Mr Bear Goes Into Hibernation

Finally the bear in me has been re-educated. It wasn't enough to endure multiple months of rising markets and declining net worth, my mental tenacity saw to it that my views were sufficiently entrenched to remain inflexible in the face of bullish market signals. Nor was it enough to know all that I'd written on since December last year. Not even the extensive knowledge of Value Investing principles from Ben Graham, Warren Buffett and Charlie Munger's writing would see to it that my investment decisions would be wise and profitable in what may amount to the best year in my working lifetime for investors to clean up without so much as breaking a research-based sweat.

How close was I, intellectually speaking, to becoming the man that I know I have the potential to be? How could I write in January that, "I have stocks picked out to research further, and ideas to progress. The speculation continues, but it helps with my markets education. I still think the best risk-reward lies in Value Investing. To time it right, I want to be bottom fishing with the tide firmly out."

Then to see the tide fall further from the shore in March than it has been since the mid-1970's - before I was even in existence - and not be focussed on the knowable and predictable rather than the unknowable and unpredictable.

The answer lies in human fallibility and the difficulty of being a contrarian when it really matters. An education can sometimes be expensive, but experience can be one of the best educators out there. It's massively frustrating to have had the time, energy, capacity, tools and capital to have profited immensely in a low-risk manner from the market's disconnection from reality earlier in 2009, but the outcome I've ensured by remaining a bearish speculator in a surging equity market is to have depleted the capital (and confidence) that could have been compounded by now into something reasonably impressive and transformed my hopes and dreams one large step closer to reality.

Here is what I wrote whilst at Octopus Investments in August...

"I'm more in the mini-bull market camp now, having arrived here still quite bearish at the start of last week. The whole scenario just feels extremely similar to 2003 - the lows in March, and the 'climbing a wall of worry'. Huge monetary stimulus finding goods and services to buy and pushing profits up. Sadly at the cost of future tax burdens and the deferral of necessary pain.

Also, whilst it feels like the Great Crash scenario was a possibility, this has now been averted (or postponed?). There's a necessary downward revision of profits as a proportion of GDP to come and that will be brought about by the rising costs of inputs to the economy in the form of imported commodities and finished goods from countries with rising currency levels. Inflation figures reported by governments don't represent real inflationary costs to consumers, so inflation may appear more subdued than it actually is.

At some point, I think that the Russel Napier scenario of rising markets being pin-pricked by the collapse in government debt values and the staving off of inflation by central banks as a highly likely scenario. But it is not imminent.

Overall, it seems eminently possible that profits could rise for a year or two only to fall back to 2008/9 levels (or worse) as the cost of risk free debt causes leveraged companies and consumers to retrench more fully or pushes them through their breaking points. I can see multiples remaining at current levels (15x or so) and profits rising by 25% or so ($60 to $75 per share on S+P), similarly to 2003 (but not to the same extent). Hence a 25% rise in the index as an upside risk.

As the bear market got going in 2008, I felt quite certain that we were looking at a repeat of 1929, with a 50% rally expected, to be followed by further, more aggressive falls. Now, I'm feeling quite certain that the worst was averted and a mini-bull market is going on. The major risks to this scenario are unexpected inflationary/deflationary pressures that suppresses earnings multiples and corporate profits. Over time I would expect these problems to be close to inevitable, with the S+P Index breaching it's 2009 lows. However my view that this would happen in mid-2010 is now revised to around mid-2012."

Whilst the above shows that market directional agnosticism has not yet been achieved, it also shows a view that is less ardently bearish than in times gone by. Fortunately, coupled with the above notions were some actual analysis of potential investments as part of the work supporting the fund manager at Octopus. And from these ideas a portfolio was born. All the investments I've made will be published here with prices at inception as a means to review the decisions at a later date, and hopefully as a record as to the methods and execution that will pave the way to future success for me as an investor, leaving behind a few years of volatile speculative activities and changes in fortunes that do not a potential Managing Partner in an Investment Partnership make.

