"Nothing in life is to be feared. It is only to be understood"
Marie Curie

Today's market sell-off has only reinforced my belief about the most important quality a good investor must have in order to be successful over the long haul- it is called being flexible. As I said before- being stubborn might be a good quality if you are running for president, but it's certainly not something you should be proud off when investing your own or even more important someone else's money...

My definition of "flexibility" consists of two main parts:
• One's ability to readily acknowledge his or her mistakes by realizing that "no strategy" out there is "bullet proof" at all times!
• Willingness to actually take action and remediate the mistakes, regardless of how emotionally unpleasant or difficult the fact of acknowledging that you were wrong in the first place might be...

As anyone who has followed my investing articles knows I don't believe in trying to time the markets by moving in/out of cash all the time, and thus several readers have been surprised by my acknowledgement of being 95% in cash for the last five weeks. While this move has certainly helped me to preserve my assets and in the hindsight has been a very wise one , it wasn't an easy decision to make in the first place as it has required me to overrule my "normal" strategy.

Below is my short logical sequence on why I have made this call in the first place, and why I am now finally starting to feel a bit more bullish about prospects of selected stocks/sectors out there. (Full disclosure- I've deployed another 5% into one preferred stock ETF and two large cap tech names mentioned in this article at close on Monday):

1. Simultaneous global deleveraging is now occurring all around the world which by definition means massive asset liquidations and lower prices
2. However, government's intervention in the form of "virtually complete" short selling ban and selective (and thus unpredictable) bailouts, has made betting on these falling prices by short selling a very risky and unrewarding proposition
3. In this situation, the only available solution for the fund managers out there is to continue meeting the regulatory and "credit crunch" driven "deleveraging" needs by selling their most liquid assets, which in most cases also has been their best performing assets
4. This forced selling of "good assets" and inability to hedge effectively in turns leads to drastically lower overall industry performance and thus additional redemption requests by "dissatisfied" and "terrified" investors
5. Government has also introduced additional volatility by making its involvement in the financial markets very unpredictable and erratic ( bailing out Bear Sterns vs. bankrupting Lehman for example)
6. Unpredictability is one of the most hated things in the world of finance- if one could just calculate/estimate losses, however large they might be, one would also be able to make a decision on how to deal with them by hedging/selling etc. In turn, this inability to reliably estimate losses/gains means loss of confidence and unnecessary risk aversion, and thus once again leads to more deleveraging and lower prices
7. And to complete the sequence now consider the complete picture:
a. Assume for a second that some well performing long/short hedge manager actually predicted the deleveraging process as describe above
b. The first decision for him should have obviously been to sell his most liquid assets and cover his shorts ahead of the main group (done)
c. After that his most logical/profitable move should have obviously been going against the "crowd" by selling "good" stocks short and buying "junky" stocks long
d. However, government introduced an important obstacle to this "logical" outcome- they decided to selectively "blow up" shorts through various forms of government intervention
e. So the only effective strategy left for this "fund manager" would "buying junk" long, however, the simple fact of it being "junk" in the first place means potential for unexpected and heavy losses including bankruptcies
f. So the only place left to hide for this manager is good-old boring cash until markets return to normalcy...Case closed

This was a logical sequence that led me to 95% cash back in August... However, now it seems as if fear has finally made its way back into the system and oversold "bottom fishing" opportunities are now popping up on my screeners left and right. I don't think we are at the bottom quite yet, but VIX readings of 45+ historically indictated that we might be nearing a "capitulation" zone of great buying opportunities...

I've already mentioned that my belief is that a large number of preferred stocks are now selling at very attractive prices/yields because of the short selling/liquidity issues that have nothing to do with fundamental values, and today I finally started buying in with real cash by allocating a small portion of my portfolio to them in the form of an ETF- PGF...Same thing with large cash rich tech names like MSFT and INTC

Anyway, more thoughts including new names tomorrow, but for now stay safe and don't panic...
Skepticalcapitalist@gmail.com