Chris Lau - Seeking Alpha

Sunday, April 05, 2009

My True Colors

The rapid reversal in sentiment in the past month is breathtaking.

It is really difficult to keep your head about you, when everyone around you is losing theirs and blaming it on you. Rudyard Kipling may not have referred to the stock market in his poem, “If,” but those who still doubt the sustainability of the market will not have been loudly heard in March.

The S&P rose almost 20% in March. This, by historical standards, is the biggest 4-week rally since 1933. Note the key word in this sentence is "historical." Yet unemployment grew at levels not ever recorded since being tracked. The Intelligent Investor is a value investor. Historical events and market patterns play little to no role in the valuation of a company. In effect, "Efficient Market Hypothesis" would need to be rejected, and the work involved to value a company is "bottom up" not "top down."

I have written and analyzed the market from a top-down perspective. Why? The broken banking system (failure of banks to lend) has affected companies in their ability to finance. This means that companies that were running on weak balance sheets will rally along with the other good companies investors should be holding.

Beware of those companies. It is still possible that the banking system is not fixed, and these companies will ultimately fail. Notice that HSBC sold 18 Billion dollars worth of “rights." This will improve the company’s balance sheet, but the buyers of this issue will probably suffer a paper loss if the market reverses in the weeks ahead.

The 20% increase has also made good companies more expensive. This will reduce your margin of safety, but in the long run it will not matter.

Differentiating good and bad companies will be important in the weeks and months ahead, as the market may move up more of implode because assumptions from a macro-economic level do not play out.

Highlights from Matt Blackman’s newsletter

( , there are a number of factors that remain troubling:

  • Unemployment rose less than expected, but rose nonetheless. That’s like coming home and being content with scoring a D+ instead of a D-
  • Conviction was lacking: every week that went by was met with lower trading volume, even though the market rose
Coming this Week! The Real Report Card

Companies will start reporting earnings this week. It would not make sense that they would be reporting strong earnings, given the continued economic weakness between January and March of this year. I do suspect some technology stocks will do well this quarter. RIMM, for example, already reported very good earnings.

My True Colors:

When does one's true colors reveal themselves? When under duress? When one is at his/her most calm state? That is, in good times or in bad?

I have been reviewing my investment strategy in light of viewing the recent events made by Congress. Keeping a high cash position when the market rallies 20% is a difficult thing to do. However, the phrase "easy come, easy go" comes to mind. it is preferable to position a portfolio to take advantage of real opportunities: one based on fundamentals and not based merely on market fluctuations.

It has been my experience that anything - not just stocks - built on a solid foundation will last longer than profits that come easily.

The same cannot be said for triggering losses.

When the dust settles, companies with solid fundamentals will be the ones left standing.

Two amazing readings that I would strongly recommended are Seth Klarman’s “Margin of Safety” and Nicolas Taleb’s “The Black Swan.”

Nassim Taleb Says Geithner’s Bank Plan Will Fail

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