Tuesday, March 18, 2008

The Lehman miss

I missed Lehman yesterday, when the stock went down to 20. As they say, "Be greedy when others are fearful, and be fearful when others are greedy". Considering that (a) Fed effectively extended credit lines to brokerages on Sunday, and (b) Lehman was set to produce its balance sheet in 24 hrs, the chances of a liquidity crisis at Lehman were <50%. What was clear was that if Lehman survived 24 hrs, one will get 100% return. And if not, lose 100%. So the expected return/risk was in favor of speculating in Lehman.

A bet against Lehman yesterday was a bet against the Fed. And a bet against the Fed never wins. This was a miss that I will perhaps rue for my life. While financials are bad and probably stink over the next year, there will be trades like this all over in the next few months. I need to make sure I act on them and not be carried away in all the bearishness.

But then, an important question emerges. Suppose I had really bought Leh yesterday and really made 100%. I would have made money. But would it have given me an overconfidence in my timing abilities and made me more speculative which would ultimately lead to more losses in the long term? I need to be careful what I wish for.

The trade of the next few years is financials. Get them right, and one will have multibaggers.

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