November 22, 2014 Say Something

Risk/Reward Vol. 243

THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.

“These oldies but goodies remind me of you
The songs of the past bring back memories of you.”---lyrics from “Oldies But Goodies” sung by Little Caesar and The Romans

“These last few weeks of holding on
The days are dull/The nights are long
Guess it’s better to say
Goodbye to you/Goodbye to you.”---lyrics from “Goodbye to You” sung by Scandal (featuring Patty Smyth)

“Everybody’s got an opinion now, don’t they
I’m here to stay/I’m here to stay.”---lyrics from “Here To Stay” sung by Christina Aguilera

“Oldies but goodies.” They not only “bring back memories”; they also “remind me” of first principles. So this week I reread several past editions in which I summarized my investment philosophy including Vols. 1 and 156 (www.riskrewardblog.blogspot.com ). In those posts, I pledged my allegiance to Bill O’Neill’s 8% Rule ( he, of Investor’s Business Daily fame). That is; do not suffer an 8% loss on any position. That allegiance notwithstanding, in the past few weeks I have faced situations with American Realty Capital Properties (ARCP) and certain oil companies where the loss far exceeded 8% before I could exit. I did not sell in a panic, but it caused me to contemplate the following: assuming the positions do not fall significantly more, do I take a double digit loss or do I hold?

The mere passage of “these last few weeks of holding on” and rereading excerpts from Jack Schwager’s “Market Wizards---How Winning Traders Win” supplied the answer. Sell. The reason has little to do with logic and much to do with psychology. Holding losing positions makes “the days dull/and the nights long.” Winning wizards know this simple truth: looking at red on the computer screen saps one’s enthusiasm and infects one with negativity. The wizards are right; when it comes to losers “it’s better to say/Goodbye to you/Goodbye to you.” And so I did—and my focus improved instantly.

But what about the stock market? Monday through Thursday, both the Dow Jones Industrial Average and the S&P 500 continued to sit, rock steady, with little volatility. Once again, the positive impact of solid domestic economic data was tempered by troubling news from abroad. On Tuesday, Japan reported that its economy contracted for the second consecutive quarter and that it now, officially, is in a recession. On the European front, Standard & Poor’s chief economist stated on Wednesday that the Eurozone was in “dangerous territory,” facing the dual threat of recession and deflation if its central bank did not implement aggressive quantitative easing soon. Then came Friday. China's central bank lowered rates and the European Central Bank announced that it had begun aggressively buying assets. Both of the major stock indices reacted favorably, jumping 0.5% that day. As for me, these moves signal that interest rates likely will remain at historic lows well into 2015, and that the interest rate sensitive portion of my portfolio (e.g. leveraged closed end funds and preferred stocks) should fare well. So, “I’m here to stay/I’m here to stay.”

In closing, I want to thank one of my subscribers. He called to tell me that in recent postings he could feel my pain. I hadn’t noticed, but in rereading them I detected a decidedly negative vibe. That detection led me to question why, which in turn caused me to review whether my holdings matched my principles. As discussed above, clearly they did not, a situation I rectified this week. Thanks again for “saying something.” As the great Christina warns:

“Say something, I'm giving up on you
I'll be the one, if you want me to"