Dangerous times

In 2005, I was on a sugar high with bank stocks. The amazing thing about the whole time period was that I was not even keeping track of the fact that mortgage origination and securitization was even happening on a large scale or anything was a miss in the market as it rallied higher and higher. I thought I was doing the most prudent thing by "accumulating" my holding in the financials as the market traded higher.

The human psyche is such that, as times goes from better to even better, the fear gauge keeps plummeting and the sense of security is very high. Though I was accumulating shares in small lots I was doing it at ever higher levels and my cost basis was astronomically high. It is not that I was not aware of the rising cost basis, but it was more a compulsion to be involved in the market when things are good, which compelled me to keep buying.

I get the same creepy feeling now. With the markets and my portfolio considerably up for the year, I feel the compulsion to be ever more involved in the market and increase my stake. The risk is the same as it was 8 years back. Raising my cost basis. As I look at my technology holdings, I am very nervous. they have been expanding multiples over the past year and even though their multiples are still not too high I am getting weary of my compulsion to expand my tech holdings at this point. The dangers are obvious. I will expand holdings at these levels and would have raised my cost basis to levels beyond intrinsic value (or DCF valuations as best as I come up with) and a strong correction would then force me to take drastic action.

So the new playbook states that you accumulate at these levels in the market only if your cost basis holds below intrinsic value. For example, I do believe that MSFT has some ways to run given the amount of money that has poured into it in the past few months as institutional investors add to performing assets at year end. I still feel that it will breach 40$ by end of year. However, I do not plan to add any further. My cost basis is now at 28.64$ and perilously close to the 28-29$ intrinsic value that I have on the stock. So I stop and look elsewhere for investment ideas.

These are times when the psyche has more to do with investment ideas rather than cold analysis. I reiterate my call for rotating into financials over the next 6-12 months. Interest rates are going higher and at this point, given they are yet to have a good solid run like technology, I am betting that is where the money will go and hopefully I would have built up enough holdings at a low cost basis to hold on for the long term.

We certainly live in dangerous times!


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