Tuesday, March 14, 2006

Kicking Ass and Taking Names - PG13

I know people would like me to write up more specific actionable ideas here. I don't do that very often. Why? First off, perhaps I'm the rare exception, but I do have a conscience. I'm no saint, to be sure. But I do feel some sense of responsibility for what I write here and I try not to forget that maybe people are out there acting on my words and thoughts, however unwise that may be, and they're not just reading the blog for entertainment. I hope to be entertaining at least some of the time. That's a goal too. But I do take the words seriously and even though I write several things a day, I try to keep them at least somewhat thought provoking and not something completely pulled out of you know where just to fill space. I don't write just to write, just to get paid. I tell you much of what I'm thinking about the markets. Much of the time what I'm thinking, or rather telling myself is 'don't trade, don't trade, don't do it, wait, be patient, let the good trades come to you.'

I was up way too late last night, as usual, and the movie Envy with Jack Black and Ben Stiller was on. If you haven't seen it Jack Black's character invents a chemical that makes shit disappear, vaporize. He gets rich, but all the while people are asking where does the shit go? The EPA shuts him down. But in the spirit of a happy ending Ben Stiller's character comes up with a new idea: Nick?Yeah.I think I have an idea.Yeah?Yeah. Like a really big idea.Really?When you got your idea, did you feel it immediately?Oh, yeah. Right away.You got one of those? Like one of my ideas?I think so.What is it?Yes!

Of course it was an appropriately silly idea, flan in a tube, Pocket Flan, but I thought it was fitting to the way trading ideas often come to me.

I've been criticized for being overly bullish on the markets. I've been criticized for lots of things, but that's one of the more recent ones. Indeed the markets have been lame for a while now. I'm still bullish. But looking back two of the rare specific ideas I've wrote about in the past month were actually shorts. On February 9 I wrote Crocs IPO where I wrote about how the company was too faddish and the product was too easy to knock off for it be a good stock in the long run, sharing a lot of the same characteristics as many other stock flops. Crocs (CROX) closed at $27 that day and is now trading at $23 on a straight down trajectory, off 15%.

Then on February 28 I wrote Writing on the Wall, which laid out some of the things Google (GOOG) seemed to have in common with other companies that struggled to keep Wall Street analysts happy and how they seem at risk of overspending on non revenue-generating strategies. Google has dropped from $363 to $334, or 8%.

It's not the number of ideas that count in the markets, it's the quality. Most mutual funds can't beat the markets, produce alpha, consistently. There are advantages to pooling resources, however. Oh what I could do with an institutional data service! There are so many ways to crunch the data and find profitable strategies that the average person is unable to test because the data costs are too high. But it doesn't take all that much money in terms of a large fund before negative economies of scale begin to take a toll.

Thus it's not hard at all for an average investor that can keep their wits about them to best the mutual funds and get a little alpha. All you have to do is spend most of the time sitting in ETFs that track against major market indices, lying in wait, patiently, very patiently, insanely patiently, like a lurking tiger. No, not like a tiger. Tigers are too hungry. More like the alligator snapping turtle whose mouth hangs open indefinitely displaying a tongue that looks like worm, but when touched by a fish sets off the jaws like as suddenly as a rattrap. Or a motionless frog that shoots it's tongue out nearly too fast to see snatching prey out of mid air. Do nothing, do nothing, do nothing, then when a good to great idea finally comes along act. Better yet be like the coyote roaming about, always on the lookout for prey, always on the move until it finds something to eat. Keep moving, keep reading, keep studying the market until you find the ideas.

But the coyote doesn't just jump on every animal it sees. The coyote doesn't just jump on the back of a bull elk and hope for the best, hope for a little luck, hope maybe the elk will just give in. No, he knows manageable prey when he sees it.

Traders aren't as smart as the coyote. They have no patience. They jump on every idea that comes their way. Ideas that make no sense at all. They just jump on ideas for the sake of jumping, rodeo riders getting on the back of massive bull. What purpose? For a thrill, to show off. Maybe that's why we like dogs so much. They are one of the few animals that do things just for the thrill of it. They show off like people. They chase anything that moves for the sheer thrill and challenge of it. Dolphins are another and we share a similar affinity to them for it. They exhibit personality in this way.

People reward charisma. They give charismatic people jobs as fund managers. But the markets are cruel, they do not reward charisma. And that's what gets people into trouble in the markets. If you can harness that trait and control it, without completely going mad, then you can handily be above average in the markets. All it takes is the patience to sit in an index most of the time then act on a handful of good ideas throughout the year and you'll kick the shit out of the majority of professionals.

posted at 2:01 PM