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I've decided to put a general post on my thoughts for the morning. There has been a lot of activity in the comments section and I am getting the impression that, despite my admonition and warnings to the contrary, there are many readers who a) are taking my opinions as investment advice and  c) are not taking small manageable positions and taking profits often, and c) are taking a short term view of a long term situation while assuming stock market price movements are somehow dogma in terms of fact and this country's state of affairs.

The market rally

The market has been rallying very, very hard. I am disappointed in my personal results, primarily because I disgorged an obscene amount of profits. I have saw the rally coming and publicly called it days before the fact, but I significantly underestimated its breadth and depth. Although I am still up over 400% on a rolling average I am down significantly from my all time high, which the bar that I hold myself to. I am the first to admit that this is unrealistically harsh and I would not suffer such a critical review from anyone else, but this is the standard that I hold myself to. I need to be careful, though. Being too demanding on oneself could be just as destructive as being too lax or not demanding enough.

 

Prudent risk management

Hedging and cash management are the words of the day, every day. When I am  making money, I find I should be constantly taking it off the table.  Basically, when I start feeling good, I should be taking cash. When I really feel bad about my positions going against me is when I should re-examine my thesis and if it still holds buckle down. This is a very unscientific methodology, but I found it to be most utilitarian over the life of this blog. I must admit that even I don't adhere to it as steadfastly as I should, and when I fail to do so I regret it, every single time. 

In addition, I believe that all who follow fundamental research in a volatile and potentially manipulated market should actively and/or passively hedge. As a matter of fact, at the rate and velocity that the market is rallying in unison, led by the banks and insurers, I find it to be mandatory. It limits your losses to determinable amounts and actually allow you to profit when things go against you by legging out of positions if you successfully stick to your thesis after things move against you. The reason many don't have staying power is a lack of long term conviction, lack of risk management and the absence of money management, ex. taking small positions and taking money off of the table. In early March when I said I was preparing for a market rally, I built up a cash position of around 65% or so. It wasn't enough in retrospect, and an active hedging strategy would have been much more fruitful, a strategy that I was more or less forced into later on. I am now just over 70% cash (give or take) and actively hedged for the balance and will be aggressively seeking to regain my disgorged profits for the year. That's right, I am shooting for the triple digit returns again. It will be harder, but still quite possible. Paying subscribers should look to the subscription content section for new material to see why I am still not convinced that banks or REITs can earn their way out of this just yet. Earnings are really just not there yet, despite the proclamations of the media and management. Once the accounting games are stripped away, there were quite a few losses and missed expectations for the quarter - and this is after the expectations were lowered considerably.