- Joshua M Brown
- December 28th, 2012
If I should die or lose my WordPress password tomorrow, I'd be satisfied with this post being the last thing you've ever read from me.
Because what is the point of publishing 6500 blog posts (as I have) if you can't crystallize and document the most important lessons learned on a regular basis? I think I've distilled everything I've chronicled this year into the six most important lessons for investors. Other years there are other lessons taught, but this is the knowledge you should be walking away with after 2012:
1. Sometimes there's no one left to buy
This is a very old lesson but a crucial one. When everyone's already in, where are the buyers going to come from?
Over the summer, Apple became the Jesus Stock; no one would ever sell it but, unfortunately, anyyone who could buy it and wanted to buy it had already done so. It had become the greatest Hedge Fund Hotel stock of all time, a massive weighting in all the large cap indexes and an institutional as well as a retail "darling", one of the most widely-held investments in the world. I was at the Ira Sohn conference when David Einhorn announced to a breathless audience of a few thousand asset managers that Apple was his next big pick. It was worth just over $500 billion and Einhorn explained how he had called both the NYSE and the Nasdaq and neither one of them had a restriction against it being worth a trillion.
It was lights out ever since that moment...
Apple has since lost more than $170 billion in market capitalization, a larger dollar amount than the total market caps of the 54 smallest companies in the S&P 500 combined.? Without any Apple enthusiasts left to come in and buy, and absent a decent-sized short interest, there were no natural buyers and a whole host of tax-motivated sellers who'd ridden the stock for a decade, racking up 8000% returns. Oh well.
2. Sometimes there's no one left to sell
Research in Motion's story this fall? was the antithesis of what we saw with Apple. The stock hit six bucks a share, almost a complete and total wipeout of the company's value. But then the market spoke in early September. It said, "Maybe this company is not long-term viable and cannot compete with Apple and Android - but it will not die now. No sir, not on this day." RIMM more than doubled to 14 within a few weeks, a monster return from the depths that happened concurrently with the Apple bludgeoning from 705 to 500.
Take everything you thought you knew about platforms and handsets and technology and throw it out the window, this was about supply and demand, not who had the better product. Just as there was no one left to buy Apple, below 10 dollars a share there wasn't a soul left who would sell their Research In Motion.
Sear the memory of this into your hippocampus.
3. Things change quickly
Let's take a time machine back to the end of 2011 and lay out what we believe will be the top performing equity plays for 2012. Let's tell people the financials, especially the large cap banks, will lead the S&P 500 along with the homebuilder stocks against a backdrop of still-record foreclosure activity, increasing regulation, horrible employment and wage growth stats, etc. Then let's tell them that recessionary - bordering on depressionary - Europe will be the home of the hottest equity markets on earth, with Germany running up 30% by year-end.
What sort of response do you think we'd have gotten to a forecast like that a year ago? Probably slapped across our fat faces with a Scotch salmon wrapped in newspaper. Laughed out of the building, dog.
But things change - in 2012, the?Dow Jones U.S. Home Construction Index was up an amazing 78%, the Financials were the best performing of the 10 S&P Sectors (up 26%) and Europe's main index, the Stoxx 600, is up a solid 15% for the year, over 20% from its June low.
This spring I watched as Jeff Gundlach unveiled his now-legendary pairs trade - short Apple versus a 10X bet on natural gas - the crowd was incredulous, Apple was trading vertically higher after all and nat gas was well on its way to zero.? Turns out that was the trade of the year. Know this - safe can be risky and risky can be safe in the blink of an eye. And mean reversion is always in the on-deck circle, playa.
4. Trends can and will persist past the point of sanity
Let's consider that US 10-year Treasury bonds have been yielding around 1.7% for most of the year while the annual run rate of inflation is 2.2%, thus guaranteeing a destruction of purchasing power for the holders. This bond binge continuing despite a growing economy, low stock volatility and no major systemic disruption in the markets at the moment is quite a thing to behold. Investors spent the year continuously pulling money from stocks to flood the bond market like the animated broomsticks in Fantasia with their buckets sloshing about. It makes no sense, but betting against it has been a loser.
