Back Online; The FWS Portfolio; Outlooks

October 16, 2008 by Joe Ponzio

In business, timing is everything; so, I can only imagine what people thought when I sent out that letter last weekend, the markets ran up 10%, and F Wall Street went offline. The truth is: The company hosting this site cancelled their hosting service without forewarning. I didn’t know for two or three days. Now, we’re back online with a new host, and ready to go.

(It’s somewhat funny because the people that thought they might have heard a big Ooops had clearly missed the long-term outlook of that letter.)

The F Wall Street Portfolio

Clearly, I had to make some changes to the F Wall Street portfolio. Our permanent holdings remain just that – permanent. As for those stocks we intended to dance in and out of – we danced out of some of them. I’ll get to those next week.

Perhaps I should have heeded some of your warnings (RenĂ© was very outspoken and forward-looking) – I did not expect things to deteriorate so rapidly or so violently. Though the problems in the economy began long ago, they really escalated over the past month. I try to look through the windshield as I’m driving; still, the road looks different to all of us.

All told, the damage to the portfolio is minimal compared to the overall markets. As Tom mentioned in this comment, you shouldn’t follow the F Wall Street portfolio precisely because it is not updated in real time. The strategy and approach doesn’t change; the positions do.

All in all, the F Wall Street portfolio is down a few percent from its start a year and 40% ago. Following Buffett’s strategy, if we can lose less than the markets in a down market, earn money in a flat market, and try to keep up when things are going well, our returns should be quite “satisfactory” and should beat the markets over the course of three and five years.

Taking Action in Today’s Markets

If your investing is done entirely in the rear view mirror (which, by the way, is the inherent danger in relying blindly on automated spreadsheets), it looks rosy out there. If you look through the windshield, the outlook for the markets is mediocre at best.

Tomorrow, I am sending out Part II of the “Investing in the Global Credit Crisis” series. In it, I’ll talk about what really drives the stock markets in the long term. (Hint: It’s not just earnings growth.)

Portfolio Hedging For The Nearly F’ed

Over the past two weeks, I have seen sheer terror and depression in people’s eyes. A lot of people have lost 40%…50% of their savings and net worth. Advisors are screaming, “STAY THE COURSE!” and “WE’RE SETTING UP FOR A BULL RUN!”

I don’t have any special insight into the markets; but, I do know that the conditions are present to create a market that is different from the 1982 to 2000 bull market, and more like the 1965 to 1982 flat market. (More on that in tomorrow’s report.) I am an eternal bull on individual companies and their stocks; but, I wouldn’t want to be broadly diversified across the stock markets for the next five or ten years.

(Mind you: My outlook on the markets is for the long-term, same as my outlook for Johnson & Johnson. All that any of us can do is try to predict the future with a degree of confidence and competence. If you know something beyond that, load up on lottery tickets.)

If, like so many Americans, you are broadly invested (through a lot of stocks and/or diversified mutual funds) and don’t want to sell just because you’ve lost too much (ie. you’re making decisions based on what you see in the rear view mirror), consider hedging your portfolio for against further downside. The ProShares UltraShort S&P500 (SDS) looks to make 200% of the inverse return of the S&P 500. That is, before fees and expenses, if the S&P 500 drops 5%, SDS will make 10%.

To me, this is a great hedge if you can’t bring yourself to sell anything. If the markets (and your portfolio) go up 30%, SDS will lose roughly 60%; but, a 30% gain in 85% of your portfolio, offset by a 60% loss in your 15% SDS position, would leave you up about 16.5%. On the other hand, if the markets fall 30% from here, you’d lose roughly 16.5%.

Mind you – I’m not advocating a “predict tomorrow’s market” strategy; rather, I’m saying this: Considering the amount of uncertainty out there, and if another 20% or more loss would push you from “feeling f’ed” to “totally f’ed,” you should hedge against those potential losses. Remember: You don’t have to make it back the way that you lost it.

Switching The Tone

Many of you have expressed concerns that I’m switching to panic mode or fear. Not true. When it comes to the stock markets, there are three approaches:

  • optimism,
  • pessimism, and
  • realism.

I’m a realist. I feel no emotion in the markets or in my investment decisions. The recent “flight to cash” or “hedge your portfolio” posts and comments are not a fundamental shift from bull to bear, or a sign of I-don’t-know-what-to-do-but-I-have-to-say-something confusion.

To provide a little history here, as it can be lost in the sea of F Wall Street posts:

And, of course, the posts from this month. Throughout the last year, I got slammed on a number of occasions for being pessimistic. When times are good, warnings of caution seem pessimistic. When times are bad, bulls sound like they’re full of, well, bull.

During that time, I was bullish on individual companies, but bearish on the vast majority of companies and the markets. Since then, a lot has changed in the markets, but nothing has changed in my approach from 18 months ago.

Hopefully, that will become more evident with tomorrow’s letter that will be available on Meridian’s website by late tomorrow (Friday) morning.

A Note From Joe Ponzio

This section is for comments from F Wall Street visitors. Do not assume that Joe Ponzio agrees with or otherwise endorses any particular comment just because it appears or remains on this website.