Tuesday, April 22, 2008

The Heroic Theory of Invention

This theory postulates that only a few selected individuals have had the genius to come up with most of the innovations that have led Western societies to dominate the world (although that is quickly changing). Guys like Einstein, Edison (this dude), the Wright brothers, Gates, etc., have had undue influence over the masses. Why do I mention this? It seems there have been few investors who have understood the market in any area with the depth it deserves, not influenced by momentum and trends, but a core understanding of why companies do well. If we can tune out the continuous stream of "what's next" information and try to assess the horizon 1,5, and 20 years down the road, I believe we'll be in a much better place. The analysts don't have this horizon. They tell you about next month and next quarter. Money managers continually underperform benchmarks because they chase results, often buying high and selling too late. Let's review some of my suggestions here and see how those trends have changed or remained on target.

12/13/07 My initial blog pick: Shorting XLF. That week, this financial index was trading at $29.35 and went over $30. I sold in March with the price at $22. Things have changed since then. XLF is now $26. Banks continue to report dreadful earnings, raise cash to stay afloat, and are rewarded for it. This sector is scary right now and I can't predict a precipitous rise or another Bear like event that will cause disaster. My recent strangle on NCC is working well as the company has not been able to find a buyer and they had to raise $7 billion yesterday to stay afloat. I still need a bigger drop in price though to cover my call, which I'm hanging onto in case of a future rise.

12/18/07 Long PXJ, $26.93 that week, fell to $21.75 1/22. Now $30.67. Good opportunities arose several times to buy this oil services ETF that owns winners Transocean, Schlumberger, and Halliburton. I have recommended it several times, but even my initial reco would have yielded an 11% gain.

1/4/08 Short COF Jan 50s and 55s. Capital One has been hugely volatile over the last 3 months, but their huge exposure to auto, credit card, and home loans leaves them vulnerable. Trading at $46 at the time, the stock plummeted to $39 and rapidly rose to $56 in the same month. I recommended shorting it again when it got over $50. It's now at $47. You could've made money both times.

1/16/08 XLY puts, $30 that week. I have and continue recommending shorting this retail ETF. Now trading at $32, it has dipped into the $28s over the last 3 months. While no returns yet, I still believe this economy is dead and these companies will suffer over the next few quarters. With that said, a more specific retail index, XRT, might have been a better hedge, but the results have been the same.

1/24/08 QID, $47. Admittedly late to this party, this double inverse NASQAQ play still yielded good results. A mere 7 weeks later, sold at $55 (went to $56), a 16% return. It's now at $42.

SRS, several times, now $87. I've gotten hammered on this one. This double inverse commercial real estate index has been beat down over the last few months. But, in reading my posts, you'll see I reco'd this as a 2-3 year play. I bought it well over $100.

3/17/08 See list of puts that paid and didn't. 5/6 for 20% return over 77 days.

Current: Still trying to workout ag/solar angle. New solar/energy ETF may present hedge opportunity by buying basket long and shorting individual solars like FSLR and TSLR.

One more thing. Happy Passover to my fellow Hebs! Know I have one reading the blog currently....

TOD: Do not, repeat do not, use cloves of garlic to cure ear infections.

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