Trader’s Narrative

What a wild day. Everyone knew coming in this morning from the markets which opened in Asia that this would be one for the books. The intense and indiscriminate selling that we saw today can only be characterized as forced liquidation.

People are not selling just because they are fearful, or because they think the market is going lower. They are selling because they have to. We’re seeing massive deleveraging. Here are some more highlights:

• the volatility index (VIX) goes to 52.05
• even “safe”, boring stuff that held up until now is getting liquidated
• brokers put in stricter margin rules
• down volume was overwhelming - do the specifics really matter anymore?
• NYSE new lows goes to half securities traded, matching Black Monday 1987
• surprise! the bailout plan doesn’t live up to its name
• less than 6% of S&P components are above their 50 day moving average
• S&P 500 is about 20% below its own 200 day moving average (see below for graph)

Here is the chart of the S&P 500 index (SPX) compared to how stretched it has become from its long term moving average. For more details about this indicator, check out: How the Stock Market Resembles a Dog on a Leash.

Ultimate Fade?

“Whatever money you may need for the next five years, please take it out of the stock market right now, this week…I don’t want people to get hurt in the market.”

Remember, this is the “Paris Hilton” of the investment world speaking. Someone who froths at the mouth almost daily, dresses up in diapers to recommend Kimberly-Clark (KMB)…. uses a ridiculous sound board to accentuate his manic “advice”… and now he is as somber as a funeral parlor. Watch:

I don’t want to be mean and kick Cramer when he’s down. I’m just pointing out something that he himself has said. When he gets overly emotional, either way, he is wrong and a great fade. At his old hedge fund he had his wife (who he calls the “Trading Godess”) who would force them to take the other side when this happened. Most famously, she did this before the 1987 crash and not only saved their hides but made them very wealthy. Unfortunately, she is otherwise engaged these days and can’t pop in front of the camera and save regular folks who may be contemplating taking her husband’s advice.

The Dhando Investor is the sort of book that is easy ignore. The title sounds strange and the cover art offers no real clue either.

To be honest, the only reason I gave it the benefit of the doubt was the author: Mohnish Pabrai. I had heard very good things about him as an astute asset manager so naturally, I was curious.

The book is a very unique take on the old Graham & Dodd “value investing” approach. It is especially valuable when you consider that it isn’t written by a journalist or a professional writer but by someone who has been implementing the investment philosophy he explains.

Like many value investors, Pabrai emulates Buffet. Even going so far as setting up his hedge fund or rather partnership fund, to exactly mimic the legal and fee structure of Buffett’s. He even runs things as a one man team. Exactly the way Buffett did. Thankfully for his investors, the elumation extends to his performance. The Pabrai Funds have gained 28% annual returns net after fees since 1999.

So what is Dhando? It can be summarized as follows: heads, I win; tails, I don’t lose much. It is the business philosophy of the Patels, the Indian caste from Gujarat province, who are reknown in India as businessmen.

I’ve had the pleasure of meeting and befriending a few Patels so I can tell you that the legend is true. They are the original Ferengies. I swear they have business built into their DNA. It seems like they can’t help but make money. It just comes naturally to them. The way, say, chewing gum comes naturally to Paris Hilton.

Anyway, I enjoyed reading Dhando Investor. It not only demystified how the Patels do what they do but it also explained why so many of them own motels in the States. Apparently a quarter of motels is owned by a Patel in the US! In Dhando you also learn about how Richard Branson started Virgin Airlines. Its shocking how little capital it took.

Pabrai also goes into detail outlining his own investment criteria and specific ideas. He takes you on a journey as he first identifies a sector, then zeroes in on one or two securities. In one case he was even a year earlier to the scene than Buffett. I believe that was L-3 Communications Holdings (LLL). Another specific example in the book is Frontline (FRO) a VLCCFs or crude oil shipping company.

In almost all his calls Pabrai is early, leaves a lot of money on the table and still manages to double or triple his original investment.

This is obviously not a trading book but I was surprised at how much I enjoyed it. If you’re interested in investing and want to learn more about value investing, I highly recommend Dhando.