Tag Archives: cognitive dissonance

UP 26.6% Year-To-Date 2011

13 Jun

I made a clear decision to get out of the market on the 5 April 2011 and the market is down almost 5% since:


This is my current position: oil and silver. The only other position that I added was to short Monster Worldwide (currently up 21%) which I detailed here:


Overall my market position is very defensive. The below holdings in silver and oil are long term holdings which I would be comfortable owning for at least the next 18 – 24 months at least.  I believe the market will continue to weaken and remain subdued until the debt ceiling issue is resolved. To the extent that this is resolved, this will give market participants a false confidence to re-enter the market with vigour. Of course the US debt position remains precarious regardless of whether the debt ceiling is raised or not. Eventually the debt ceiling will be raised and that will be the greenlight to position yourself back into the market.

However, volatility is still likely to continue even after the debt ceiling raise passes. Remember back to when the Euro crisis was in full swing, concern permeated the Street. The ECB announced a $1.0 trillion Euro-wide bailout package to calm the market and investors. Initially it was received positively, but that reaction slowly reversed to one of concern and economic fragility.

Similarly, US debt ceiling dynamics are likely to be similar so getting into the markets immediately after the debt ceiling upsize would be unwise. It would be better placed to wait a couple of weeks at least to allow the market to stabilise and then to establish positions which have a highly disproportionate possibility of upside relative to the risk profile.

Current portfolio holdings:

I have detailed exactly my investment thesis and the justifications for my stock selections across the website. Here is a summary:

Summary of winners: (This has essentially been the core holdings of my portfolio >80%)

BIDU – UP 40% – Growing Chinese consumer base, and at a purchase point valuing the business at $34 billion the bottom line was that this was low relative to existing revenues and growth metrics. BIDU is the premier web franchise in China, it has high barriers of entry, a wide moat, and the company is able to leverage existing ideas into services that generate strong and consistent earnings. BIDU has a high growth trajectory and seemingly has central government support and assistance.

CLNE – UP 34% – T Boone Pickens is the largest shareholder and the US is the Saudi Arabia of natural gas. I have personally used natural gas-powered vehicles so it has passed the tried and tested element. CLNE was attractive on a value metric basis combined with growth and product uptake by AT&T, UPS and Wal-Mart. Reasonable correlations to high oil prices also made it attractive.

AGQ – UP 33% – Silver as an inflation hedge, an inverse of confidence in central bank policy and a high correlation to the performance of gold (gold being a store of value in a highly inflationary environment). Precious metals have been seen as a store of value for more than 3000 years, that perception will not change in our lifetime.

NDN – UP 31% – Another value play, food discounters intrinsically linked to the state of the economy both in prosperity and difficulty. High inclusion of premier brands and even organic. High growth, good management and growing within a bullish sector.

2498UP 27% – HTC is the Taiwan-based manufacturer of Android driven smartphones. The thesis was based on the global secular growth of information and its dissemination. Valuations were also attractive and growth metrics were phenomenal. Product margins were healthy and HTC innovations were technically superior to most competitors. Their choice to fully embrace the Google Android platform enhanced their focus on devices unlike other competitors who were muddled in competing and offsetting strategies. I recall observing two ladies on a train journey in their late 40s, early 50s in deep conversation about their HTC Android devices and apps. That one conversation crystallised my thoughts and highlighted the broad reach that new mobile technologies had now penetrated. This basically reinforced my thesis.

DO – UP 25% – Headwinds over the Gulf of Mexico were overdone and misplaced, clear misprice and one of the biggest market laggards in 2010. Purchased in January 2011 at a heavy discount to core value and future growth prospects. Highly correlated to the price of oil which I had a bullish stance on. Goldman Sachs gave DO a double upgrade, a rare occurrence. Not that GS ratings matter, but it was just a validation of the increasing acknowledgement of the misprice crossing Wall Street.

SLV – UP 25% – Silver as an inflation hedge, an inverse of confidence in central bank policy and a high correlation to the performance of gold (gold being a store of value in a highly inflationary environment). Precious metals have been seen as a store of value for more than 3000 years, that perception will not change in our lifetime.

PLCE – UP 23% – Strong value play,  a very strong balance sheet with little debt and strong recurring revenues.  PLCE is a premier franchise in children’s apparel/clothing; children’s clothing is price elastic and better able to weather price increases; parents seeing their child in adorable clothing are less likely to be as price sensitive relative to other apparel markets. PLCE therefore can better able manage margin compression with rising cotton and input prices. Children’s clothing is less sensitive to market trends.   At that valuation takeover/private equity etc. would also seem to be a viable possibility with an appropriate premium.

BRCD – UP 14% – Strong recurring revenue flows, value + growth within a secular bull market, good cost control and management.

GENZ – UP 9% – Merger-arbitrage position with an expectation of a takeover. The risk-reward skew was disproportionately high, essentially there was a high probability of a successful takeover. Overall there was a high degree of consolidation within the biopharmaceutical sector aiding the possibility of a takeover.

SHORT MWW – UP 21% – Horrible fundamentals, legacy financial reporting issues and option settlement charges. Strong competition from Indeed.com and SimplyHired.com. Poor search functionality and weak integration into the social cloud. Heavy and continuous discounting lowering margins and more advertising dollars chasing a diminishing market share. Misunderstood correlation on the Street that an improved job outlook translated into a better performance by MWW. This link was arbitrary and the transmission mechanism was weak. 

