Monday, September 15, 2008

Ax, What Is A Stop-Limit?

Hell if I know. Until recently, to be blunt, I thought stop-limits were for cowards (insert stronger word here). I based this on much reading of supposed expert limits of 10%, 20%, the "thus you can never lose more than x-percentage" theory that essentially guarantees losses. At one point in February, my financial and homebuilder puts were down 50%. Had I put stop-limits on, I would've been stopped and my choices going forward would've been limited.

As we know know, 6/7 of those puts did very well, posting a combined 20% return in a very bad market.

Let's move forward to July 15 with oil near $150 and financials fighting each other for biggest daily loser. Mindful, but not fearful enough of the insidious Fed and Paulson, a series of events including limits on short-selling of the very companies I shorted, and "great results" from Wells Fargo and JPM (who within 2 weeks announced equivalent 3rd quarter losses), wiped out 100% gains on 4 of my puts in about 3 days.

Like a blackjack player using house money, instead of employing stop-limits to secure at the time what would've been a yearly gain of 50%-60% and a market beating performance of almost 80%, I added positions in BAC, WB, and KMX. I sold everything on 9/10, and now stand at a yearly gain of over 12%. As I mentioned just last week, we were only 300 points from our July 15 lows, and yet some financials are up nearly 100% in that time. To further explain the madness of this market, had I sold the morning of 9/11, my yearly return would be closer to 17%. By that afternoon, my return would've been down to 10%.

I apologize for not pushing myself and my readers to sell some or all of their gains on 7/15. I no longer think stop-limits are evil but I do think belief in your calls and research take precedent. We only need to revisit my shorts in WM and LEH to see this. At one point, down in both, I made out for 40%-50% gains. A little more courage and well, we know now that they are both near 0. LEH 1/09 $22.50s would've produce over a 600% return. It's even easier to kick myself on a day like today where gains would've been substantial. But given the Fed's recent track record, it was hard to know Wed. that no bailout was coming.

So, I will continue to swing for the fences. I will continue to believe that a potential gain of over 100% is always greater than a 100% max loss. I will continue to ignore the bulls, who, like Bove and even short-seller by title only Kass, who recommended Lehman as strong buys at $15 and$12 respectively, have led their followers to their financial deaths, and hope to continue, even with admission of error, to beat the market by 30%.

Not posted but 2-2 so far with picks. Had USC andGB this weekend, Colts blew me up last week and NO blew a late 9 point lead to even me out. I promise more football from here on out.


Anonymous said...

OK I am going to be nice so with that beign said enough of the market going Kablooee. We all know it!

Can we please go back to basics and discuss something much more important right now such as Football. I believe we are heading into week 3 and not 1 post. Cmon Ax its time.

Tiger Coach said...

Good news...Senator Dodd said the Fed can set up a fund to buy bad debts... brilliant!!!