For the first ten months of 2002 I could do no wrong. I was heavily short Internet/technology and long MREITs. There were minor flare-ups in March, when tech rallied sharply for a few days, and July, when MREITs collapsed, but both were short in duration and I was able to hold through. In June, I had quit my job and begun to think about taking classes again and eventually entering an economics PhD program. By October I had realized gains of around 70% and had exceeded what my annual salary would have been.
I was feeling very smart and when I closed many of my shorts in early October and the market jumped up I was feeling smarter still. I was still long-term bearish. One pearl of wisdom wisdom I was operating under (forgot the source) was that when markets overshoot in one direction they often overshoot in the other and that we could probably expect post-Bubble PE ratios to go to 10 before things turned up (the PE on the S&P 500 was still above 25). I was willing to concede 15, but didn’t want to leave money on the table. When the markets took a big jump on October 10th, I started to dive back in on the short side.
As Mark Twain noted, €œHistory doesn’t repeat itself, at best it rhymes.€? The market didn’t cooperate with my PE target and October 2002 turned out to be low of the post-Internet bust for both the major averages and particularly the tech stocks I was shorting. By mid-December I was in full retreat from my shorts with major losses. In addition, AXM managed to blow up as they had locked-in to fixed rate funding and short-term rates continued to fall. The writing had been on the wall and the knowledgeable poster I had first learned about AXM from had been giving warnings. I sold AXM for a big loss, but it was an easy decision as it was obvious the game was over. AXM struggled along for the next year until getting taken over.
Another big mistake I made was something I’d like to call conjunctivitis €“ selling another position when one goes bad. The shaking my shorts and AXM had given me caused me to close my most of my IMH position. I bought most of it back several months later when I recovered my nerve €“ at higher prices. I’ll do a dedicated column on conjunctivitis some time in the future.
2002 wasn’t as good as it could have been, but +37% in a year when the major averages were down is probably more than most (including me) can expect on average. At the end of the year I also entered into a position which would be one of my best performers ever: another mortgage originator called NFI which was heavily recommended on the message boards. They were trading near 15, their PE was below 10 and they had just declared a $1.60 dividend (up from .47 earlier in the year). Another attraction was that short interest was reported by Yahoo to be at 70% of the float (though probably a miscalculation, it was still probably above 30%). When short interest is high, eventually short sellers must cover. If prices rise quickly, short covering can accentuate the rally, as I had discovered to my peril with Amazon. I hoped to be on the other side this time.
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Hitting Stride in 2002 (My trading history Pt. 5)
For the first ten months of 2002 I could do no wrong. I was heavily short Internet/technology and long MREITs. There were minor flare-ups in March, when tech rallied sharply for a few days, and July, when MREITs collapsed, but both were short in duration and I was able to hold through. In June, I had quit my job and begun to think about taking classes again and eventually entering an economics PhD program. By October I had realized gains of around 70% and had exceeded what my annual salary would have been.
I was feeling very smart and when I closed many of my shorts in early October and the market jumped up I was feeling smarter still. I was still long-term bearish. One pearl of wisdom wisdom I was operating under (forgot the source) was that when markets overshoot in one direction they often overshoot in the other and that we could probably expect post-Bubble PE ratios to go to 10 before things turned up (the PE on the S&P 500 was still above 25). I was willing to concede 15, but didn’t want to leave money on the table. When the markets took a big jump on October 10th, I started to dive back in on the short side.
As Mark Twain noted, €œHistory doesn’t repeat itself, at best it rhymes.€? The market didn’t cooperate with my PE target and October 2002 turned out to be low of the post-Internet bust for both the major averages and particularly the tech stocks I was shorting. By mid-December I was in full retreat from my shorts with major losses. In addition, AXM managed to blow up as they had locked-in to fixed rate funding and short-term rates continued to fall. The writing had been on the wall and the knowledgeable poster I had first learned about AXM from had been giving warnings. I sold AXM for a big loss, but it was an easy decision as it was obvious the game was over. AXM struggled along for the next year until getting taken over.
Another big mistake I made was something I’d like to call conjunctivitis €“ selling another position when one goes bad. The shaking my shorts and AXM had given me caused me to close my most of my IMH position. I bought most of it back several months later when I recovered my nerve €“ at higher prices. I’ll do a dedicated column on conjunctivitis some time in the future.
2002 wasn’t as good as it could have been, but +37% in a year when the major averages were down is probably more than most (including me) can expect on average. At the end of the year I also entered into a position which would be one of my best performers ever: another mortgage originator called NFI which was heavily recommended on the message boards. They were trading near 15, their PE was below 10 and they had just declared a $1.60 dividend (up from .47 earlier in the year). Another attraction was that short interest was reported by Yahoo to be at 70% of the float (though probably a miscalculation, it was still probably above 30%). When short interest is high, eventually short sellers must cover. If prices rise quickly, short covering can accentuate the rally, as I had discovered to my peril with Amazon. I hoped to be on the other side this time.
Like this: