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Is Mr. Market Crazy?

August 7, 2011

Sometimes we get caught up in the day-to-day fluctuations of the stock (or any other) market. It’s up 2% or down 4% (like last Thursday)! Sell, buy, do something! But would you sell your house if it went down 4% in value, 10% in value, more? Well, I know I wouldn’t. Nor would I sell it if it went up 10% in value. So why sell your shares in Bank of America if they go down 20%? Are they going out of business anytime soon? If you believe the bank will never recover from the last several years of financial turmoil, then by all means sell, and sell now! If, on the other hand, you think there’s a good possibility that Bank of America will still be one of the major money center banks in 10 or 15 years it doesn’t seem to me that you should be selling; at the moment shares in BAC are selling at a level I would consider ‘low’. I don’t usually counsel people to sell their shares when they are selling at a ‘low’ point; it simply wouldn’t be good for my reputation.

So what to do when the market sours or swoons like it did last week? Well, if you haven’t prepared for this event by keeping a bit of cash in your rainy-day fund, turning off the TV, tuning out the Kramers of the world and sitting on your hands is a good start. Go play a set of tennis, take a jog, do something physical. It gets the ‘ants’ out. Face it, there’s nothing you can do about the market going down, and eventually of its own accord it will go back up. Maybe you can improve your portfolio if you have a little spare cash hanging around by buying something on your watch list [that’s right, you should be keeping a watch list, preferably with target buy-in points based on some notion of intrinsic value].

As I wrote in my last post, I added to my positions in BAC.WS.A, AIG and GYRO recently. A bit too early as it turned out, but then again, I have already confessed that I’m no market prognosticator. So what to do now? Like I said, nothing. If the market drops another 10%, I’m sure a lot of my current positions will look even more attractive and I’ll begin to convince myself that this is a good opportunity to ‘improve’ my portfolio. I’m still between 15% and 20% in cash so I have some slack, though I rarely go under 10% cash. [Believe it or not I had exhausted my cash and was beginning to buy on margin at the depths of liquidity crisis in March ’09].

Of particular interest to me at the moment is AIG. The Government still has a 77% ownership stake in the company and Berkowitz’s Fairholme fund owns about 23% of the non-government-owned float (as of May 31). The shares are now trading well below the $29 re-IPO price of early June and the $49 book value. It appears to me that the vultures (read shorts) are out there circling, under the belief that Fairholme may have to dump some of its stake if redemptions in the fund increase. This, in conjunction with the government-owned overhang is putting continual pressure on the share price. Remember, forced selling could be a major opportunity! If shares gyrate below $20 I would have to seriously consider doubling my position.

In any case, I’m still waiting to see if Mr. Market makes any further dekes.  He’s really not crazy, just a bit immature. But if you’re getting antsy just reflect back a moment; from a low of 660 in March 2009, the S&P 500 index had more than doubled to 1350 by last April without any significant pullback. Wasn’t it about time we had one? Wouldn’t you expect some kind of pullback and not some ever-forward-marching uptrend? We’re now down about 11% from the April high. That’s not so bad. I wouldn’t be surprised if the pullback increased to 15%-18%, pushing the S & P 500 index down somewhere around 1100. But who knows? We could be in for an updraft next week…. I’ll never know in advance.

Just remember, do your own independent homework when investing and don’t follow the crowd (or my comments, either)!

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