST have before they'll even deal with you? This was not someone buying the Abacus paper on E*Trade from someone for $7.95 or whatever they charge. The group putting the security together got to toss ANY mortgage out of the SIV (Structured Investment Vehicle) they wanted to! Can you believe that part of it? So, who's really to blame that it went south? I don't see the millions of people who were stupid enough to buy GM stock before it was declared worthless coming out and filing a lawsuit against GM. Jim Cramer told people for months that the GM paper was worthless...but that didn't stop people from trading it.

Just because someone loses money in the stock market, or any other capital market like commodities, options, SIVs, CDOs, RMBS, CMBS, MBS doesn't mean something was wrong or criminal. No one is exempt from doing their homework, especially not people with money who can hire other people to do their homework for them. When this buyer asked Goldman Sachs for the product, they didn't ask their advice on it, they asked them to have someone make the product. John Paulson was willing to do that and go short the product. Who says the IBM you bought today wasn't someone who borrowed the shares and sold them short to you? Heck, you may be the person to sell it back to them when they cover since you have the exact amount of shares they'll need.

Sometimes investments are complicated. Sometimes people lose money. But you always have to do your homework, no matter who you are or what you're buying...and you'll never know who's on the other side of the least not in a world that's fair. You just have to hope that the person or institution that sold you the investment, is an idiot.