How to Turn a Garage Into a Woodshed

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Overnight markets were nonevents; even the downgrade of France's debt by Moody's had no real impact, though French bonds did decline in value just a bit. As for the market here, it traded mostly unchanged in a small range before closing flattish. Away from stocks, the dollar was mixed, fixed income was weaker again, oil lost 3%, and the metals finished mixed with small changes.

How to Turn a Garage Into a Woodshed

Last night Hewlett-Packard reported a massive write-off, which I bring up as a way to talk about what has happened to a great many of the tech leaders that flew so high in the stock mania, which ended in March of 2000. A lot of the pretend stocks of the dot-com variety have of course evaporated, but plenty of "real" companies have also declined in the 12-plus years since the peak of that insanity, HP being just one example (which is now back to where it was price-wise in 1995).

What often happens to good companies that get really expensive is that when valuations start to decline (usually due to some fundamental deterioration), people are attracted to them because of their "value." We have seen a bit of that with Apple, and will probably see more prospectively (more about AAPL below). In any case, Hewlett, Dell, Intel, and Microsoft, etc. are all examples of that, but there are hundreds more. However, the difference between Hewlett and the others is that its board is probably one of the worst on the planet. After they brought in Carly Fiorina, who was a disaster, she was replaced by Mark Hurd, the only CEO there over the last decade that had done anything approaching a good job (whose exit was handled poorly). He was followed by Leo Apotheker, who led the charge for the dreadful acquisition of Autonomy, and was followed by Meg Whitman, who I don't see as a savior there at all.

The point of all this is just to note the metamorphosis that occurs at many companies as they go from being the darlings of the growth stock community to "value" stocks. One must be very careful taking positions in companies making transition, as it is very easy to get fooled and you can lose a lot of money being way too early.

"Do Not Hurry, Do Not Rest"

On the note of being careful, and more importantly, patient, the reason why I mentioned my small trade in Apple yesterday was to illustrate the sort of patience and discipline that is required to be successful when speculating. As I noted, I purchased some slightly out-of-the-money calls when AAPL was trading at around $580 going into the election and lost $4. I had no real plan to be either long or short it, although I could see a reason for either, unless it traded in a way which made me feel as though the downside may have reached exhaustion in the short run. Thus, I bought the stock and wound up selling it later yesterday (although I forgot to note that at the bottom of the Rap).

I had been very careful about when I acted, and only did so when I had good reasons and could define my risk. I am not trying to pat myself on the back (since the idea worked), as I make plenty of mistakes, but I wanted to illuminate the point that patience and discipline are really important. Oftentimes folks probably don't give themselves credit for the trades that they don't do or the ones that they get away from. (By "get away from," I mean, for example, by owning the calls when I was wrong about Apple, I didn't have to fight the potential "value" rationalization as it collapsed and was getting cheaper, and thus a "better" idea, as of course the former was true, but the latter wasn't.)

In any case, hopefully that discussion of growth, value, patience and discipline will be of use to folks.

Positions in stocks mentioned: long MSFT.

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About Bill Fleckenstein

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