I'd Rather Be Rich Than Right
While I believe my analysis that bonds are historically cheap is correct, the fact is, the point of investing is to make money, not to be "right." When a market moves against me, good technique dictates that I look to reduce exposure, no matter how good my research is.
My analysis hasn't changed, but the market has. And whether I was early, or just plain wrong, the recent weakness in bonds can't be ignored. While I still remain a bull on bonds, let the record show that I've been stopped out of several positions, many at a loss. My overall exposure is still long bonds, but for now, it has been reduced (as has my capital). Fresh stop loss orders have been set.
OK, I've got egg on my face. But that's all part of the game. No matter how good the research is, you've got to be flexible. When the wind blows, you've got to bend in order not to break.
Granted, I've lost some money in bonds. But I've also strengthened my position by raising some cash. It's OK to be wrong in the market, and far less acceptable to stay wrong in the market. If bonds were able to show some strength, I would certainly consider taking some new positions. But as I always like to point out, the best indicator of the market is the market. The burden of proof is back on bonds.
Just because I've reduced my exposure to bonds doesn't mean I'm putting new money into big U.S. stocks, however. As I've long pointed out, there's more to the market than Cisco Systems (CSCO). The truth is that it often pays to avoid the herd, and many of the best gains over the past few years have come via tradable moves in specific sectors, not the big indices. They include gold, energy trusts and even Internet stocks.
Late last year, I first mentioned buying some depressed Latin American names. And because I'd much rather build on an existing position than establish a new one, I've allocated some assets to several of these illiquid, quirky and still off-the-radar names. Interestingly, more established Mexican stocks have lagged "riskier" markets like Colombia, Argentina and Brazil.
But no matter how much research or analysis you do, the market will always be the one element of trading that is completely out of your control. And because nobody knows what XYZ will do, every market action should be made within the context of your existing portfolio and tolerance for risk.
Bite your lip, open up that statement and see where you stand. Because, as I wrote last summer, smart investors don't trade stocks as much as they trade their positions. The real question isn't whether or not you want to buy XYZ, but whether you want to buy XYZ — and how much — considering you current positions and all the alternatives to buying XYZ, including buying nothing at all.
Should we buy the Dow Jones Industrial Average or sell bonds? Time to short Cisco, or buy it on margin? Nobody knows. But because the best risks are those you can afford to take, every investment portfolio should start with savings. Just like we learned with the Nasdaq so long ago, in the final analysis, "Is it time to buy?" is the wrong question. What really matters is whether you are in a position to find out.
I'm not Kreskin or David Blaine. I don't have a magic ball. But because investors control their portfolios and not the market, prudent technique is far more important than stock- (cough cough, or bond-) picking prowess. I've taken some losses, and it hurts. But no matter what the research says, a position going against me is reason enough to reduce my exposure. After all, the point isn't to be right every time, but to be profitable over time.
| Latin Lover |
| COMPANY | 12/9/2002 | 3/21/2003 | % Change |
| Latin American Discovery Fund
(LDF ) | 7.70 | 7.75 | 0.06 |
| Latin America Equity Fund
(LAQ ) | 9.58 | 9.57 | -0.01 |
| Brazil Fund
(BZF ) | 10.61 | 11.69 | 10.20 |
| Brazilian Equity Fund
(BZL ) | 3.05 | 3.53 | 15.70 |
| Chile Fund
(CH ) | 7.14 | 7.13 | -0.01 |
| Mexico Equity & Income Fund
(MXE ) | 7.60 | 7.45 | -2 |
| Mexico Fund
(MXF ) | 14.11 | 11.25 | -20.30 |
| America Movil S.A. de C.V.
(AMX ) | 14.56 | 14.04 | -3.60 |
| BanColombia S.A.
(CIB ) | 2.00 | 2.97 | 48.50 |
| BBVA Banco Frances S.A.
(BFR ) | 3.32 | 4.8 | 44.60 |
| Compania Anonima Nacional Telefonos de Venezuela
(VNT ) | 13.75 | 9.43 | -31.40 |
| Embratel Participacoes S/A
(EMT ) | 0.93 | 1.01 | 8.60 |
| Quinenco S.A.
(LQ ) | 4.61 | 4.76 | 3.30 |
| IRSA-Inversiones y Representaciones S.A.
(IRS ) | 5.14 | 7.51 | 46.10 |
| Tele Celular Sul Participacoes S/A
(TSU ) | 7.2 | 6.9 | -4.20 |
| Tele Norte Celular Participacoes S/A
(TCN ) | 4.38 | 4.61 | 5.30 |
| Tele Norte Leste Participacoes S/A
(TNE ) | 6.90 | 8.12 | 17.70 |
| Transportadora de Gas del Sur S.A.
(TGS ) | 1.51 | 1.98 | 31.10 |
| Tricom S.A.
(TDR ) | 3.04 | 2.97 | -2.30 |
Jonathan Hoenig is managing member of Capitalistpig Hedge Fund LLC.
