A Couple of Great Realmoney.com Articles Today

If you are a subscriber to Realmoney.com I recommend you read these 2 articles - sometimes the best thing to do is listen to how others view the markets and it helps explain "why" things are the way they are. Due to this being a subscription service I won't cut and paste the whole articles but will throw a few excerpts in here. These struck me particularly strong today as I try to reconcile some of the huge moves in sectors where I cannot make head or tales of the valuation - and how stocks continue to run in the face of major economic headwinds. I've been trying to do more of this over the years, suspending the 'logic' of macro economic viewpoints in lieu of just making money. Sometimes knowing too much hurts you in the market. Strange, but true. Sort of like the woman in the NCAA office pool who wins because she picks the basketball teams with the cutest colored uniforms or the best mascots, versus the guy who stays up til 2 AM watching that Pac 10 game in the dead of January. Bottom line, you are judged at the end of the day by what is your on P&L, not that you were 'intellectually correct'.

First from "Rev Shark" (his nickname) who writes a daily blog and has a very short term (day/swing) trading perspective; an article titled Don't Lose Sigh of Short Term

• We are in one of those environments where the short-term traders are creating lots of good action for themselves. With the Fed looming, the bears are on the sidelines, and that makes for a friendly environment for those who don't dwell on long-term negatives.
• Many small investors handicap themselves greatly by focusing on long-term negatives. The big problem is timing. It doesn't matter if you are right if your timing is off. You can make a tremendous amount of money sticking with positive action even though you are convinced that something very ugly is soon to occur.
• One of the ironies of investing is that as you become more experienced and sophisticated, there is often a tendency to focus more on macroeconomic conditions. We dwell on the big picture and all the weighty discussions about how matters are going to unfold.
• It tends to be the grizzled market veterans who have been around for ages who tend to be the macro bears. They no longer focus on the crazy momentum trading that can be so lucrative if you play it right. They want to warn us about how such things always end badly. They are right, it will end badly, but they have forgotten how well an aggressive short-term player can do.
• For example, we all know the China bubble will end badly at some point. What we don't know is when. Your choice is whether to sit on the sidelines and contemplate this question or to to try to take advantage while you can. If you are a small individual trader, you have the ability to exit in the blink of an eye. Don't waste that power by contemplating the big picture.

So the lesson to me here, is take advantage of these times when the going is good, and the 'speculators' drive stocks up to heights that make no sense when you apply logic, and try to bank the profits over time - eventually times like this will end; and it will end badly but to leave all this profit potential on the table defeats the purpose and the goal of making money. I also have to agree with his comment about as you become more experienced and sophisticated you tend to look at the big picture more and (sadly) that is in fact many times a hindrance. One tends to think everyone in the market views it as you do - but the reality is there are many approaches, and many are of the most simplistic nature i.e. stock ABC is up today, its up 50% for the month, therefore it must continue up. This seems to be a very popular methodology in certain sectors. Which can drive anyone trying to utilize fundamental analysis batty.

On to a very interesting piece by Cramer titled 'China Bubble? So What?'

• I don't care if China's a bubble. I care about making money. And that's one of the reasons why I am so disliked by so many "professionals" on Wall Street.
• What amazed me, oddly, was that any of the critics really thought I believed that Baidu "deserved" to be at $500. I could care less what Baidu's worth. I care about what it could trade to. I couldn't care less if it is "overvalued." Of course it is overvalued. It was overvalued at $100, $200 and now $300. Oh, and stop trading, it will be overvalued at $400.
• What I care about, as I said at the top of this piece, is making money, and sometimes you have to suspend the rules to make money if that's what you really want to do.
• Some people want to be "right" and make money, and I am telling you that being right is not always the same as making money. Sometimes the really rigorous thing to do is to "suspend" your judgment temporarily and play the bubble because the money can be made so fast and it is so lucrative that it is worth playing.
• "Aha, the intellectuals say, "how do you know when it will stop? How do you know you won't get caught in the bubble's bursting?" To which I say, "I don't know, who cares?" I think what is more important is that you choose the right instrument to play the bubble and play it whole-hog.
• Again, I don't care that it is a bubble, I acknowledge that it is a bubble. I just want to be able to capitalize off the bubble rather than simply say "Nope, it is a bubble, I know better."
• I will ride them to the bank, and then I will give some back when the bubble bursts. But not before I have taken enough off while the critics sniffed.

So again, a similar theme. And it is important to realize how others think, even if it does not totally reconcile with your way of thinking. As both commentators said; what is going on now in certain sectors i.e. solar, i.e. China makes little sense from a valuation metric, but that doesn't mean these stocks cannot continue a relentless ascent, drawing in more 'intellectual' shorts (and crushing them along the way up). At some point these sectors will falter and give some (or a lot) back, but if you take gains along the way - you will have banked a lot of profit. In fact with some of these breathless moves up, you could sell the entire original stake and just let the 'house money' go from there until an eventual implosion. This is very similar to NASDAQ in late 90s. Many were calling it (correctly) overvalued at 3000. Unfortunately for them they missed out on another 2000 points of ascent in a very short time frame. Eventually they were proven correct as NASDAQ fell well below 1500. But the opportunity cost of being intellectually correct was huge. (as long as one cashed out along the way) With that said, there is a big difference (to me) from buying absolute junk that is rising 50% a month versus real companies with real futures that are simply 'overvalued'. At least with the latter there is some fundamental reason for the rise, as opposed to the former....

Myself, I constantly like to look at valuations on future earnings, and I try to be lenient in my assumptions on true secular growth sectors, as I use forward estimates as opposed to trailing (I care a lot more about where a stock is going, not where it came from). But I don't look out 3,4,5 years because other than in very stable industries or sectors such as where a Procter & Gamble sits, its nearly impossible to predict what the sector will look like half a decade out. (Do you realize in the late 90s Yahoo, Lycos, Excite were the 3 main search engines? and the future "kings of the internet"? 2 of which I think most people under the age of 20 have never heard of nowadays - it's only 8 years later and 2 are basically meaningless and the 3rd (Yahoo) is struggling under the assault of Google) Huge price swings, new technological innovations, input costs rising, new competitors - many things can change in 3-5 years. So I try to look 1-2 years out and limit it there. Even on that basis, a few sectors in this market make little sense on any basic valuation basis, so sometimes you miss out on those gains. But a safer way to participate is to keep smaller positions, and let them run, and to take profits along the way. And realize there a lot of investors in these stocks that either don't know, nor care about the fundamentals....