Small Cap Stocks

If you’re wondering why we’re still mired in a residential real estate crisis with no end in sight, here’s a good summary from a recent AP Article:

“Barofsky said Treasury is giving mortgage companies too much leeway to decide which homeowners will qualify for a program to reduce the principal balance of their mortgages.

The program relies on voluntary cooperation from mortgage companies, Warren said. She said many of the mortgage debt collectors make more money when they foreclose than they do when helping homeowners.

“We have a crisis, and the consequences of not having cooperation from (mortgage) servicers is . . . felt by this entire economy,” Warren said. “We need a program with far more urgency and some real teeth in it.”

Also appearing at the hearing is a leader of the Government Accountability Office.

So basically since it is more profitable for a few banks to force a foreclosure, rather than do a modification (which would end the real estate crisis almost immediately), a huge portion of the social fabric of our country must be compromised. Even if one believes in the ideals of capitalism and profit (and the banks do not given their continued acceptance of trillions of dollars of free money from the government), it is absurd to believe that pursuit of profit can be defended when the damage to society is so enormous.

In listening to a recent interview with Warren Buffett on Huffington Post, Buffett commented that:

“People get scared in crowds, confidence comes back one at a time.”

I believe this statement to be 100% true, which is why investment gains that may take years to build up, can be wiped out in a matter of weeks or days.

Incidentally, Buffett’s statement also provides the psychological reason for why it’s possible to make money in the stock market, in the first place. Basically, because confidence builds slowly, prices of stocks that are in turnaround mode do not immediately reflect the fact that “things are getting better.” This slow recognition of positive changes, allows a minority of astute investors to buy into securities before the improved situation is accepted by the majority. With time, momentum builds in securities precisely because people get scared of missing gains, (i.e. greed is a type of fear), at which time the price of the stock can have a significant rise.

Finally, since “confidence only comes back one at a time”, it stands to reason that only those with a non-conformist mindset can succeed as investors. It takes a certain aversion to following the “normal” path, that allows one to risk capital where the majority of others currently still fear to tread.

Today VOCL announced what is basically a reverse merger with MagicJack.

You can read the press release here:

Congrats to all who have held VOCL, since our first recommendation last August (find it here).

This is another example, of how a losing investment in a distressed stock, can suddenly become a giant winner by virtue of patience, and a lot of luck.

Disclosure: Affiliates of Envoy Global Research, and its principals, own shares in VOCL. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

Here’s a good Peter Lynch anecdote from a recent Bloomberg article on banking stocks:

“David Ellison learned a simple lesson from legendary mutual-fund manager Peter Lynch as a young bank analyst at Fidelity Investments in the 1980s: If things at a company are getting better, you want to own its stock. “

This lesson is, of course, is the basis of the simple investment philosophy I espouse on this website: Buy a diversified portfolio of distressed stocks that show evidence of a turnaround and have legitimate growth prospects. (see this post for a bit of philosophical justification for this approach).

Even though many of the types of stocks you will buy under this approach, will fall in price (especially right after I buy them) or provide little gains, a few are bound to rebound enormously over time as the “company gets better”, and you are guaranteed to make money “in the long run”. Simply witness the performance of NAVI, VG, PWER and a few other stocks I’ve mentioned here over the years. The massive gains in these stocks have more than compensated for major losses in Britesmile, Corgi, and a few of my other truly bad investments. Of course, one never knows in advance which stocks will gain and which will fall.

The problem with any investment strategy, it seems, is not so much the theory, but in fighting the negative emotions, such as fear, that surround the prospects of loss, both temporary and permanent. They key is to use analysis to locate potential investment winners, and then practice diversification to quell the fear of loss, and provide you with the financial staying power to allow random fate to eventually dole out it occasional reward.

The other day I was watching one of the episodes from Star Wars, and Yoda provided some great advice to the young Skywalker, that I think is perfect for investors:
Yoda said: “Fear of Loss Leads to the Dark Side.”

Why is a fear of loss dangerous for investors? Aside, from the fact that fear will always cause you to make rash decisions, without a proper risk/reward analysis of the situation, I think there are three specific situations where a fear of loss leads to unprofitable consequences:
1. A fear of loss prevents you from taking the calculated risks that can lead to profit.
2. A fear of loss forces you to sell or give up too soon on a position or new business venture.
3. A fear of loss makes you unwilling to admit failure, take losses, and move on.

When investing in the stock market, or any other business, one needs to anticipate and suffer through short-term losses, simply because not every decision will be correct, and if you are going to be right, you must be early. In other words, losses are inevitable, even in winning positions. I think if one accepts that truth, fear can begin to dissipate. To combat fear, one needs to stay diversified so as to be able to sustain the losses from failures, and have the courage to take on new risks. In addition, one needs to have the patience to wait thru the short-term losses, which are common to all great successes.

A key issue, of course, is when you should throw in the towel on a short-term loss, since obviously not every investment or business idea will pan out. There are numerous guidelines for this type of decision (patience again is a key attribute), but a key lesson is not to make any decisions out of fear of some loss or because of external price movements. An objective analysis of the situation away from the computer and “market noise”, without a fear of losing money or any other negative emotion, is essential. Sometimes the simple question: Am I Making this Decision out of Fear?, is enough to guide you in the right direction, since we soon discover that nearly all our fears are exaggerated.

Have some additional tips on how to control fear? Leave them below in the comment section.

After reading the title of a recent article on Yahoo! Finance, “Market’s swoon prompts fears of dreaded ‘death cross’”, I really got to thinking how completely silly our economy has become.

To put it succinctly, our economy is now entirely based on satisfying unnecessary wants, as opposed to real needs. In addition, the financial underpinning of our economy rests on short-term gambles on future prices of assets in random series, as opposed to long-term commitments of capital in consideration of future income. This combination of Wants and Casino Capitalism, makes the entire economy subject to the whims of emotionally charged metaphors, and imaginary fears, that have no basis in reality. In other words, the economy is really in our head, and therefore economic prosperity is entirely dependent on how we think about our economy.

As such, the best antidote to the economic “mind” games currently being manufactured by pessimists, would be for the government to begin propagating completely fake, and yet optimistic, statistics to combat the false pessimistic memes that continue to proliferate. China of course, does this routinely and the economy remains the fastest growing economy in the world. Conceivably, the US government can also begin to make up statistics that show strong economic growth across all sectors, and Wall Street would eat up the data driving asset prices higher and freeing up credit.

If you’re somewhat a believer in pragmatism, as I am, you probably won’t find the above suggestion all that morally repugnant. Pragmatism suggests that the lies which make us happier and less fearful, should in some sense be considered true, and those which hurt us and make us worry, should be considered false.