"The market can stay irrational longer than you can stay solvent." – John Maynard Keynes
On Friday, October 16th, while the stock markets in the US were in a mini-decline, I decided to buy more of two of my favorite "takeover target technolgy stocks": NetApp Inc. (NASDAQ:NTAP), and Brocade Communications (NASDAQ:BRCD).
Why? Mainly because that day they were "on sale," and because in all my reading and personal investigation I've concluded they would be a good fit with some bigger acquirers like IBM (NYSE:IBM) or Hewlitt-Packard Company (NYSE:HPQ).
I also bought a technology company that appears to have a great balance sheet and plenty of cash, EMC (EMC). This in spite of the fact that all three of these stocks have had an impressive run-up this year off their March lows.
Whether it was a rational or irrational decision on my part, you can judge and time will tell, but if I decide to sell them today (the dreaded date of Monday, Oct. 19th), I will make a least a small profit.
You see, I've come to believe that the famous comment by John Maynard Keynes happens to be a reality, whether we can accept it or not.
Brian Hunt, editor in chief of Stansberry Research, recently wrote that, "John Maynard Keynes was the most influential economist of the 20th century. His ideas shaped the way the Western world ran its finances after World War II. Keynes was also a brilliant speculator who pulled millions of dollars out of the market.
"You see, Keynes brilliantly cautions traders against shorting a stock or a market that "shouldn't" be rising... and cautions against buying a stock or a market that "shouldn't" be falling."
"The market is full of stories like this. Think of the traders who went bankrupt by shorting super expensive Nasdaq stocks in 1999... or the famous blowup of Long Term Capital Management in 1998. Both groups took big positions against markets they felt were behaving irrationally... but those markets just kept on behaving irrationally for a long time."
"A corollary to Keynes' quote is the Jim Rogers line, "Markets often rise higher than you think is possible, and fall deeper than we can imagine." We learned that first hand over the past 14 months in a way that none of us will ever forget if we were invested in the stock markets during that time period."
"You can put the warning from Keynes and Rogers to real-world use by [deciding to using trailing stop losses]. Go ahead and take a contrarian position at the extremes. But always have an "uncle" point to limit losses in case the crowd keeps pushing prices in a crazy direction" Brian opined.
"It's tough to say uncle on a trade you know has terrific potential. But when you start thinking, "This is an irrational move... I'll just keep betting against it," remember Keynes and Rogers. Know that markets can go farther in either direction than you can imagine... and they can keep going longer than you can stay solvent."
"You know what? Bank earnings really were terrible. With the exception of Goldman Sachs (not really a bank) and JPMorgan Chase, the numbers were pretty hideous.
Cramer went on to opine: "In some ways, I don't think that these companies even have a handle on how bad things are. The foreclosures are all moving parts, anything bought, underwritten or being serviced from 2005 to 2007 is a total disaster. I think something like 40% of the loans and debt that was let that period on anything (cars, homes, credit cards, etc.) is going to default or is defaulting. The losses are mind-boggling and many bankers were either so irresponsible as to be sickening or were victimized by fraud. Also, the numbers are not peak bad. There will be many others that will be worse. Far worse. It is a disaster. Unmitigated. And for the most part, the stocks are all buys."