CWS Market Review – April 4, 2023

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Markets Are Chaos

Yesterday, the price of Dogecoin soared 30%. For the uninitiated, Dogecoin is a joke crypto currency, or, as it’s more commonly known, a “meme currency.” While it’s very much real, Dogecoin is a parody that’s one step ahead. It’s a parody that parodies attempts to parody itself. Needless to say, it has lots of fans.

For now, I’ll skip the possible benefits of Dogecoin, but one aspect I like is that it has a cartoon mascot of a dog, a Shiba Inu. You’ve probably seen it in countless memes.

So what prompted yesterday’s big rally? Well, Twitter owner Elon Musk replaced Twitter’s normal bird logo with the famous Dogecoin dog. Yes, that’s what sparked the massive rally. At last report, the doggy is still there.

Let’s be clear: At no point did Dogecoin gain any real value. Nothing was added. Nothing was taken away. It rallied solely because of attention. Traders were buying because they thought it would rally, which, in turn, caused more traders to buy, which caused it to rally even more. This was crypto meets Seinfeld. It was a rally based on nothing.

Mr. Musk has been a fan of Dogecoin for some time. Tesla even accepts Dogecoin as payment for some items. At some point, I expect it to be integrated into Twitter. One day it may even be legal currency on the moon. At this point, who knows?

On a related note, Musk is currently being sued for $258 billion. He’s accused of running a Ponzi scheme by boosting the price of Dogecoin with his tweets. I don’t expect this suit to go far. If you buy a dog-based crypto currency, then you really shouldn’t be shocked by the losses you get.

I bring up this silly story for a serious reason. That is that finance and investing is far more chaotic than most people understand. Every day on Wall Street, smart, well-dressed, serious-minded people go off to their well-paying jobs and watch something that, at root, is highly irrational.

Finance goes out of its way to cover this up. We have all sorts of models and statistics that give finance a false front of rationality. Finance has a serious case of “physics envy.” As a result, it pretends to be far more scientific than it truly is.

Why did Silicon Valley Bank go under? Because people panicked. That’s the whole story. Sure, there’s lots of blame to go around, but you can’t escape this basic fact. If people hadn’t panicked, SVB would still be in business today. Emotions matter. Any market is made up of people, and therefore, it will be driven by emotions.

Twenty-five years ago, the hedge fund Long-Term Capital Management went bust. Before LTCM went under, the fund made a lot of money by using complex models to bet on small deviations in prices. The fund used math to unlock the market, but they should have been using psychology.

This gets to the heart of the issue. No matter how much data you throw into your models, you can only use information that’s known. You can’t plug in the unknowns because … well, you don’t know them.

In the case of LTCM, all their models went down the drain when Russia defaulted on its debt. It was assumed that couldn’t happen, and it had never happened. Until it did. Before you knew it, they faced billions of dollars in losses. The models all failed.

You can look at the stock market with lots of fancy equations and Greek letters, but once the billionaire tweets the cartoon dog, then all bets are off. Isaac Newton said, “I can calculate the motion of heavenly bodies but not the madness of people.” That’s a good line to keep in mind the next time anyone talks about what the market will do.

When to Sell?

This afternoon, shares of Bed Bath & Beyond (BBBY) closed at 35.4 cents. I try not to let my emotions get in the way, but this is a sad end to what was a very good company.

I was a fan. BBBY was on our Buy List for 11 years. The problems at BBBY came about slowly. They were way behind with an internet presence. The company also overly relied on its coupons. Gradually, the numbers got worse. It was the world’s slowest-moving train wreck.

If there’s one good part of the story, it’s that we sold out long before the worst came. In fact, when we sold, we actually made a small profit in BBBY. There aren’t many people who can say that.

The black line is when we owned BBBY. The red part is after. I had to use a log chart to show how badly it’s performed.

This brings me to an important lesson, and that’s when to sell. Whenever we add a new stock, our aim is to own it as long as we can. Stocks like AFLAC (AFL) and Fiserv (FISV) have been with us since the beginning.

My basic rule for selling a stock is to do so when the thesis changes. BBBY was no longer the retail powerhouse it had been. It allowed Amazon to gain too much market share. Management was far too slow to adjust to the new reality.

We also owned Signature Bank (SBNY) for five years which we also sold for a profit. We bought it because it was a niche bank that focused on services in New York City. The problem was that it got tied up with too many taxi medallion loans. The story had changed. Uber and Lyft killed the markets for those medallions and Signature took the blow. The bank later tried to make up ground by specializing in crypto. That didn’t go well either.

We thought we had bought one firm and we then realized that we actually owned something quite different. This was a tough one for us because selling it appeared to be a big mistake. The stock soared after we sold it, but it was caught up in crypto mania. It didn’t last.

Disney (DIS) is another good example. We bought it because we thought Disney was well-positioned to profit from the shift to streaming. Initially, we were exactly right, and the stock soared. Initial success can be a dangerous thing.

Then came Covid. Again, the story changed. Disney was a company that seemed to be tailor-made to be harmed by Covid. Disney’s business is movies, sports and theme parks. If that’s not enough, they also have a cruise line. Everything Covid wrecked is where Disney stood. This is also when Bob Chapek took over as CEO.

Fortunately, we sold Disney after having it on our Buy List for three years.

Selling a stock is difficult. It’s an admission that you may have gotten it wrong. People can be very stubborn. Again, emotions get in the way.

The worst investor in the world is the man or woman who bought a stock at $80 per share. Now the company is not doing well and the stock is currently at $70 or so. The investor refuses to exit a lousy position because they “don’t want to take the loss.” Famous last words! I’ve seen it happen many times. Heck, I’ve done a few times.

Another time to sell is when a company is part of a major merger. Even if the company you own is the senior partner in a merger, the new entity will be quite different from the one you bought. Maybe the combined firm will be good, but there’s no guarantee. In fact, the research shows that most mega-mergers don’t work out for shareholders.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

P.S. If you want more info on our ETF, you can check out the ETF’s website.

Posted by on April 4th, 2023 at 10:46 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.