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Witness Post: “Look Out Below” & Other Lessons from the Home Office

All in all, the first decade of the century (2001 – 2011) was a wild and nerve-wracking ride, especially after Lehman Brother’s collapsed in the fall of 2008. But it was also valuable in many ways. How else can we discover and clearly identify hubris, fear, greed, due-diligence, panic, myopia, humility, pain, insomnia, pride, risk, avarice and reward, all in one time brief line?

For ten years I was the Chief Accounting Officer and Chief Operating Officer at a small, collegial family of hedge funds, based in Vancouver, Washington. In my last year there, one more title arrived, Chief Compliance Officer. That final “C” role created more created headaches, sleepless nights, and near-ulcers than I had ever had before. The moniker, CCO, brought me to my knees.

What’s Your Risk Tolerance?

Holding true to the advice of diversity in a portfolio, our investors were cautioned never to have more than 20% of their “exposure to the market” in any one investment vehicle, including ours. We asked investors to report their assets to us to make sure that they were “sophisticated” and met the income and net worth tests, as outlined by the SEC to be Reg-D investors. In many cases these investors were family and friends.

Buy Right  

“So, when should I buy?  Do I wait, as Baron Rothschild urged to times, ‘When blood is running in the streets …’ or are there other right times?”  Buying right is one of the trickiest parts to smart investing. Investors must have insight to see when an asset is unappreciated by the market and therefore, undervalued. It helps if the buyer is interested in buying large quantities, because when others are panicking and throwing it away, there are many shares that can flood the market at once. Sure, anyone can buy ‘wrong’ and still make a profit, but to torture the metaphor, stock bargains come to light with self-held flashlights in near darkness, and not in the klieg lights of the roadshow, nor the spotlight of news headlines.

Take Profits When You Can

Selling opportunistically is a smart thing to do.

“No one ever went broke by selling early after making a small profit.” What an important lesson in investing that little number is! More than likely people will double down on losers, and wait too long and lose out on larger gains from winners. There are several expressions about this tendency: one is “people water their weeds and pick their flowers.” Another is that “pigs get fat and hogs get slaughtered.”

Greed gets in people’s heads and clouds our judgment.  It is important to have a range of possible outcomes and with each outcome, a target priced for buying, holding, and taking profits. And it is best to take profits starting below the target exit price, in case the estimates for success are too high.

Besides, if you fall in love with an investment, it is always wise to remember that it does not know that you own it. The stock can plummet with or without you as an owner.

Be Patient, and Don’t Let Pride Get in the Way

It takes a long time of study before anyone can claim to be a good investor. Before I began in the investment business, my biggest successes, it is shameful to admit, were from lucky investing. Often, when I did not know what I was doing, I was able to ride a momentum wave for a long time, deluding my belief system. I must be a good investor, right?

Having invested in technology stocks, primarily wireless telecom stocks in the 1990’s, I thought I was a wunderkind at Investor’s Business Daily investing. My “winners,” it turned out, had nothing to do with the fundamental soundness of the companies, nor their managerial talent. It was dumb luck.

When I told my friend, David Nierenberg, the names of my “great stock picks,” he was aghast. They were the hot wireless telecom darlings of the day alright: Qualcomm, Nokia, Andrew, NexTel, Sprint, PageNet, Motorola, Trident, and TESSCO Technologies. But in the dot.com era, they were also toxic. His urgent advice was, “Sell them, sell them all, and quickly.”

His rational was that these telecom companies were part of a classic market bubble and it would soon be pricked and deflate badly. He called out my darlings as ugly ducklings. I thought I was right as rain, and held off his admonishments, but slowly came around. I started taking his advice, very reluctantly, in 2000. It hurt my pride to sell them as they drifted down off their 1999 highs; but, swallowing hard, I sold.

If I had not sold everything in 2000, I would have lost 75% of the value of those investments within 6 months. The ride up was longer than most rational minds would have predicted and the downward slope was steeper and more catastrophic than I thought possible.

“Look Out Below”

Whitney Tilson, the self-promoting value investing hedge fund manager, wrote a book about the lessons he had learned in real estate investing during the Great Recession. He called it More Mortgage Meltdown: 6 Ways to Profit in These Bad Times. In the book he catalogues all that went wrong with the mortgage market and ways he felt that it would continue to be bad. Attending the “Value Investing Congress,” featuring Tilson and his colleague Glenn Tongue, Whitney gave a lecture about the fundamental problems with the houses already in foreclosure, soon to be underwater, and soon to be delinquent.  With each new seriously bad revelation he would echo to the audience: “Lookout Below.” And so I have for the past few years.

Cast Iron Stomach


Cooking with a cast iron skillet is my favorite way to prepare most any hot meal. The pan cures over time, it has a uniformly hot surface, it never cracks, it takes constant attention not to burn the ingredients and it cleans up in a snap. If you are a nervous investor, who gets a queasy stomach when a stock drops 25%, or heaven forbid 60%, then hedge fund investing is not for you. Find someone else to manage your money. If you want outsized returns, give your assets to a professional you trust and assign them discretionary power to buy, when everyone else is throwing it away, and sell when the momentum players show up. Otherwise, you will end up as a long-term loser or day trader with a short time horizon, lots of commission dollars, and little to show for it.

Find People You Can Trust

Perhaps the biggest lessons of all are about people. Having been fooled in a real-estate partnership by a guy named Kyle, my wife and I was keen never to work with anyone we did not know well again. But when one moves to a new town, lots of questions arise: who can you trust? What does it really take to trust someone? What questions should you ask? And how long does it take to know what they will do in a crisis? Is three years enough? Is ten too many?

It takes time and experience. Relationships are hard fought, but critical in the long run. Surround yourself with investors you can predict, as well as bankers, lawyers, accountants, and advisers you trust. Seek only quality people and that collection will serve you well for years to come.