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Jasper M
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Retired, 48, been making my own financial decision since I was 17. Every day, for the rest of my life, I will be a recovering Merrill Lynch customer. Proudest Financial Moments: Personal Best return on equity: 20/1, Leap Puts on Citi & GE, closed in late 2008 Personal best adjusted for... More
  • Structural Inequities make Stock Picking harder  0 comments
    Jun 1, 2010 3:18 PM | about stocks: FNMA, AIG, C, MBI
         It can be very satisfying to invest your ideals - If you have realistic ideals. You see a company with a good business model, you think it is going to change the world for the better, and get paid for it, so you buy a piece of it. If you're right, everyboby wins. The American Dream.
        And, I can tell you from experience, it can be just as satisfying on the short side: You see a Bad company, one that is making critical mistakes, and not learning from them, you are sure it can't last. So you short it. I suppose we could call that the Einhorn Dream.
    (that's not a slam; I respect the guy immensely)

       The trouble is . . . 
        I'm a Big Picture guy. My thesis there is that most price moves in financial assets are driven by macro trends, so those are the ones you want to ensure you are on the right side of. Long in bull market, short in bears. Not exactly rocket science. 
        But it is not Near as easy as it sounds. The thing is, the biggest Bear markets do not 'spring fully formed from the bow of Zeus', but are the product of serious imbalances in national finances. And part of that invariably involves the propping up of failed models with the output of healthy ones. And so it is this time. AIG, FNM, Freddie Mac, C, BAC, MBI - all clearly insolvent, all preserved in a sort of 'undeath' by federal fiat, through interest rate manipulation, congressional extortion of the accounting profession, or outright "guarantees" (based on the sweat of the taxpayers). All of these effectively transfer wealth from the better managed entities, to the worse ones. 
        In an environment where bad business model are routinely preserved, not by repair, but due to political connections, that becomes a complication beyond the scope of business sense. Certainly it's giving me fits! I can't imagine for a moment why the taxpaying public is putting up with this grotesquery. But they are. 
       Which brings me to the problem: How in the world is one to properly deduce a bad business model, if the reality involves the incalculable probability that said model will be bailed out from on high? At the expense, I might add, of better models. Thus, I not only have to find the bad models, I have to figure out which ones aren't "sacred cows". Which so far, is proving troublesome. 
       And it's not just zombie banks. there are all sorts of bad idea being subsidized these days, that cloud my aim. For example, normally, if a company makes policy of wasting their money buying overpriced "green power" I would mark them as less likely to compete with companies with wiser leadership. But wait! Green Power is a "sacred cow", and is subsidized (at the expense of the taxpayers), so they pay a reduced net cost for the expensive foolishness. 

         My conclusion from all the above is, in severe bear markets, stick to indexes. I remain confident in deflation. But figuring which companies will prosper in this horrifically distorted economy is too hard for me. But, like risk, costs cannot be eliminated by such games, only moved around, and I know that any funds siphoned into the various money pits I identify must perforce come from the more productive, so I know something will go down by that much; and probably more. And the indexes will represent this. 
       

       

    Disclosure: short, or holding puts, on things that move
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