I cave in

[David Randolph]

I admit defeat and recognize that my long term bull case was wrong. The market proved me wrong because it broke down below $132 and now it looks like it will test the $126 level:



The problem is that this test shouldn't occur, because just going down there will also prove wrong everyone believing lower interest rates and liquidity injections by the FED would revive the US economy and the stock market. This disappointment will probably make the SPY break the $126 level on the downside which will be further evidence that indeed, we're in a bear market.

Even more disturbing, for me, personally, is to acknowledge that almost all stocks, good or bad, fundamentally attractive or not, are going sharply down. This is telling me that what I've learned throughout 2007 about fundamental analysis isn't as valuable as I thought.

I'm not sure if you're aware or not, but I had a "philosophical" debate inside myself about which of two currents of opinion was right or more appropriate for me as a long term investor:

1 - The micro approach

This strategy is best defended by Peter Lynch and to some extent Warren Buffet. For them, a good business bought at an attractive price should be held for the long term, regardless of the general market, which should be ignored.

2 - The macro approach

This strategy is best defended by Jesse Livermore in Reminiscences of a Stock Operator, a 1921 book. Basically he says that one should be long stocks in a bull market and in cash or short stocks in a bear market. He made his investment decisions based on the trend of the general market, because, in his opinion, almost all stocks went up in a bull market and down in a bear market.

I used to be more of the Livermore camp, however, as time went by, the market gave some "false" bearish signals and I learned more about fundamental analysis, I went more to the micro camp.

This indecision and search for an inspiration or strategic guru is perhaps an indication of my youth, or shall I say, inexperience?

I've been studying the stock market since 1996, but I have to admit that I didn't knew much about individual stocks until the start of 2006. You may say, "David, you shouldn't be running this website, since even you acknowledge you don't have a lot of experience", which I could agree with, but I can say, to my defense (even though no attack was made), that at least I'm honest and many of the guys out there with similar services are dishonest or have even less experience than I do.

The results since inception in 2005, with the Main up 258% at yesterday's close versus 14% for the S&P 500, were great. But since the start of 2008, with the Main down -18.3% versus -11.2% for the S&P500 and -13.5% for the Russel 2000 are quite frustrating.

Suddenly it has become more important to preserve capital than to just keep holding everything, ignoring downside risk.

There were two pieces of evidences in the back of my mind that kept telling me my bullish case was wrong, but I preferred to ignore them:

1 - Sentiment analysis/contrary opinion

One of my strongest bull weapons was the general bearish sentiment. People were so bearish that they could only have sold stocks and they were holding cash, so the market could only go up, as the negatives were already discounted. Every poll on the US economy confirmed this view on sentiment, with the majority of people saying the economy was already in a recession and the future was dark.

However, a few days ago, I saw one poll that was very conflicting with this assessment of sentiment: when asked "what are you doing with your money now?", the vast majority responded "buying stocks". This corroborates what that guy based in Hong Kong, what's his name? I don't remember now, but he said: "sentiment is negative because of headlines, not because people are selling stocks". And, as written in one of my Contrarian opinion books, it is all about the potential of money in and money out. It doesn't matter what investors say, but if they're holding stocks or cash. If everybody has stocks the market should go down and if everybody has cash the market should go up.

2 - The US stock market should be bullish because China will still grow strongly for many years to come

I wrote about this on another thread. It is clear that China will be the largest economy in the World, and on a per capita basis the average Chinese is still 10 times poorer than the average American, so there would still be a lot to grow in China ... however, and this was a puzzling information, if one were to consider both economies on a PPP (Purchasing Power Parity) basis, China already is the largest economy in the World!

Of course, I still believe China and other emerging economies will still grow a lot over the long term, but the transformation from an exports lead economy to an internal demand lead economy won't be done without a lot of reform and probably some economic pain. The World is getting to a point of seeing it isn't all that good to export to the US, because the US is paying back with a depreciating asset (the US dollar).

So, two of my basic bullish factors can be dismissed by these two points, most people are still holding/buying stocks and China's economy may have a cyclical recession, because, indeed, it is already a very large economy without such a high growth potential and it has to reform itself to move from exports to internal demand.

Even though I'm admitting I was wrong in my long term bullish case for the stock market, I'm not going to just dump all stocks. Of the 14 stocks currently held by the Main Portfolio I plan to sell 5. I'll keep holding the other 9. I'll try to write the 14 individual analysis before the open to justify the decisions.

On a final note: I don't know how many subscribers 3 SOF premium service has now (it was just too painful to see people giving up - even though I understand), but probably we have about half of what we had six months ago. Obviously I'm not doing this for the money, since, also because of the dollar's huge fall, I could bring more money home doing any other job here in Portugal.

But I'll continue doing this job. It's about time for me to start facing and dealing with difficulties. It would be just too easy to give up.

I just want to say that you've been very friendly and supportive and I'm very thankful. It has been a pleasure

[pinoleropuro]

David,
your openness and honesty is what keeps me a member. I am glad you wrote this letter. I know you're going to continue to do great and I respect your decicion and to be honest I was considering canceling my membership also but this letter you have written has reassured me that you will once again bring this portfolio around.
once again thanks for being open and honest!
keep up the great work that you do.

[soxguy]

David,I too respect your honesty and thank you for your efforts. Think about this. If an optimist like yourself is feeling this way, could we not be near a bottom? Having said this,I too agree that preservation of capital is paramount in these tough times. Maybe if Jim Cramer's show got cancelled due to lack of interest,that would be another sign.

