The Best Way to Lose Everything
by Alexander Green, Chairman, Investment U
Investment Director, The Oxford Club
SmartStops comment: Excellent article and great example of the pitfalls of over confidence and lack of diversification. Reminds me of the well known hedge fund manager (he wrote a book) who was proud of the fact that he never used stops. He has now gone completely broke twice in the last few years losing all of his investor’s money and many millions besides.
This true story is intended to point out that there is often the assumption that good traders don’t need stops. Actually they need disciplined stops more than the bad traders. Unfortunately the bad traders are doomed to go broke quickly whether they use stops or not. Meanwhile the good traders will survive and be around for a long time. The good traders will be making many trades through all sorts of unusual and risky market conditions. They all know that sooner or later they will be glad they used stops.
Excerpts: Back when I was still managing money 10 years ago, I had a client who transferred in a rather sizable account. There was only one problem. Over 90% of his net worth was tied up in a single stock, Ericsson. He refused to use a trailing stop or sell a share of it or even to use a position sizing strategy.
I warned him it was crazy to have his entire financial future riding on one stock, especially since he was retired. "That's what everybody keeps telling me," he said. "But the stock keeps going up. I'm glad I ignored them all."
I congratulated him that the stock had appreciated so nicely. But I reminded him there might come a time when it didn't do so well. But he was stubborn. He wouldn't part with a share. Furthermore, he grew weary of having the same conversation. He transferred his account out again.
You may already know how this story ends. From a high of over $105 in March 2000, Ericsson took a breathtaking dive. It traded at less than $5 two years later. This is the kind of mistake - especially when you're already retired - from which recovery is simply not possible. However, I sometimes see other investors making similar mistakes.
Everything we do - asset allocation, trailing stops, position-sizing and stock selection - is done with an eye to not only maximizing returns but also limiting risk.
Link to article:
Aug 24, 2008
High Beta Stocks: Do They Offer Higher Returns?
High Beta Stocks: Do They Offer Higher Returns?
By Roger Nusbaum
SmartStops comment: This article points out that going after higher returns by taking on added risk is not necessarily a good idea. It also points out that the holding period for many “fad stocks” should be limited to only “a couple of years give or take.” We agree. Here is an alternative idea: In order to get higher returns you might occasionally consider taking on a few “fad stocks” with a high Beta and then use SmartStops to limit the risk. Now that sounds like the best of both worlds.
Excerpts: A high-beta stock is likely to have its day in the sun, but eventually it will start to rain. Pick any internet stock from the bubble. Chances are it gave ten years', or more, worth of appreciation from 1998-1999. The person who sold his net stock on Dec 31, 1999 and never went back had a different experience than someone who held on to internet stocks too long. This is true for every stock market fad. Success with the next fad will not come from holding forever; it will come from holding for a couple of years, give or take.
When I write about beta I use the word volatility, not risk. Increasing risk is really not something people want to do. They may want to increase volatility to capture a general rise in the market, but there is never a good time to absorb an 80% hit to one of your stocks.
Link to article:
By Roger Nusbaum
SmartStops comment: This article points out that going after higher returns by taking on added risk is not necessarily a good idea. It also points out that the holding period for many “fad stocks” should be limited to only “a couple of years give or take.” We agree. Here is an alternative idea: In order to get higher returns you might occasionally consider taking on a few “fad stocks” with a high Beta and then use SmartStops to limit the risk. Now that sounds like the best of both worlds.
Excerpts: A high-beta stock is likely to have its day in the sun, but eventually it will start to rain. Pick any internet stock from the bubble. Chances are it gave ten years', or more, worth of appreciation from 1998-1999. The person who sold his net stock on Dec 31, 1999 and never went back had a different experience than someone who held on to internet stocks too long. This is true for every stock market fad. Success with the next fad will not come from holding forever; it will come from holding for a couple of years, give or take.
When I write about beta I use the word volatility, not risk. Increasing risk is really not something people want to do. They may want to increase volatility to capture a general rise in the market, but there is never a good time to absorb an 80% hit to one of your stocks.
Link to article:
Aug 18, 2008
Fannie and Freddie Bring Credit Crisis to Defcon One
Fannie and Freddie Bring Credit Crisis to Defcon One
By Mike Swanson Wall Street Window
SmartStops comment: This article will definitely get your attention.
Just for the record:
Re Freddie Mac - FRE traded as low as $3.89 on Friday, July 11. Our SmartStops exit was at $22.64 on June 9.
Re Fannie Mae - FNM traded as low as $6.68 on July 11. Our SmartStops exit was at $24.39 on June 9.
When you read this article you will understand why you need SmartStops.net protection right now.
Excerpts: We are at a critical point in the economic history of the United States. I know of no other way to put it. The events of last week were of a character that we've never seen before. On Friday mortgage lender IndyMac Bancorp became the second largest federally insured financial company to fail after it got hit by a bank run. The Federal Deposit Insurance Corporation took it over. That news may be a big story, but is totally overshadowed right now by the teetering collapse of Fannie Mae and Freddie Mac. Both are in danger of going under and the Bush administration, Federal Reserve, and Treasury Department are now meeting on a daily basis to figure out what to do.
There is no news that would be worse than the collapse of these two institutions and such an event if it happens will have ramifications for the economy and stock market for years to come. Fannie and Freddie buy mortgages and then package them into bonds, which they guarantee. They then sell the bonds to investors, including mutual funds, hedge funds, pensions, annuities - just about any institutional investor you can think of. Odds are that if you own a mutual fund or annuity that you indirectly own a security backed by one of these two institutions. The two of them combined own half of America's twelve trillion in outstanding mortgages and their failure would be the implosion of the entire financial system.
