We are the lucky bunch

Totally enjoyed Daniel's post on some of the perils of value investing. It is both insightful and thought provoking. Daniel made a good case against jumping into US equities and why us mortals not being Warren Buffett should not emulate his every move, Xin Hong's post on his blog as usual gives us much to learn from. 

I agree with Daniel to a very large extent. However, as a cock eyed optimist (or at least an optimist with lazy eye), i think that the decision to 'jump in' or not is totally dependent on the investor's time horizon and risk appetite. I have a 30 year time horizon and can stomach a fall of my portfolio of over 50%, thus i'm fully invested. And Daniel, reading Cramer and Buffett's dueling view, i think they could be both right depending on holding horizon.

Some reflection...

Should i have lighten up on stocks earlier last year? on hindsight, yes. 

But given what i know then, should i sell? maybe. 

Looking at what i know today, should i buy/sell/hold? I'm cautiously optimistic.

As on the thesis of diversification, i believe that the two extreme ends make sense. Extreme diversification in the form of globally diversified index fund is how i do it, and that's where the bulk of my assets are. On the other hand, my portfolio picks consists of less than 10 stocks, with the top 3 making up almost half of the active management base. I'm surprised that this portfolio has held up quite well over the past 2 years against major indices, despite committing stupid mistakes like CFC and LEH. The common thread that runs through the failed investments is that i would never want to own the WHOLE company. So it is also not right that i would want to hold a slice of the company. 

In this world which prolong recession is probable and tight credit market,  i would ask myself the following question after finding a GOOD COMPANY before buying what is seemingly cheap.

1. Does the company depends on the credit market to maintain its operation? 

This would rule out many financial institutions, developers and companies that rely on debt refinancing to maintain operating cashflow.

2. Does the manager have substantial stake in the company? 

Angelo Mozilo, the CEO of CFC was busy selling shares before the share price went down and down.

3. Does the company have enough cash on hand and HIGHLY liquid assets that is not encumbered (e.g. pledged as collateral)? should there be a need to raise cash to pay for whatever.

4. After all the above criteria has been satisfied, can the company survive if they do no business over the next year or so while maintaining the required cash expenses (wages, rental etc)?

5. Is equity the best form of security to hold?

Holding debt or quasi equity investment in a perfectly decent company may be more advantageous than than common equity.

6. Following qn 5, are there more senior securities in the company that any upside of the firm no long accrues to common equity holder?

We are really lucky to have this crises to learn from. Imagine that those bankers who are in their forties wouldn't have experienced the late 70s crazy inflation and early 80s S&L crises. Even the banking crises in late 80s was comparatively short lived. The relative prosperity of 90s sprinkled with the dot.com bust and LTCM debacle is nothing compared to the current crises.

PIMCO's Bill Gross Oct commentary is out. Fear the McFear! Go read it.