Although Wall Street may be the last place to go, for those seeking introspection, I find year-end to be an excellent time for investors/traders to process and reflect on all the good, bad, and ugly investment/trade decisions that were made in 2013. it’s an excellent time for introspection on Wall Street. Everyone is subject to bad/good luck; happens to the best of us. The real question is: when I fail, can I pick myself up? Can I determine how much was my fault, vs. what was beyond my control? What could I/you have done differently, and what can I/you differently going forward?
Or, if and when I am doing exceedingly well, how much of my success is simply a result of luck? Skill? Future success (independent of bad/good luck) seems somewhat dependent on figuring these things out, as it pertains to applying to future actions/decisions. That is, until one encounters a black swan that renders one a fool of randomness…
I find it time-consuming and painful, but ultimately valuable to examine all investment/trade decisions… it helps me figure out the underlying ’cause and effect’ relationships behind wins/losses (answering the “why” questions). Or not (“I don’t know” is a perfectly acceptable answer/belief, in my view). By the way, luck is fine… self-honesty is what matters, in my opinion. As long as one is aware of return attribution… staying power/replicability may be within reach.
PERFORMANCE ASSESSMENT SUMMARY
- Public and Private Statements – Mixed bag. Made some very bad public calls, and made some good calls (statements made via verifiable fashion, e.g. tweets, posts, e-mails, in-person statements, etc). See below, “THE UGLY, THE BAD, AND THE GOOD” for more.
- Actual Returns – Great job, but can do better going forward, especially on the long side. My overall batting average remains poor, but as some guy named Stanley Druckenmiller said: “I’ve learned many things from him (Soros), but perhaps the most significant is that it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” A friend earlier this year told me, “try harder.” He’s right, need to try harder. Also need to consider scale-ability and replicability. Shorting the Yen is very scaleable. Other, lower hanging fruit? Not so much. I had an interesting discussion with a quant about scale-ability. Despite the fact we do very different things, we understood each other…I gather his fund seriously ‘models’ scale-ability for each implemented as well as prospective strategies.
THE UGLY, THE BAD, AND THE GOOD
- Short CAT – This idea generated positive alpha, but in absolute terms, this has been a bad (but not ugly) short.
- Short OSTK – I tweeted, “$OSTK has this huge “SHORT ME” sign all over it… but I’ve thought so all year, and haven’t pulled trigger yet.” – the stock has been flat/down slightly since. Yes, alpha. But abysmal.
- Long JCP – I wrote, “If you have some “moolah to torch”, methinks you start building a long $JCP position next hour, if not early next week. No Ch.11 over wknd.” – The stock drifted further, before going slightly positive from the point I stated. T
- Short China – China definitely underperformed relative to the US, but my timing was perfectly bad, as it was in July.
- Long $ – I wrote https://thelongshorttrader.com/2013/07/08/make-way-for-the-coming-of-king-dollar/ – Another terrible call (though I stand by it, going forward).
- Short Gold, Miners – On twitter, in person, in e-mails, etc… in virtually every medium my message has been consistent. Sell/short gold/miners.
- Long TWTR – I wrote, “Is Twitter really worth less than $NFLX ? And only a tiny fraction of $FB ?Doesn’t pass sniff test, from my vantage point.” Since 2011, I’ve said many bullish things about TWTR. I also recently (in November, when the stock was in the 40s) shared it as a long idea, on sentiment: https://thelongshorttrader.com/2013/11/24/72-of-investors-expect-twitters-stock-price-to-decline-or-stay-flat-you-know-what-this-means/
- Long CRM – Not a fan of the company or its CEO, but my call was correct: https://thelongshorttrader.com/2013/01/15/crm-200-before-100-why-its-on-the-radar-and-why-lst-is-not-short-it-yet/
- Long CNSI – I didn’t originate the idea ( @mojoris1977 publicly did), but I stood by it.
- Short IOC – Well-timed action/statements.
- Long HLF – On twitter, in writing in other mediums, in person, etc. I made clear I’m not a fan of the company, I respect HLF’s critics, but that the shares would nevertheless go higher.
- Long John Paulson – Last year (around this time) I wrote: a 2013 Counterintuitive Investment Theme #1: Betting on Paulson (?) – https://thelongshorttrader.com/2013/01/07/2013-counterintuitive-investment-theme-1-betting-on-paulson/ What I got wrong: I suggested that shorting Europe, going long miners might wrong. Thematically, I had the right idea (remember how hated and ridiculed John Paulson was in 2011/2012?), in going “long Paulson” but had the wrong specific trades in mind (fortunately as the year progressed I more firmly and clearly stated short gold/miners).
- Short LOTE, UNXL – Self evident.
LESSONS LEARNED FROM PAST MISTAKES (a.k.a. “trader’s tuition”):
- Value Traps (long housing 2005/2006) – In 2005 and 2006, I went long some housing related names because they looked cheap on book value, etc. basis. I was the patsy on the table. I lost nearly 100% of my invested capital in these names. Lessons learned: cheap can get cheaper (and go to zero), book value can erode, earnings can go negative (despite past results), macro matters, true fundamental/securities analysis is NOT merely looking at numbers/ratios. Cyclicality matters, and structural discounts to valuations on cyclical names are often well warranted. Risk management and diversification are NOT a linear function of # of securities one owns.
- Risk Management and Humility Critical with Short Selling – In 2011, I was overly concentrated in a short that I believed was going to zero. As the stock went lower and lower, I grew my position substantially (“It takes courage to be a pig” so I thought). I initiated the short at 100, added some at 67, added more at 50, and a lot more at 29. I felt like a genius. It went down to 18…and hit a temporary low at 18. I considered taking profits around 20… but did not. As fate would have it, I was incidentally on a flight most of that day. I had about a 20-30 minute window of time to decide whether to cover or not. Woe be the day I did not cover, because the stock went up 4x-5x before eventually going to zero. I realized a loss on this trade. It almost single-handedly destroyed my 2011 performance. Fortunately, I learned my lesson quickly (after taking my loss), and actually ended up handsomely in 2011. As Kyle Bass said (regarding a similar experience he endured), “and it was the most important lesson in short selling that anyone could ever learn. It taught me the humility and the respect that you must have when you’re on the short side of anything. It wound up being one of the best things that ever happened to me.”
CONSIDERATIONS FOR 2014
- Consider sectors and strategies that were out of favor in 2013 – When I say consider, I am not advocating that you blindly invest in everything that didn’t work in 2013… but to understand what did not work in 2013, why it did not work… and why it may (or may not) work in 2014. Try to understand causation. There’s one particular strategy that I’m very “bullish” on… and I think I’m “bullish” for all the right reasons. Hint: unreliable, but often cited hedge fund performance survey claims that performance for this strategy was -20-35% in 2013.
- Gold and Miners – I say we will see gold go lower in 2014. 10+ years of up, up, and up does not correct this easily. Need to see some miners go the way of chapter 11, and/or massive dilutive capital raising. “Gold tumbled 28 percent this year, set for the worst annual plunge since 1981.” Note that gold declined further in 1982.
- Endogenous vs Exogeneous – So I think it’s fair to say that the 2006-2008 financial crisis was largely an endogeneous one, whereas 2001 was more exogeneous in nature. I wonder if the proximate cause for the next correction will be of the exogeneous variety.
- Go Long Active (vs. Passive) Management – The popularity and proliferation of passive management (as evidence by ETFs and similar), coupled with the rise in US equity indices in 2013, provide a rare opportunity for active managers to generate significant alpha in 2014 vs. their passive counterparts. 2014 will favor true alpha seekers.
- Credit/Rates – I say go long Saba Capital, or some of the strategies/concepts they employ that have not fared so well this year.
- Bitcoin Implications – I took bitcoin very seriously, before many others did (thanks to a geeky friend of mine who is very much a forward-thinking individual). I’m thinking through the investment implications, i.e. the 2nd/3rd/4th order implications. Suffice it to say: I believe bitcoin and/or related concepts may end up slaying certain rent-collecting goliaths of the real economy… these behemoths, in my view, have de facto monopolistic power within their respective domains. Their demise/contraction are long overdue. For the sake of society (and capitalism), I would love to see innovators slay them within the next 5-10 years. Innovate or perish. Creative destruction, par excellence. It is the American way.
- Russia? Turkey?
- War risk creeping – Investment implications unclear (not the US per se), but for example, Japan is getting aggressive. It seems symptomatic of desperate governments. Certainly rhyming with past history. I personally hope all their unnecessary aggression dissipates…but you never know. It is my understanding that (?) market prices poorly predict war.
“Trading, like poker is a zero sum game. We have 1,500 employees, spent hundreds of millions on research during 37 years. You are going to have to beat me.” – Ray Dalio, Bridgewater Associates.
And David slew Goliath.