Live your life like a thrown knife

The title comes from a Todd Skinner quote, a hugely successful and motivated climber who sadly died a few years ago. The very concept appeals to me greatly, but the truth is that I've not exemplified the concept since my last posting.

In the markets it's been a fairly poor month for me, coupled with an odd sense of further positive reinforcement for both the value ethos and my potential skill as a stockpicker. The tragedy still remains that I have revisited the bearishness that I need to extricate myself from, and have done so not just with the purchase of put options, but with the sale of call options. Expiry is in September, so could all pan out in a positive way, but really I should be focussed on the search for value and the exploitation thereof. Not the search for direction, and the speculation thereon.

The most interesting move in the stocks I've been following would have to be that of HMS. From highs of around 145p (as mentioned below), the stock positively tumbled following an announcement from management that margins would contract in 2009 - something that had been clearly noted in the 2008 annual report. So not very big news, in my mind, but Mr Market voted the stock down to 110p, then 105p, swiftly followed by a low of 95p a week or so later. Supply outstripped demand., you could say. But in a small corner of France, close to the Swiss border, a rump of demand was buying as much as he could.

That particular story is still in progress. The stock got as low as 2x last year's earnings. Margins were noted as falling, but not collapsing, and revenues were reported to be up on last year. The product is strong and services a niche of the oil industry which is cash rich. All quite bizarre, and one to watch. It really looks like a $150m company to me and trades for around $60m. If it continues to grow as it has been the $150m valuation will look conservative. Definitely a value play, or I've just not uncovered why the market sees it as such an inexpensive company. One to watch for sure.

On the stockpicking front, another stock I was following last year has been having a good run of late. Michael Page, a recruitment agency, doesn't exactly sit in the recessionary sweet spot. Particularly in the UK where it services a large proportion of financial sector clients. However, my basic thesis was that demand for their services in emerging economies is set to grow as service sectors emerge to satisfy the needs of a growing middle class and increasingly complex 21st century societies. Happily they don't hedge their foreign earnings, so a falling pound is good for profits (aside from the causal or secondary effects).

Anyway, apart from the above, it just looked way too cheap for the potential growth possibilities and extremely strong management team. Essentially a value play with a potentially long-term investment horizon. So I bought. So far so good. Then, during the March rally (which continued into May!) I sold for a tidy 20% profit. This is, in hindsight, another in a string of disastrous moves during 2009 so far. Not so tragic in taking the profits, but buying at £2, with a future view of a value at around £10/12 (discounted to today to give £5/6) and then selling when the stock got to £2.40 was not exactly in-line with the philosophy of a value investor. The bearish sentiment ravaged my holdings and with the stock now over £3, the decision to sell isn't looking too wise.

Well, those are two stories of a few stocks I've been following recently. Equities are up, whilst the economy remains in the pits. There is work to be done on Nexen Inc, a Canadian energy provider with interests in the North Sea, as well as William Hill (back below where I sold my holdings in March) and Man Group (still hovering around 285p, pricing in a halving in AUM). But more interesting stocks may be uncovered during a two week stint with one of London's better investors, as I have an internship with a man at the top of the small-cap league tables planned for the middle two weeks of August. Hopefully I'll learn lots and be of some use to him. Time, as ever, will tell.

On seeking to change oneself

Following my last post, and a good night's sleep, I awoke and as soon as was possible commenced in deleveraging my own portfolio. Gone were the Apple shorts, gone the FTSE shorts. Back to simply holding positions in a few stocks where I felt I had an edge, which is to say a few stocks that I believed to be undervalued. But such transformations of temperament do not take place immediately.

According to the research I've been conducting, habits are the key to all outcomes. A more advanced argument from the realms of NLP is that values drive beliefs, which in turn drives your thoughts and from there you get your habits, which leads to your actions and thence your outcomes. But, crucially, those habits can be manipulated away from their basic tendencies with sufficient work. In some forms this is done by revisiting values that may inhibit outcomes at the other end of the relationship. I haven't been too successful with this approach though. In other cases, a simple application of a new habit (generally where it doesn't conflict with deeply held beliefs) will be sufficient to bring about new outcomes.

