Trust Your Research

Investing is a peculiar beast: just as one can sin from overconfidence, one can also sin from the lack of. An investor has no guarantee that getting 10 calls right is not due to pure luck and when things go
wrong for an extended period of time, it’s not easy for the investor to stick to his or her approach. Unfortunately, there is not an easy way: learning to distinguish right from wrong in your investing research comes with experience. With that in mind, I decided to summarize my predictions and outcomes of 2008.

My bragging rights:

Around January 2007 I wrote an email to my family telling them to get off the stock market. Rising inflation, mortgage applications on the rise, oil prices skyrocketing, and S&P 500 on the 20s P/E. I was just amazed the stock market was still going up! The Dow Jones shot up 15% before falling 40% from its peak. 30% lower from the moment I made the call.

Nov 5, 2007; I wrote about Credit Derivatives: “If things get worse politicians will try to regulate this largely unregulated business”. I nailed this one. When I wrote about CDS/CDO in 2007 I had to explain them. Nowadays even Joe the Plumber seems to know about them. On September Christopher Cox called for regulation and on November, regulators gave the CME the go-ahead sign.

March 31, 2008; “I’m surprised that not many small hedge funds have collapsed. I would expect a round of bankruptcy declarations coming up soon.” Do you really need links for this one?

The dollar. I was bearish on the dollar for quite some time. Unfortunately I don’t have a specific date but switching currencies gave me about 30% profit in the
past 2 years. Nowadays; I can’t make a call on the currency and I don’t like to gamble.

A whole list of stocks to buy and sell. I was bearish on oil after hitting $100 per barrel. Bullish on pharma and food which outperformed the market by a wide margin. Even though it was considered extremely cheap, I got out of Washington Mutual for the simple fact that I realized I had no idea where I had put my money on.

My whoops:

I can’t time the market. March 31, 2008 “we are near the bottom of the credit crisis”. Oops. Define “near”.

I failed to trust my own research. I made the call for a stock market crash on early 2007 but when by the end of the year the stock market was up 15%, I doubted myself. I got into the stock market again. A painful experience not only because I lost money but because “I told myself so, dummy!”.