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Tradecraft by Jonathan Hoenig (Author Archive)
Investing Discipline: Technical Analysis
From counting cars in the parking lot at Wal-Mart (WMT) to poring over Blue-Square Israel’s (BSI) annual report, there are innumerable ways to invest. Everybody with money, regardless if it’s $100 or $100 million, must find a style or series of styles that work for them.
Every fundamental analyst I know talks of buying “good” companies. What is a “good company” anyway? I think a company is good if I’m holding it as it’s heading higher.
Yet even for those who rely on fundamentals, price must always factor into the equation somewhere. Assuming you’re going long, there’s obviously the price at which you plan to buy. Too often, fundamental analysts pine away for a bargain. So with XYZ at $25, they hesitate, hoping to be able to instead snag shares at $24.25 instead. Meanwhile, the stock ends up going to $35, leaving them behind.
I believe that if you like a company at $25, you should buy it at $25. We must be humble enough to see that, when the stock is at $24, $23, $22, the market isn’t confirming our outlook for the firm. Where people go wrong isn’t that they buy a stock that drops, but that they compound the problem by fighting the trend the whole way down. Suddenly they find themselves with a huge position in a weak stock. That portfolio management misstep is the noose that hangs us.
People bought Cisco (CSCO) at $65, United States Oil Fund LP (USO) at $119 and Pacific Ethanol (PEIX) at $30 thinking they were paying reasonable and fair prices that were bound to look cheap. Where they went wrong was not having the humility to respect the price action of a security that didn’t confirm their outlook, no matter how good the fundamentals looked.
You don’t simply like a company. You like a company at a certain price. The problem with fundamental analysis is that it prompts investors to alter their approach only after the fundamentals have changed. By then, the damage is usually already done.
Thinking Generations Ahead
As a kid, I was too chicken to get a tattoo because I knew that one day I’d grow up and most likely no longer like it. Tattoos, I knew, look great on college kids. White, old flabby bodies aren’t as appealing a canvas.
Successful investments—and a successful life—require that type of rational, long-term thinking. Man is not ruled by instinct or impulse. To make money, we must carefully consider the future, our situation and how to take prudent risk in an uncertain world.
As our government embarks on a historic press to further tax, regulate and control the free economy, one hopes they have some of the same long-range perspective as to how their actions could affect much more than just next month’s employment numbers.
Could regulators ever have foreseen 24-hour E-Mini futures or volatility ETNs when they passed the Securities Act of 1933? Did our elected officials truly imagine a multitrillion-dollar unfunded liability for Social Security, also part of the New Deal, before it was passed? Even something as simple as extending FDIC guarantees on bank deposits affects trillions of dollars in ways not even Chairwoman Sheila Bair can possible anticipate.
So many of today’s financial quagmires stem not from free markets, but from government intervention. Health care and finance, most notably, haven’t been totally unfettered in generations.
And while I have tremendous faith in the productivity of rational businesspeople looking to maximize profit over the long term, I’m less confident in the choices made by opportunistic politicians looking toward the midterm elections. Their decisions will haunt us for generations to come.
Lunch With Buffett Down, but No Bargain
Warren Buffett’s annual fundraiser for the Guide Foundation, a San Francisco nonprofit, ended with a winning bid of $1,680,300 from a still-unknown bidder. While down from last year’s $2,110,100 record bid, the donation still reflects the second largest haul over the lunch’s 10-year history.
Source: Bloomberg
Parting Shot
“The chief business of the American people is business. They are profoundly concerned with buying, selling, investing and prospering in the world.”
—President Calvin Coolidge, 1925
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC.
That warrants some explanation from the author. I brush my teeth religiously every day before going to bed. How will it help me make money?
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"The problem with fundamental analysis is that it prompts investors to alter their approach only after the fundamentals have changed. By then, the damage is usually already done."
Such good advice. This has cost me money in the present downturn.
So many of today's financial quagmires stem not from free markets, but from government intervention.
This is a good warning to all. I can attest to it from experience in agriculture. Govt programs come and go with the drop of an election promise. Our symbolic boycott of USSR in 1979? for the invasion of Afghanistan cost me thousands because of hedged soybeans.