So, how do habits form? Well, simply from repetitive actions. By repeating an action every day for a month, it has been shown, a new habit can be formed. This seems to be a great path for creating outcomes in the future that I would dearly like, and I'm happy to say that some progress has been made in this area.

So, following the closing out of the more speculative positions, I adopted a new approach, although I did retain some of the old habits, which have caused some pain to my P+L. The new approach is the one I seek to maintain forever more. That of the Value Investor. Do enough work in valuing a stock to be comfortable with your own view on where it should be fairly priced. Check the market price and buy if significantly undervalued. Simple.

As a case in point, there was some volatility in the price of shares in Man Group following an earnings announcement on 28th May. First the shares fell by 10% on the earnings news. This was surprising to me as I thought the news was fairly positive. They had written down a retained stake in the trading arm that was (wisely) sold off recently, and underlying profits apart from that were strong, given the climate. So the immediate sell off was a bit odd in my view. And, what does one do when he finds an undervalued stock trading at a discount to intrinsic value - he buys. Unfortunately I bought when the stock was down 5%, so didn't get the best prices of the day but did well enough paying an average of 245p/share. They stock is back up at 285p today (16% above where I was buying) against a fall of around 5% in the FTSE 100 index over the same period.

But hang on. A one month period does not a long term investor make. At least the market voted my way after the first day of decline. Similarly my other favourite, Hallin Marine Subsea International, posted healthy gains over the past month and stands at 146p/share today. My view is that both these stocks are significantly undervalued and I continue to own them.

In my more speculative trades, I am now short US treasuries to benefit from a perceived rise in fears over inflation to come. I would like to short oil at what was recently over $70/barrel, but think I have no edge here. Incidentally, I have no real edge in treasuries, but was annoyed not to have done something about my views when 10 year yields hit 2%, so have done something about it at 3.54% (now 3.7%) and have a stop limit order in place in case I am wrong. For the general indicies, I have (speculatively) bought put options that expire in September on the S+P at a strike of 850. This is my psychological hedge, to offset the annoyance if markets tank and I'm not involved in the fall.

And so, it appears, the new thought habits haven't set in quite yet. I've not been glued to  a screen as I have my CFA exam on 6th June and have been busy ever since. Off to Italy this evening, so more busy-ness for a couple of days. On changing habits, Antony Robins notes that it is the pain and pleasure associated with outcomes that leads people to really seek change in their lives. Well, enough pain has been endured watching red numbers grow larger as my bearishness has been met with rising markets this year. And the last month has seen some pleasure from the shoort-term gains on Man Group stock and rising treasury yields. Perhaps more research, when there is time, and more competent investing with positive outcomes is the key to long-term success.

Of course that's why investors want to see track records in the first place, as they may be repeatable in the future.

So here's to creating the habits of success. Think long-term. Perform robust analysis. Always, ALWAYS preserve capital. And try to be macro-agnostic, or at least not incredibly biased in one (negative) direction all the time!!!

On Human Fallibility

Though time moves relentlessly forwards, the progress of this secular bear market moves in waves. Whatever the presumptions I had, or expectations of outcomes related to the current recession, it is clear that an excessively strong bias can have negative repercussions. This relates closely to Soros' statement that the secret of his success is knowing that he is fallible. 

The market is, in many ways, a mechanism that transfers wealth from those with a short-term bias to those with a long-term bias (Buffett). Based on the truth therein, it would appear wise to adopt a long-term bias. So what prevents rational people from doing so? One thing, human fallibility. Hence the successful speculator's answer, of knowing he is fallible. Soros' ability to turn from long to short on such information as a back ache is the stuff of legend. My ability to turn from bearish to bullish is disastrously lacking.

