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The Credit Crisis Financial Stocks Short Journal
- Thread starter Daal
- Start date
A strong argument against shorting puts as a way of starting bullish exposure in my view, is the following:
You might not necessarily buy a stock if it goes down to the price you thought it was cheap because there is new information avaliable
If BP goes to $25, I would not jump in and buy it. I need to see why it is there, if its there because estimates of losses are growing, I would try to see if the analysis is wrong, if it is I buy it, if its not I dont get involved. At $25, there is something wrong with the price, its just too much of a steal, which means there is a catch and I need to find out what is it. The market does dumb things but when the money is too easy, I dont want it, at least not yet, the market is likely fooling me and there is something I dont know
This could apply even to stocks like Berkshire Hathaway, if you can buy BRKB shares at $20 a share(down from $70ish), there is something wrong(perhaps massive accounting fraud), you might not want it anymore
The solution is to take that into account and put the probabilities of such event in your calculations then see if the premium is big enough to compensate for those risks. And of course, being conservative in the position sizing
You might not necessarily buy a stock if it goes down to the price you thought it was cheap because there is new information avaliable
If BP goes to $25, I would not jump in and buy it. I need to see why it is there, if its there because estimates of losses are growing, I would try to see if the analysis is wrong, if it is I buy it, if its not I dont get involved. At $25, there is something wrong with the price, its just too much of a steal, which means there is a catch and I need to find out what is it. The market does dumb things but when the money is too easy, I dont want it, at least not yet, the market is likely fooling me and there is something I dont know
This could apply even to stocks like Berkshire Hathaway, if you can buy BRKB shares at $20 a share(down from $70ish), there is something wrong(perhaps massive accounting fraud), you might not want it anymore
The solution is to take that into account and put the probabilities of such event in your calculations then see if the premium is big enough to compensate for those risks. And of course, being conservative in the position sizing
Interestingly enough, that goes against one of the Buffettisms of being happy when stocks goes down. I believe that is true up to a point, a stock might be a great buy at $25 but a big gamble at $10
This is true specially when the company has bankruptcy/litigation/nationalization risk. GGP might be a good buy right now, but if it goes back to $2, chances are, shareholders are going to get clobbered by the BK Judge
This is true specially when the company has bankruptcy/litigation/nationalization risk. GGP might be a good buy right now, but if it goes back to $2, chances are, shareholders are going to get clobbered by the BK Judge
Eckhardt (sp?) talks about this phenomenon in his Market Wizards interview when he makes the case for buying things that are moving higher and selling things that are going lower. If you like an asset and it goes down in price, the typical human reaction is to be excited because you can get it "on sale". Eckhardt contends that the fact that it is at a lower price means that something about the outlook for that asset must have changed for the worse and you're not necessarily getting a bargain. Of course, Eckhardt is a purely technical trader who more or less buys stuff when its above its MA and sells when below. The Buffet way of knowing the intrinsic value of a company and purchasing when its price falls far enough below that value is completely foreign to him.
I would again refer to Julian Robertson who bought a little C at 10 in 1990. He didn't really pile into the stock until it rose to 20. His thinking was that at 10, C still had the possibility of going under. When it hit 20, he believed that possibility had passed, and went all-in.
I would again refer to Julian Robertson who bought a little C at 10 in 1990. He didn't really pile into the stock until it rose to 20. His thinking was that at 10, C still had the possibility of going under. When it hit 20, he believed that possibility had passed, and went all-in.
"BofA to Pay $108 Million in FTC Case"
http://online.wsj.com/article/SB10001424052748703303904575292582384769918.html
"The money will be returned to the more than 200,000 customers the FTC believes were overcharged."
PPD is under both SEC and FTC investigations. If PPD is found guilty, the company will be ruined as a ton of people could be paid back. The fact that the CEO quit a while ago speaks volumes about his trust. Its a matter of whether the stock his $70 before it goes straight to $10
http://online.wsj.com/article/SB10001424052748703303904575292582384769918.html
"The money will be returned to the more than 200,000 customers the FTC believes were overcharged."
PPD is under both SEC and FTC investigations. If PPD is found guilty, the company will be ruined as a ton of people could be paid back. The fact that the CEO quit a while ago speaks volumes about his trust. Its a matter of whether the stock his $70 before it goes straight to $10
Pickens on the spill and energy policy
http://www.cnbc.com/id/15840232?video=1515895824&play=1
http://www.cnbc.com/id/15840232?video=1515895824&play=1
Quote from Daal:
Interestingly enough, that goes against one of the Buffettisms of being happy when stocks goes down. I believe that is true up to a point, a stock might be a great buy at $25 but a big gamble at $10
This is true specially when the company has bankruptcy/litigation/nationalization risk. GGP might be a good buy right now, but if it goes back to $2, chances are, shareholders are going to get clobbered by the BK Judge
Yeah, the whole Ben Graham "Mr Market" metaphor is incredibly misleading, it relies on the assumption that market prices only change because of irrational fear and greed, and ignores the role of price signaling genuine change in fundamental values.
It's like if half the people on your street suddenly put up for sale signs, and willingly taking offers at 50% off last month's price. Do you run out with chequebook in hand, or do you check the local notices to see if someone just got planning permission to build a toxic waste dump next door?
This is why most value investors underperform the S&P. They aren't actually value investors. They just buy stocks that have gone down somewhat. Sometimes a stock becomes more overvalued when it has fallen 30%.
Quote from ralph00:
I would again refer to Julian Robertson who bought a little C at 10 in 1990. He didn't really pile into the stock until it rose to 20. His thinking was that at 10, C still had the possibility of going under. When it hit 20, he believed that possibility had passed, and went all-in.
An interesting question would be whether he thought the chance of bankruptcy had passed *because* it hit 20, or whether he independently concluded the chance had passed, and thus it was cheaper at 20 with little risk than it had been at 10 with huge risk.
If it was the former, he has the dilemma of what to do if it starts going back down again - is the bankruptcy coming back as a possibility, and thus the stock is now a sell?