[terainvestment]

David,

thank you for your great letter and for your honesty. I think you have a great potential to become one of "Gurus" most admired in the financial analysis and stock investing world, so you are very right when you say that giving up would be too easy.

These times are bad, but you could demonstrate so many times with your picks that you obtained great results despite bad market.

for this reason I will continue to stay here and support you.

Don't worry for subscribers who "resigned": many others will come :-)

cheers from Italy.

p.s. this week end is very sad for me: I am leaving now for the Alps, going to White Mountain (Monte Bianco), where we will dispell the ashes of one of my best friend. An extraordinary people, who travelled all around the world, with a great humanity and an happiness to live that was so great. Thanks Michele to stay with us, I will always remember you.

[stocky]

David, integrity has never been an issue. Though I must say that David is still trying to come to terms with Long Term investor vs Short term speculator. Much of the success of 3SoF was result of speculating short term on microcap stocks. I dont want to say that it is the way to go now or have 3 year outlook b/c it is for David to decide. Also ppl may leave 3SoF for reasons other then performance, some may buy home or whatever.

Anyway David is a great fund manager and I have full confidence that he will beat S&P not just by 30% but even more by end of this year. Just hang their.

[berloga]

Thanks for the openness, David, it is highly valued here! Many of us here are busy people having full-time jobs and familes. I personally, have little time to do my own investments, so your service has been an inspiration. I made some money here a while back, bought a car (well, paid for half a car's price), but then drained the profit with time. Now I am where I was 2 years ago. Roughly even. USD is badly down, etc. But I look at it this way, if I were to invest on my own or using some other service, I could be losing all of my money.

I like your flexibility, keep on going, man!

[Houlahan]

Applaud everyone! Many truths spoken here, especially..."David is a great fund manager and I have full confidence....." I totally agree! He has many years of experience and he will persevere and prevail.

Gas prices are killing everyone. It touches everyone. Govt. needs to do something to ease gas prices, but what? Hey, why not drill in Alaska for oil. I hear there is ampule, oh , I forgot, the environmentalists are afraid the moose and elk will trip over the pipe lines. Poor moosey. Besides it would take years to get production up and running. So, we remain slaves to oil. I think I will go for a bike ride.

[buddjas1]

Govt. needs to do something to ease gas prices, but what?

How about stopping the Iraq war?  It is not a coincidence that the price of oil and gas have tripled since the war started.  So, as usual, the answer to cheaper everything is less government involvement--not more.

[soxguy]

Oil will peak at some point,$110,$115,$125,I don't know.Does anyone know of an investment vehicle that in effect shorts the price of oil?

[berloga]

A way to stop the gas prices rising??

buddjas1 is right - stop policing the World, that's one.

Reduce the consumption!!
1) Why should a 100lbs lady climb into an F350?? She'd look so much nicer in a cure little car. Do not use your AC unless it is really hot! In Germany, many companies just open windows to let fresh air in, c'mon, Einstein could think without an AC in July in New Jersey, why can't the others?
2) Begin developing infrastructure! Public transport in the US is worse than in Kenya!

The problem is that the government will not do a thing, I agree with JKN. And the consumer can only do so much... It is sad, but without the help from the government, it is hard to fix an economy.

[capricho]

Oil will peak at some point,$110,$115,$125,I don't know.Does anyone know of an investment vehicle that in effect shorts the price of oil?

DUG

[buddjas1]

It is sad, but without the help from the government, it is hard to fix an economy.

More bad goverment does not fix existing bad government. 

Problem - Inflation
Solution - Eliminate the Federal Reserve and government central banking (i.e., fiat money) and allow free market, asset-backed, monetary system such as the gold standard.

Problem - Unemployment
Solution - Eliminate corporate taxation and minimum wage requriments.

Problem - Lack of Growth
Solution - Eliminate corporate taxation, investment profit taxation, minimum wage requirements.

The government causes all economic problems and only makes them worse by trying to fix them.

[kslifka]

Looks like everyone's throwing in the towel.  Must be just about time to buy

This market has been crazy...but mainly down.  People are still selling into these rallies.  Nice comeback in the last half hour...let's see if it holds.

I still have a hunch the Nasdaq will get down to about 2010-2020 and the S&P will drop to about 1220-1230...since we broke down out of the triangle a week ago.   1220 has huge support going back to the downturn in the summer of 2006.

[pinoleropuro]

It is sad, but without the help from the government, it is hard to fix an economy.

More bad goverment does not fix existing bad government. 

Problem - Inflation
Solution - Eliminate the Federal Reserve and government central banking (i.e., fiat money) and allow free market, asset-backed, monetary system such as the gold standard.

Problem - Unemployment
Solution - Eliminate corporate taxation and minimum wage requriments.

Problem - Lack of Growth
Solution - Eliminate corporate taxation, investment profit taxation, minimum wage requirements.

The government causes all economic problems and only makes them worse by trying to fix them.

you have my vote for the presidency 

[BigSully1]

Oil will peak at some point,$110,$115,$125,I don't know.Does anyone know of an investment vehicle that in effect shorts the price of oil?

you could short USO or buy puts. My brother was buying heavy puts on it today. I wouldn't though myself, I rarely ever agree with him and think he might well get hurt.

Heavy volume on Capricho's DUG today.