Penultimate Preparedness

I continue quoting Peter Lynch's "One Up On Wall Street":

"No matter how we arrive at the latest financial conclusion, we always seem to be preparing ourselves for the last thing that's happened as opposed to what's going to happen next. This 'penultimate preparedness' is our way of making up for the fact that we didn't see the last thing coming along in the first place."

Greed on the way up, fear on the way down. Both are contageous. That is why we always miss the turn of the tide.

"The day after the market crashed on October 19, people begin to worry that the market was going to crash." [he refers to 1987 Black Monday]

"Those who got out of the market to ensure that they wouldn't be fooled next time as they had been the last time were fooled again as the market went up."

His point eventually is in the book... you should not try to time the market because you can't. No one can. I know I have tried. Sometimes almost correct, many times not at all. It's like tossing coin. You may get enough success to think you can do it and then you get really wiped out. And I totally agree on the penultimate preparedness. That leads to excellent buying opportunities as was the case in early 2009. Both crashes and bull markets will always be overdone. Always have been and always will be.

Passing The Mirror Test

I just finished "One Up On Wall Street" by Peter Lynch, the legendary fund manager of Fidelity Magellan. The chapter 4 in the book is called "Passing The Mirror Test". In short, you should answer:

1) Do I Own A House? (A: Yes)
2) Do I Need The Money? (A: No)
3) Do I Have The Personal Qualities It Takes To Succeed? (A: Yes)

For questions 1 and 2 the answer is easy as they are objective. The third one is tricky as probably anyone investing already will say yes :-)

The qualities related to success as an investor according to Lynch:

• patience
• self-reliance
• common sense
• a tolerance for pain
• open-mindedness
• detachment
• persistence
• humility
• flexibility
• willingness to do independent research
• willingness to admit mistakes
• ability to ignore general panic

And on top: "In terms of IQ, probably the best investors fall somewhere above bottom 10%, but also below top 3%".

Still say Yes to the third one? I say "Maybe, hope so"..

Crappy investments: Airlines

I haven't been flying with Finnair for a while and noticed that they have reduced their service in the intra-Europe flights to the level of a low cost airline (give or take a sandwhich). However, their ticket prices still ain't in the same ballpark, which leads me to believe that they have basically given up the competition in those routes and are only flying them to feed their long distance routes to Asia. Why in the earth would anyone want to pay 30-50% premium for flying with them? Better service (definitely not this time)? Better pilots? (I do not think so)

Next time I pick a low cost airline. That will also save the money of my employer. I guess they have airmile cards too..

Airlines in general are crappy investment due to cronic overcapacity in the business. Apart from a few airlines most of them are running on losses. I don't touch them even with a very long stick. But for some reason new airlines emerge and the old ones don't seem to have trouble attracting capital. Beats me..

Talk about business that has need for high CAPEX, generates tons of CO2 and is utterly dependent on cheap oil.. They will get really screwd over long run..

Gold: pros and cons

Every time gold sets new records gold related articles fill the media. In Seeking Alpha, gold related articles appear daily and in large numbers. Here are some picks that I found interesting recently:

Pro gold articles:

• AngloGold Ashanti Buys Back Hedges: Is That a Clue for Gold Investors?
• Gold Bubble? Think Again
• When Is the Gold Bubble Going to Burst?

Critical articles:

• Soros Explains His Comments on Gold as the Ultimate Bubble
• Determining the Intrinsic Value of Gold

Despite for repeated bubble calls, I remain pro-gold. It is the ultimate hedge against irresponsible government behavior. Currently such behavior (deficit spending & money printing) is rather common throughout the western world (so called "developed" countries ;-).

Closer look to most retirement schemes reveal that they are nothing more than giant ponzi schemes with a twist. The twist being that governments never get procecuted on the fraud. They just either lend some more money or print it. Or default under the debt load.

The most powerful signal towards continuing gold rally is the unwinding of hedge books by major miners (such as AngloGold as told in the first referenced article).

No matter how convinced I am to gold as speculative investment (or wealth preserver), I will not put a significant amount of my money into it. House, piece of land and farmland are also quite good inflation hedges if you are into them for a very long run. You see, land is no longer "manufactured" ;-)

Gold continues bull run

Gold seems to continue bull run after seasonal (summer) weakness. New records have been set in dollar terms..

I have recently bought a bit more gold and more shares of my two favourite gold miners (NEM & ABX). Like anything in my portfolio, I will be steadily adding gold and gold miners to keep their share in my portfolio constant. Currently my target is to allocate 15% to gold and 15% to gold miners. That makes me more of a gold bull than Soros although you have to take quite many zeros off when talking absolute value in dollars ;-)

Eying Wintel

I have been avoiding tech stocks ever since the crash of 2000-2001. Not because I got burned badly, because I wasn't. Sure I lost almost 100% on one stock and more than 50% on a couple, but I also made some spectacular gains on the ones I was wise enough to dump between 1999 and 2000.

The reason why I don't like tech stocks in general is that the field is very competitive and requires huge R&D spending. You can loose your #1 position very fast. There are numerous examples of companies that were ones great, but now are either bankrupt or dimineshed to some niche market.

There are exceptions: the ones having moat.

An economic moat is a competitive advantage that is difficult to copy or emulate, which provides a significant barrier to competition from other firms. Buffett has often referred to an economic moat as being similar to a fortress or a medieval castle that one can not penetrate.


Two companies come instantly to my mind: Intel and Microsoft often referred as "Wintel". Both companies are so strong in their fields that they are close to monopoly without being one. Currently both are trading quite low P/E ratio so many prominent hedge managers characterised as "value investors" have picked up either one or the other. I too am eying both companies.

I could buy them tomorrow, but on the other hand I want to space out my investments in order to keep the market timing minimal. Also, as everyone else, I am still cautious on the "recovery"...

Took a position in Chevron

I basically transferred money from CHNG to Chevron (CVX). Out of all big oil companies, I found Chevron to be most attractive based on financial comparison between the big ones.

Otherwise, a good summary of oil&gas majors can be found here:
http://seekingalpha.com/article/221875-is-now-the-time-for-the-energy-conglomerates

Unfortunately the article does not include PetroChina and PetroBras, which I found interesting in addition to Chevron and maybe ExxonMobil.

Dumped CHNG

The Rosen Law Firm today announced that a class action lawsuit has been filed on behalf of purchasers of China Natural Gas, Inc. common stock during the period from March 10, 2010 through August 19, 2010. CHNG was trading over $10 a share in beginning of the period. Since then the stock has declined over 50% (or 110 MUSD in market value) so the potential damages are quite huge compared to the remaining market price and book value of the company.

Shortly after seeing this announcement I dumped all my shares in CHNG.

I happen to be one of the people that purchased the stock during that period so I need to consider whether I want to participate in the lawsuit. My largest purchase was on the 20th of August so that won't qualify. At any rate I don't want to stick around while other people loot the company via the lawsuit especially if I won't qualify for it or have other reasons not to participate.

Even though I increased position in CHNG fairly recently, I did that without fully understanding the underlying problems in CHNG and similar stocks. These problems are fairly well summarized in the following arcticle:
http://seekingalpha.com/article/223026-12-signs-and-158-reasons-investors-should-avoid-chinese-rto-stocks

Here you can find the Barron's article + some commentary in the end:
http://chinainvestorking.blogspot.com/2010/08/article-barrons830-beware-this-chinese.html

I feel like a sucker. But this will teach me one more lesson. It's not the first time and won't be the last... Such is life..