Survive to Fight Another Day
Research for Online Investors

by John Dalt

12/28/09

One of the attitudes we must develop to trade, or invest in the stock market is to be a “survivor.”  We are not talking about a TV show.   The attitude is one of watching the market dispassionately, making trades and investments with a well thought out plan.  We must however, be willing to change as the market tells us how stupid we are.  Mr. Market has a way of humbling even the most experienced investors.

Don’t believe me?  Witness Warren Buffett buying ConocoPhillips stock in 2008 and then selling at a loss in 2009, or Berkshire’s long time holdings of Moody’s.  He recognized his mistake in these two instances and changed courses to take his loss and move on.  These investments were interesting as Moody’s was a classic Buffett move, “The moat is far wider in Moody’s than the operating company (Dunn & Bradstreet).”  Charlie Munger said, “Moody’s is like Harvard, a self-fulfilling prophecy.”  The ConocoPhillips purchase seemed to be good move with exceptionally bad timing.  Berkshires purchases were made just as crude oil was cresting its historic price run-up and starting a nine-month slide.

The point is to live to fight another day.  Buffett makes concentrated bets but will change direction if new information dictates.  Do not let your greed push you into a large position that will remove you from the field if it goes against you.

Years ago, I went to Las Vegas with my brother-in-law. We had ‘toiled’ at the blackjack table and built up a nice stack of chips.  We both were getting tired (too many drinks), and my brother-in-law shoved all his chips out for the last bet.  I implored him to pull them back, telling him “You are going to regret that tomorrow.” He would not, and proceeded to lose the hand.  Going home a small loser for the day, rather than a big winner.  It is not surprising stock traders can display this same attitude.

Much is made of Warren Buffett as a long-term investor, but he is also agile.  In his biography “Snowball”, on page 544 through 546, the story is told that Buffett was dumping stocks in 1987 because he felt the market was overpriced.  In his March letter to shareholders, he “said that money managers were so hyperkinetic they made whirling dervishes appear sedated.”

On Black Monday, October 19, 1987, the market came close to a trading stop, dropping 508 points.  This was the markets largest one-day percentage drop in history.  Buffett was at the annual meeting of Ben Graham followers, now dubbed the “Buffett Group.”  What do you suppose the members were doing, while other investors and traders were selling?  “…with the market crashing around their ears, for three days Buffett, Tisch, Gottesman, Ruane, Munger, Weinberg, and the others glowed like fireflies as they flickered in and out of the room, checking stock prices and phoning their traders with controlled excitement.  Unlike the many people devastated by losses, they were buying stocks.”

One of the interesting side stories to the above was that Warren’s sister, Doris, had sold puts against the market and was wiped out.  She did not ask her brother for advice, until it was too late.

These are some good lessons to be learned. Do not get greedy for the last ounce of profit. Mr. Buffett observed the market and decided it was overpriced, so he sold stocks while they were moving higher, and moved to cash. This left him with cash to purchase when “there was blood in the streets.”  Don’t be like my brother-in-law and take your hard earned money, and throw it away on a hunch or a sure thing in one large ‘bet’.

Be realistic.  How many of us WANT to make 50% next year?  Is that realistic?  We cannot control what the market will give us, but we can control how we play it.  For much of 2009, we were less than 50% invested in our long-term portfolio.  We were disciplined and rebuilt our portfolio at prices we felt represented value.  We were not as brave as the “Buffett Group”, lesson learned.

While I always believed the U.S. economy would pop back, the intervention of the government last year dictated cautious optimism.  The present recovery could be so much stronger, if politicians would quite spending money they do not have, and regulators would turn on each other rather than the goose that lays the golden eggs.

Moral of the story? Be dispassionate, realistic, decisive.  Survive to play the game the next day.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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