Summary of losers:

CCJ – DOWN 19% – Was up fairly significantly, events in Japan hammered nuclear power stocks indiscriminately. I still believe the long-term profile of nuclear remains positive and that it still needs to represent part of the total energy mix. Exited the investment as part of a broader concern with the market.

Steinhardt on Variant Perception

23 May

Charlie Rose: What is variant perception?

Michael Steinhardt: Variant perception is the effort to become sufficiently knowledgeable about whatever the subject is, that at a time to be at variance from consensus, because one of the few sure ways to make money in the market is to have a view that is off consensus and have that view turned out to be right.

Charlie Rose: Now is that contrarian? 

Michael Steinhardt: That’s not enough you have to be right. A contrarian is a plus, but it’s not enough. To be a contrarian is easy, but to be contrarian and to be right in your judgement when the consensus is wrong is where you get the golden ring and it doesn’t happen that much, but when it does happen you make extraordinary amounts of money. And in order to do that you have to be intellectually advantaged. You have to go through that same routine in terms of intensity, focus and commitment and the sorts of things that makes anybody in any area I think superior.

Charlie Rose interview with Michael Steinhardt (2001)

Peter Thiel: The Higher Education Bubble

17 May

A great article by Sarah Lacy at TechCrunch.

One of Thiel’s best quotes from the piece:

“A true bubble is when something is overvalued and intensely believed,” he says. “Education may be the only thing people still believe in in the United States. To question education is really dangerous. It is the absolute taboo. It’s like telling the world there’s no Santa Claus.”

The full article link is here.

Cognitive dissonance and the impact it has on investing

21 Apr

You know when you invest in a stock and then you try to seek out every reason to validate your investment thesis i.e. ‘this stock is cheap, look how much cash they have on their balance sheet, its year-on-year growth momentum will ensure the company grows into its earnings multiple’ etc; and you phase out almost all negative information about the stock (which may just be the plain reality), well scientists (well not the ones in white lab coats!), have a term for this collective pattern of behaviours, ‘cognitive dissonance’.

A large part of investing is about psychology and sentiment and what drives human behaviour. Cognitive dissonance is perhaps one of the most significant psychological theories with a direct transmission mechanism into investing.  Investors purchase stocks long or short because they hold a certain set of beliefs about that stock, even short term investors.  Now if markets are efficient information is already in the market and prices should adjust accordingly. Now, unless everyone is trading on inside information they
are taking positions based on their interpretation of market information. It is precisely this fact which essentially makes markets.

Cognitive dissonance almost explains why investors typically nurse significant losses on stocks and don’t always sell them even when they have ample opportunities to exit positions incurring only marginal losses.  When bad news occurs, damaging fundamentals, the idea of buying into weakness or lowering your average purchase price reinforces this cognitive dissonance behaviour. Instead we should be reconsidering the position itself.

A good example of effectively managing cognitive dissonance behaviour was Whitney Tilson’s  Netflix short. Clearly on a financial metric basis the company is overvalued and faces a number of headwinds going forwards. In addition, negative news or general downward market momentum is likely to result in Netflix experiencing deeper stock price losses due to the significant appreciation which has already been achieved to date. However, the company is the premier franchise in online video; international expansion also offers the opportunity to further consolidate their dominant positioning. It would also cost competitors billions to create a bold infrastructure to compete.

Netflix also has first mover advantages and although content costs are high and are expected to increase this is somewhat offset by subscriber growth, and the potential to leverage subscriber price increases. Also any upward guidance is likely to propel the stock artificially higher due to the existing high short interest.

Whitney covered his short and this prevented potential further losses of approx 50%+. He appreciated that his position was not as originally perceived; but there are shorts who have been in Netflix since $70 and the stock has had a parabolic move since then. It is this behaviour of ignoring company and market fundamentals that reflects exactly what cognitive dissonance is. So the next time you see a psychology or social studies book, don’t throw it by the way-side, as it may just contain that small nugget of wisdom hidden behind all that bravado.

Why value investors should appreciate technicals

17 Apr

Value investing is all about searching for financial securities that are at a discount to their core intrinsic value. They also offer a considerable amount of margin of safety to offset any potential downside. We can extend these concepts further but these are some of the primary features. In order to understand stock movements we need to appreciate market composition, cycles within the economy, macro and micro economic issues, fundamental company-specifics and drivers, including near-term catalysts, and general trading behaviour.  As a value investor I don’t pay much attention to short-term technical behaviour such as moving averages, MACD’s, volume and RSI’s. However, it has been estimated that 60% of trading volume is directly attributed to either short-term traders or high frequency algorithms. Therefore, because this group correlates so highly to market performance we need to consider their behaviour and influence.

Short-term technicals overall can generally be viewed as noise rather than having any meaningful value for long-term value investors. The short-term technicals were horrible in March 2009 yet we experienced a generational rally across all stock averages. In terms of technicals I find long term support and resistance indicators as a good barometer for financial instruments. We need to appreciate that there is an underlying fundamental attribute that stock resistance and support levels reflect in terms of market valuation and whether the market is comfortable with that. As always, however, markets are generally inefficient and the market does not always know how to price valuation – the 2000 tech. bubble and the generational March 2009 low highlight this.

To reinforce the point, long-term market behaviour and its directional emphasis is useful and can give clues to future performance. However, viewing technicals in isolation, especially short-term, can be dangerous and is more about speculation and greed rather than investing. It is this type of behaviour and absolute reliance on short-term market performance that almost guarantees continued market volatility and dysfunctional dynamics.

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