Friday, January 28, 2011


Five Things I Have Learned From Mr. Market This Week

1. Do your own research and homework. And take the precision and the quality of Wall Street research with a grain of salt. Specifically, I am referring to Merrill's really dumb price target increase for NFLX on Thursday from $131 to $275. I mean, how can you be off by that much in a calculation of value? So, when you hear from your broker and he repeats his research department's next best idea, be skeptical; that broker is not necessarily your friend. If you want a friend, get a dog, and don't listen to Wall Street research without doing your own work.

2. Never short valuation, and avoid shorting stocks with high short-interest ratios. This is a recipe for a portfolio disaster. Never short a stock such as Netflix that is crowded. Whenever short interest exceeds about 10% of a company's float, it's a non-starter for me. Stay away, and don't short. In the case of Netflix, the theatre is very crowded with 32% of the float short. If you have a death wish and want to short a Netflix, AMZN or AAPL, buy out-of-the-money calls for as a hedge to define your risk and force the discipline of taking a small loss.

3. Even smart investors, including some great hedge fund managers, make mistakes. Don't automatically follow them into positions. Case in point: gold. John Paulson might have personally made $10 billion in the last two years, but one of his largest positions, gold, has cratered in recent weeks, falling by $100 an ounce since January.

4. There are adverse and unintended consequences to the Bernank's quantitative easing policy. Today is a vivid example of how QE2, which indirectly moved food prices higher, has provoked the unrest in Egypt and in other corners of the world.

5. The path to a $95 a share in S&P 500 earnings for 2011 might be bumpy. Numerous earnings reports this week, including F, CL, PG, SBUX and even AMZN, indicate that higher input costs could challenge profit margins and that second-half earnings are not automatically cast in stone.

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