Lessons Learned

 

Occasionally I ignore my own rules and 7 times out of ten it comes back to bite me in the bottom line. Here is one of those stories. In the IBD, I read an interesting article about FIO, Fusion I/O. The more I read and I did do all the homework, there was a lot to like about this company and the stock. Unfortunately in looking at the SEC filings, I was focused on the quarterly earnings reports (10-Q) and not the other filings. While I began buying the stock at 35 and got a lot of the Salve Lucrum Family into the stock, I was feeling pretty good about the stock and added to it for my and several portfolios. On November 20 something, I heard a news piece about FIO doing a secondary offering. That usually mean the IPO was so successful that the company has the confidence to issue and sell more stock. In this case they issues 3 million more shares on top of the 5 million issued at the IPO. That is a 60% dilution of value. The stock went down very quickly.

 

One of our rules we try and follow is SELL when you get an 8% loss. The concept is taken from William O'Neil of IBD fame and has been a round longer than him. Keep in mind that winning at this game has more to do with minimizing your losses than maximizing your gains. The gains will take care of themselves. Well by December 1, our positions were down 11%. We got everybody out of FIO and I felt bad because these are my friend and they are trusting me with their money.

 

Now some of you are saying that a 11% loss is not that bad, or some stocks go down before they go up, or what ever other reason you can come up with to catch a falling knife. Well we got everybody out of FIO except one person. ME. Now I can't explain why I did not follow my own advice and why I did not go into my account and dump FIO when I did the other 5 accounts who had FIO. But I did not. As I look at a sizable position in FIO this morning at $22.92 (That was hard to type. Ouch!) we are down 37.4% and could end up being the biggest loss to date this year. Now I still have not taken the loss yet and I cannot figure out why. I know it is the right thing to do, I know that the share dilution whacked 60% my buy in value away and the current price reflects that. I have had gains this year so taking the loss now makes sense, so why don't I?

 

Boys and Girls, this is why you have to have rules and live by them. No exceptions, or at least as few exceptions as possible. I am closing this position with a loss today.

 

Speaking of today, what did Mr. Market do? The two catalysts at the opening of the market were a decent bond auction in Spain. Now I know a hand full of you know what that means and another had full might want to know and the rest of you have stopped reading already. Here is what that means. Spain issued some debt in the form of bonds their equivalent to our treasury notes. Keep in mind that sovereign bond yields are basicall driven by supply and demand. If a lot of people want them, the yield is lower and if people don't want them the issuer (Spain) has to raise the rate of return (Yield) higher to attract investors. Also keep in mind a Yield over 6% is considered unsustainable in almost all economies, except maybe the US, UK, Germany, Japan, China, and Brazil to name a few. So there was a decent demand for the Spanish Bonds which helped keep the yield lower, a good sign.

 

We also had a decent jobless claim number today. The actual came in about 30,000 less than expected at 366 K. we would caution that the initial jobless claims for this week, last week and next week are historically "squishy" because of what is called "Holiday Noise". Temp hiring, people to busy to file for claims, and other reasons makes these weeks a bit unreliable. But it was accepted as good news.

 

The PPI remained in a comfortable range, another piece of good news. And there was huge pop in the pace of industrial production as reported by the Empire State Survey. (There was also a good production umber out of Germany as well before the market opened.)

 

So what does all of this mean? Brian has to be vwery vwery cwareful in the next few days or he could find himself on the wrong side of an upward rally. We have a lot of the portfolios with some bearish bets via PUT options. If this is the beginning of a rally, which we do not think it is, we will need to move quickly to get out of these PUT positions. The volume today in the market makes it hard to say this is a rally starting.

 

I Can Stop Feeling Sorry

 

As far as I am concerned, as long as I am learning something I do not mind losing money. (I can't afford to many lessons like FIO every month.) I do not like losing my friend money and we have had that happen a couple of times this year. Then I got a nice e-mail from my Wealth Daily newsletter. When I read it, I was feeling pretty good. Apparently a lot of the fund managers are sending out notes to clients expressing they apologies for under performance. In fact here is a list of some very well known under performers:

 

Paulson Advantage: -32.57%

 

Advantage Fund: -45.35%

 

Credit Opportunities Funds: -19%

 

Credit Opportunities II: -15.31%

 

Paulson International Ltd: -10.40%

 

Paulson Partners LP: -9.89%

 

Paulson Enhanced Ltd: -22.41%

 

Paulson Recovery Funds: -31%

 

Paulson Gold Funds: +1%

 

Pimco's Bill Gross made a huge bet against U.S. Treasuries this year. He was wrong.

 

Fairholme's Bruce Berkowitz's investment in banks was a bad bet. His Fairholme fund dropped about 30% this year.

 

And Legg Mason's own Bill Miller stepped down from the Legg Mason Value Trust Fund.  Another fund he runs is down nearly 34%.

 

I am feeling like I am in good company. I still don't like to lose money for my friends.

Salve Lucrum