As I was checking my computer for old files to back up (I’m selling my MacBook) I came across this photo of my trading desk:
Click on the photo to enlarge it. On the right-side computer monitor, I had my list of longs and shorts arranged carefully under relevant categories. Longs occupy the top half; shorts occupy the bottom. I just went through 40 or so tickers and checked out how they have performed since (the photo is dated February 17, 2011). If most of these tickers look familiar to you, that’s because I was testing out the ideas written up on a certain website that most of you read reports on. I also threw in some of my own ideas here and there, along with Chinese RTO shorts that everybody knew about.
It looks like the Chinese RTO shorts were REALLY amazing trades as a whole. I think HRBN was the only one to survive the deluge. The so-called fad shorts were actually really bad trades, with the exception of the two rare earth stocks. This supports my theory that consumer goods companies should be shorted only after extra scrutiny, or not at all. The cyclical shorts (mostly a list I came up with after listening to Jim Chanos) all dropped a lot. It was a great macro call on his part. (Not sure why LNG is on that list.) Under the regulatory category, GDOT dropped a lot and so did the for-profit education stocks. The rating agencies, though, had a huge rally. I guess it’s not so easy to tell how regulations will move stocks. The Obsolete list is my absolute favorite because it’s mostly comprised of my own ideas. LOGI, RIMM, NOK, EK—all trainwrecks. The outlier was GRMN, which I still believe is a $20 stock at most. I really did a bad job with the FDA approval list. My friend and I came up with a hypothesis that you could make fairly easy money by shorting pharma companies seeking Phase III FDA approval. SGEN and VVUS went up a lot… not a big sample size but the increases are enough to scare me from doing this type of trading.
On the top part of the screen are the longs… much less entertaining to look at. Big losers include YHOO (I liked this stock at $17 unfortunately), XRX, RJET, S, C, GS and MF. (The first four of these ideas I got from Greenlight Capital’s filings.) The latter three all did terribly because almost everything in the financial sector did badly last year. It was just a terrible macro call.
The post bankruptcy list had some massive losers like CODE, GM, VC, and XRM. I used to like looking at post bankruptcy companies just like other event-driven people, but this doesn’t seem smart. Most companies end up in bankruptcy because they are terrible businesses. The key to making money in this arena is to pick something that filed for bankruptcy due to liquidity issues rather than solvency issues… one that is not involved in heavy industry with lots of competition and low margins. But how many GGPs will we see in our lifetimes?
Big winners include AAPL (my favorite secular story of all time), HOS, BUD, and IDT—and AHCI which got bought out.
Oh, and finally on the right side under the momentum category… those were ideas from our resident genius technical analyst. I think CMG is the only winner on that list. Everything else went straight into the shitter. This supports my theory that technical analysis in general has poor predictive value over longer time periods. You’re not supposed to hold on to momentum stocks for long.
Lessons to Take Away
I think it is pretty clear that one cannot make consistent money in stocks reading reports on that site for investors that we all like to visit. The market is more efficient than we think. Macro calls can determine how entire sectors perform and it’s useless to pick the best of the bunch because it will just go down along with everything else. But do any of us make an effort to make macro calls? Most of us don’t.
Frauds are categorically bad investments. That’s for sure.
Fads are dumb to bet against, probably because they can stay popular for a long time before reversing.
Obsolete companies are great to short because the business operating momentum is downhill.
Avoiding pharmaceutical companies (long and short) is a great idea.
This is a good exercise to go through, just to keep my head in check. I want to find true anomalies, and I don’t want to play a game where the outcome is random. Got to find out what is predictive and what is not.
Whats the site we all like to visit?
U should just setup ur return analysis as an attribution analysis to determine what strategies have worked best for u. Kinda fruitless to say the best companies in a category perform just like the peer group when the macro moves. Typcially good business always create wealth and that is what the key determinant should be for allocating capital. Otherwise u are just guessing at an investment hypothesis that u have no competitiv advantage on. I like your short thesis bbecuase u are saying – how can this business fail and look at core values. Phase 3 shorts is like gambling, so why would ever try it out.
The real take away is that you are too afraid to find your own ideas and think independently. As a result you will always be late to the party. Coat-tailing will only get you so far. That should be your key takeaway. There are only so many good ideas that get put on your fave site. The best results will always come from doing your own thinking and work. Try and avoid reading any one else’s opinions on stocks for three months (I bet you find it hard to do). Your results will improve so much. Do you think Buffett ever wastes his time thinking about what others think? Everyone wants to take shortcuts these days – as investing is hard – but you get out what you put in. Remember too Burry quit the site you mention. Best wishes for your investing. John