Sunday, July 06, 2008

What went wrong in the last 3 months?

I had a disastrous qtr in the invested portfolio. From the peak in Jan, the invested portfolio is now down 15%, with almost all the losses coming in May June. For the overall portfolio, losses are close to 8% (as more than 50% is cash). My aspiration is not to beat the markets on a relative basis but on an absolute basis - whatever the conditions. So this is a failure - even if there is relative outperformance against markets that are down 20% or 40%.

I made a wrong bet. In late March - early April, I thought that the entire second half recovery/"govt rebate checks to citizens" optimists in US will give a temporary boost to the US stock market and global equities. I thought that the boost will occur in May and June - closer to the second half - and then the boost will fade in July as earnings disappoint.

What happened was otherwise. Stocks ran up in April. Since ealy May, when I bought some high beta stocks, they have been going downhill. And CY2Q earnings havent even started. 2Q is not the best time of the year usually - all holidays (Thanksgiving, Christmas, Chinese New Year, Diwali) occur in CY4Q or CY1Q.

So what are the learnings from this episode? Bail out quickly if mistakes become apparent. The key trick is not buying but selling, and selling aggressively when proven wrong.

As Bill Gross put it neatly in his May 2008 newsletter, "Investment success depends on an ability to anticipate the herd, ride with it for a substantial period of time, and then begin to reorient portfolios for a changing world. Today’s world, including its inflation rate, is changing. Being fooled some of the time is no sin, but being fooled all of the time is intolerable".

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