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11/4/2009 5:36:20 PM - Stock Trading

If you've read my previous posts, you'd know that once upon a time I was bullish on the banks. I didn't like them because I hoped to make 20-30% in a year. In fact, I liked them for the opposite reason - I viewed them as slow-growing, stable, conservatively run companies. Oops.

The financial meltdown put an end to that thinking...and cemented my disdain for CEOs and other highly paid - and supposedly very bright - individuals at large companies. If it's possible to think less about an economist, I'm there. I distinctly recall Ben Bernanke - the Chairman of the Federal Reserve - giving a speech in the early Summer of 2007 and talking about how the collapse of the subprime bubble would not spill over into the economy. Think about that for a moment. If you're a universally renowned economist, Chairman of the Federal Reserve, have hundreds of people working for you to help decipher all of the available data as soon as it's available, and you STILL can't see the greatest financial crisis since the Great Depression when it's already well under way, maybe your occupational title should just be changed to "Fortune Teller". People would then figure that your predictions will be right some of the time, but will never be sure enough about it to make a big money bet either way...and probably for the better.

I lost about 10-12% - including dividends - on banks before finally getting out. I only lost about 8% on Washington Mutual and finally bailed when it was around $38 or so. (The last trade price that I saw before it was taken over by JP Morgan Chase was for $0.16 - yes, sixteen cents.) I actually made about 5-6% on US Bancorp (selling out around $33 - it's now around $23, up from a low of $8.06), lost about 15% on Wachovia (selling at various price points that averaged around $35, with it eventually being acquired by Wells Fargo for $10.) I never invested in Citigroup. I had repeatedly thought about buying it when it dipped below $45 but decided that when the best reason a major analyst has to recommend the stock is that it's so incompetently run that they'd probably break it up within the next few years...well, it's not exactly a ringing endorsement. I invested more heavily in Bank of America than anything else - by at least a factor of two - on the premise that, as I distinctly remember thinking, if the largest consumer bank (by deposits) in North America took a serious hit to its stock price that things would probably be so bad (i.e. nuclear war, etc.) that you wouldn't be all that concerned about your finances. Oops again. I was EXTREMELY unhappy when Ken Lewis - the (soon to be ex-, and not a moment too soon) CEO decided to make a major investment in Countrywide. When things continued to deteriorate and he decided to double down and buy the whole thing, I decided that I had had enough and cashed out. I wound up selling out for about $37-38 when my average price was about $43 (including dividends.) I thought it was the height of idiocy to make such a risky bet by buying hte largest mortgage lender in the US when it was already clear that we were in a serious housing-related meltdown. I remember reading about a woman at a shareholders' meeting pleading with him not to purchase Countrywide because it would add too much risk to the company. Lewis, though, wanted to build an empire. In one fell swoop, he figured that he could become the predominant mortgaget lender. As I noted in a previous post (about Microsoft), the heads of large companies often put their own self interests ahead of shareholders.

Did anyone investing in a slow-growing stock like Bank of America really want the uncertainty of buying the largest mortgage lender during a major housing downturn on the hopes that it would all bounce back and you'd get a quick 10-20% return on your investment? I certainly didn't care about such things. As long as they kept paying the dividend and raising it annually, I would have been happy. Lewis went on to compound his error by buying Merrill Lynch as the market continued to fall. That purchase will result in dozens of lawsuits, and has kept Bank of America at a fraction of its value ($14.70) today versus where it was (as high as $55), versus something like JP Morgan Chase ($42.21, which is actually right around where it was when all of this started.) Bank of America had to cut its yearly dividend of $2.56 to $0.04, borrow $45 billion from the government to avoid insolvency, sell valuable assets like a major Chinese bank that will likely grow far faster than the rest of the company over the next 20 years, and issue tens of billions of dollars worth of new shares at extremely low prices to increase their tangible common equity (TCE) ratio (which will, in turn, make it that much harder to ever get back to where the stock price once was.)

Bank of America dropped 28% on the day that the Merrill Lynch merger was announced - a pretty ringing endorsement that Lewis was out of his mind, overpaying dramatically (he could have probably picked up Merrill Lynch for the change in his wallet if he'd have waited another week or two, rather than spending $50 billion in stock.)

Much has been made of Bank of America not telling its shareholders before they voted on the merger with Merrill Lynch that Merrill Lynch's losses were starting to escalate. (They lost $15 billion that quarter, dramatically higher than what people had been expecting.) Lewis' primary reason as to why he did not warn shareholders that Merrill Lynch's losses were rising before the vote was that Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke would have likely gotten rid of him and the Board of Directors. To that I say...so what? Lewis is going to retire with a retirement package worth over $60 million, after having already pulled roughly $150 million from the bank over his career. At what point does one finally have enough such that it isn't all about you keeping your job (and being able to keep running your empire), but rather about the shareholders who have put their faith in you to give them material information as you encounter it? Instead, Lewis kept his mouth shut, kept his job, and let the shareholders vote to approve the deal...and only then did they find out that Merrill Lynch was doing much worse than they had been led to believe.

After freeing up my cash from various bank holdings, I then moved most of it into MLPs - which I've discussed earlier - and lost quite a bit more. The MLPs were decimated as badly as the banks. In this regard, I consider myself somewhat special. I was heavily - heavily - invested in financials when the worst financial crisis since the Great Depression hit. I took a beating, got out, and moved into another supposedly ultra-safe sector that then also promptly got annihilated.

In the end, when the American stock market was down by about 60% I was "only" down by about 20% (from what I had invested), or 36% (from the peak value of my holdings.) I'm willing to put up with a lot, but month upon month of taking a financial beating - as well as the increasing volatility in the markets - convinced me to get out of equity holdings entirely in the Fall of 2008.

I basically figured - as I've previously thought - that I could generate better returns by investing in myself either directly (say, by investing in SLI - my company) or by simply doing my own trading.

Since around September of 2008 I have avoided holding shares in any public companies. Instead, I've traded extensively - via options - every month, and waded profitably through the calamitous period following the collapse of Lehman Brothers that accelerated the market's decline into the greatest recession since the Great Depression. I have yet to have a losing month and have long since recouped the losses that I suffered with my bank and MLP holdings. I'm averaging about 3% per month, with my best month hitting about 6.3% and last month coming in right at 3.332%. Needless to say, from this point forward I'll stick with simple trading rather than trying to invest in a stock market that seems perpetually geared towards lurching between bubbles and crashes.

- TZ

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