Others have warned about what a collapse of Freddie and Fannie would mean. Warren Buffett has made statements in the past that he feared the failure of Fannie and Freddie could set off a "derivatives time bomb" that would implode the whole financial system. By insuring over half of the mortgages in the country they are too big to fail. This is serious situation folks. We've never seen anything like it before.
Link to article:
By Mike Swanson Wall Street Window
SmartStops comment: This article will definitely get your attention.
Just for the record:
Re Freddie Mac - FRE traded as low as $3.89 on Friday, July 11. Our SmartStops exit was at $22.64 on June 9.
Re Fannie Mae - FNM traded as low as $6.68 on July 11. Our SmartStops exit was at $24.39 on June 9.
When you read this article you will understand why you need SmartStops.net protection right now.
Excerpts: We are at a critical point in the economic history of the United States. I know of no other way to put it. The events of last week were of a character that we've never seen before. On Friday mortgage lender IndyMac Bancorp became the second largest federally insured financial company to fail after it got hit by a bank run. The Federal Deposit Insurance Corporation took it over. That news may be a big story, but is totally overshadowed right now by the teetering collapse of Fannie Mae and Freddie Mac. Both are in danger of going under and the Bush administration, Federal Reserve, and Treasury Department are now meeting on a daily basis to figure out what to do.
There is no news that would be worse than the collapse of these two institutions and such an event if it happens will have ramifications for the economy and stock market for years to come. Fannie and Freddie buy mortgages and then package them into bonds, which they guarantee. They then sell the bonds to investors, including mutual funds, hedge funds, pensions, annuities - just about any institutional investor you can think of. Odds are that if you own a mutual fund or annuity that you indirectly own a security backed by one of these two institutions. The two of them combined own half of America's twelve trillion in outstanding mortgages and their failure would be the implosion of the entire financial system.
Others have warned about what a collapse of Freddie and Fannie would mean. Warren Buffett has made statements in the past that he feared the failure of Fannie and Freddie could set off a "derivatives time bomb" that would implode the whole financial system. By insuring over half of the mortgages in the country they are too big to fail. This is serious situation folks. We've never seen anything like it before.
Link to article:
Financial Crisis Is Expected To Bring More Big Shocks
Financial Crisis Is Expected To Bring More Big Shocks
Monday August 18, 10:17 am ET CNBC
SmartStops comment: As might be expected in an uncertain market environment there have been plenty of “gloom and doom” articles lately. Here is another one to add to the collection. Whether you agree with the gloomy outlook or not, these articles should certainly prompt you to seek the portfolio protection being offered by SmartStops.net.
Excerpts: The year-old financial crisis is not only far from over but could actually get much worse, bringing more big shocks to the US economy and stock market, a host of experts said Monday.
Among the predictions: the failure of some of the country's biggest financial institutions, the collapse of 1,000 banks and a possible government bailout of mortgage giants Fannie Mae (NYSE:FNM - News) and Freddie Mac (NYSE:FRE - News).
Meanwhile, billionaire investor Wilbur Ross told "Squawk Box" that a thousand banks could fail before the financial crisis is over.
"Not very big ones necessarily," he said. "But a thousand banks is going to be a lot." And the impact on the credit crunch could be severe, he added.
"Each dollar of bank equity that gets lost takes out about 12 or 13 dollars of loans so there's a tremendous magnifier effect of small changes in bank equity."
His comments were echoed by Morgan Stanley co-President Walid Chammah, who told a German newspaper that the financial crisis will probably not end until next year or even 2010.
"We will likely see more insolvencies among small U.S. regional banks that have focused on mortgage business," Chammah said. .
And a Barron's article over the weekend said the U.S. Treasury is growing increasingly likely to recapitalize Fannie Mae and Freddie Mac in the months ahead on the taxpayer's dime.
The weekly financial newspaper said that such a move could wipe out existing holders of the agencies' common stock, with preferred shareholders and even holders of the two entities' $19 billion of subordinated debt also suffering losses.
Link to article:
Monday August 18, 10:17 am ET CNBC
SmartStops comment: As might be expected in an uncertain market environment there have been plenty of “gloom and doom” articles lately. Here is another one to add to the collection. Whether you agree with the gloomy outlook or not, these articles should certainly prompt you to seek the portfolio protection being offered by SmartStops.net.
Excerpts: The year-old financial crisis is not only far from over but could actually get much worse, bringing more big shocks to the US economy and stock market, a host of experts said Monday.
Among the predictions: the failure of some of the country's biggest financial institutions, the collapse of 1,000 banks and a possible government bailout of mortgage giants Fannie Mae (NYSE:FNM - News) and Freddie Mac (NYSE:FRE - News).
Meanwhile, billionaire investor Wilbur Ross told "Squawk Box" that a thousand banks could fail before the financial crisis is over.
"Not very big ones necessarily," he said. "But a thousand banks is going to be a lot." And the impact on the credit crunch could be severe, he added.
"Each dollar of bank equity that gets lost takes out about 12 or 13 dollars of loans so there's a tremendous magnifier effect of small changes in bank equity."
His comments were echoed by Morgan Stanley co-President Walid Chammah, who told a German newspaper that the financial crisis will probably not end until next year or even 2010.
"We will likely see more insolvencies among small U.S. regional banks that have focused on mortgage business," Chammah said. .
And a Barron's article over the weekend said the U.S. Treasury is growing increasingly likely to recapitalize Fannie Mae and Freddie Mac in the months ahead on the taxpayer's dime.
The weekly financial newspaper said that such a move could wipe out existing holders of the agencies' common stock, with preferred shareholders and even holders of the two entities' $19 billion of subordinated debt also suffering losses.
Link to article:
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