How long can these trends go one while everyone agrees they shouldn't?? Ask some of the geniuses who've been entangled in the Short-Japanese Government Bonds (JGBs) "widowmaker trade". The answer is almost forever, and you will capitulate just before the turn. Of course you will.
5. "Uncertainty" is a buy signal, not a sell signal
When you hear the term "uncertainty" being bandied about from every corner of the universe, you may want to consider putting in some buy orders. Let's take Greece. How much uncertainty was there about the oft-lamented Mediterranean problem child nation? The maximum. There could not have been more. Each day, the discussion was about when (not if) they would leave the Euro Zone, would they voluntarily withdraw or would they be kicked out, how may millions of people would starve on the streets when it happened and who would be next.
And while all these motherfuckers were busy blabbing away about the "Fate of Greece" the Athens Stock Exchange decided to rally 34% this year, doubling the returns of the S&P 500, Switzerland, France, the Emerging Markets index, the Asia Pacific region and just about everything else in sight. Your passing, superficial knowledge of the risk factors of a given thing, gleaned from newspapers and television and repeated ad nauseum by a million wannabe pundits and newsletter writers, are priced in. Tell me something I don't know.
Uncertainty is why Wilbur Ross gets to buy up the nation's entire complex of bankrupt coal and steel plants in the 1990's while no one else would even think about it. It's why Dan Loeb can buy a billion dollars worth of Greek bonds in August and sell them for a $500 million profit four months later.
Uncertainty is how kings are made.
6. Usually, the asteroid misses earth
Markets usually climb a Wall of Worry they say. Let me tell you something - investors of other eras don't even know the meaning of the term Wall of Worry.
The shit we've had to listen to and worry about this year all at once will be looked back on someday by a future generation and marveled at. China's hard landing, the break-up of the Euro, the Fiscal Cliff and on and on. This is to say nothing of the collapse of the largest commodities brokerages, the London Whale, the LIBOR scandal, Lloyd Blankfein totally nude, the loss of trusted reporter Kelly Evans to England, etc. Some of the top veteran hedge fund managers threw the towel in this year, for no reason other than they had had enough, and possessed no explanation for what they were supposed to be saying or doing anymore. The emotions, the intellectual incongruity of the whole thing, it was just gut-wrenching and the fun - if ever it was fun - had been wrung out of it. Even Wall Street's full-of-shit Chief Strategist promotion machine struggled this year, a record amount of bearishness had crept into their forecasts and estimates - something we almost never see.
If you've traded and invested this year and came out okay, then you are to be commended, this was a tough one no matter what the index statistics say. Nerve-wracking doesn't even come close as a descriptor - we were Riverdancing on a frozen-over pond with steel-tipped boots and ice sharks swimming below the cracking surface just waiting for us to fall through. And those ice sharks had some kind of weird fish syphilis.
The asteroid certainly seemed to have been getting closer at various moments, but alas, the end of the world was not to be. I'm protectively shielding my crotch with one hand as I write this, wincing at the thought of an immediate boot-kick from any of the disasters we've managed to skate past.
But once again, the asteroid missed earth in 2012. We are alive and live to fight another year, much to the chagrin of basement-dwelling misanthropes and grumpy old men everywhere. To the fear-mongers: I'm so sorry your apocalypse was staved off another twelve months, better luck in 2013, bitches 
To everyone else - those of us who are investing for prosperity and for the future, I'll say that it's been an honor serving in the trenches with you this year. Sometimes we traded together and sometimes we had opposing positions on. But always, we did our best to remain constructive and to make sense of the news and the data and the action on our screens. And now we're that much smarter and tougher, wizened and battle-tested, for the new year to come.
***
What did you learn this year? Tell us below!
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