There is really only one way to react to the knowledge that adopting a long-term bias is the way to have an enduring competitive advantage in the investment game, and that is to adopt such a bias. And to do so wholeheartedly and without regret or remorse. And yet, I have found myself continuing to pursue trading opportunities that can only be described as short-term speculative activities. I have managed to create a rationale that supports this activity, but the rationale probably belongs somewhere between spurious and hopeful. However, for the sake of argument it is included below.

Back in the recent years of 2006 and 2007, when the economy was ticking along nicely with 10 years of positive growth behind the UK, it seemed unlikely to me that the housing market would hold on to it's 100% gains of the prior decade, and that the consumer, having reached indebtedness to the tune of £1trn, would continue to spend more than he was earning each year. Thus spending was to decline eventually, and the very full prices for equities were likely to decline also.

Armed with this knowledge and a speculative bent, I set out to capitalise on my beliefs in the form of profits from shorting the equity indicies - a rather blunt effort in what could have been an incredibly profitable targeting of  the housing and financial sectors, given the benefit of hindsight. As the markets fell, I would open new short positions, and generally lose a little as the declines were met with bids to keep levels held up well... until the crash that is.

Beginning largely in May 2008, a year ago almost to the day as I write, equity markets (and many others in sync) began an incipient slide that wiped 50% off their values over the space of the following summer months. A fine speculator should have absolutely cleaned up, with the insight as to the depth of problems to come, the slow response to these problems, and the massive reactions once the realisation hit market participants that the great debt party was over. Many fine speculators did, and yet I did not.

Excessive short-term trading during the period, including a week of madness around the Lehman's bankruptcy in September (precipitated in part by the relative shock as to the level of profits achieved by that date), took at least 1/3rd of the profits I should have made, given my leverage and positioning, out of my hands. Still, the year's overall profits were fantastic and enough to fund 18 months here in The Alps, so you can't complain too much about that sort of outcome, can you, unless it's not the final outcome of course...

As we reach a point a year from where the depths of problems inherent in many western democracies was finally appreciated by the masses, many of the factors that were closely scrutinised, acted upon, and reacted to, appear to have been conveniently forgotten once again. Consumer indebtedness is still excessively high, corporate leverage remains problematic for many firms and the banking sector remains in a state of de-leveraging, thus reducing the availability of credit to those institutions and individuals who simply cannot maintain old levels of spending without such leverage.

An investigation of the Crisis of 1929-32 shows many bear market rallies, of up to 52%, lasting for periods of an average of 50 days (http://www.zealllc.com/2002/rallies2.htm), so the thesis that the current crisis is not yet over is far from written off by the current 40% rally over the past 60 days.

Anyway, my rationale for remaining short-termist is one of a practical nature. If markets are to continue to decline, the pain associated with my being right and losing money from adopting a long-term bias will be high. In this scenario, however, my prospects for employment will be significantly better than I currently envisage them to be, as the 'old order' of affairs will be restored and people will be looking to expand once again. I cannot for the life of me, however, escape the notion that the probability of this being the low point in our current economic cycle as hopeful at best, and plain nonsensical at worst.

So, as I find myself at a junction with the potential for further losses if I remain stalwartly short and markets continue to forge ahead, I have decided to continue in the vein that I started with back in 2006. It is my strongly held belief that markets have a strong tendency to overshoot, and that this is a behavioural phenomenon in mankind, so will repeat ad nauseam so long as people remain determinants of market prices.

Furthermore, the currently held beliefs that we are in the midst of an economic recovery create an opportunity for fine speculators to profit from the likely coming realisation that the old order of affairs simply cannot be repeated.

Finally, that the deleveraging process that began in 2007, has barely started, let alone run it's course, and it is the lack of understanding prevalent in the majority of commentary that leads me to conclude that markets have yet to fully appreciate the incipient problems that have to be worked through the economy in order for it to be righted once again on a surer footing.

And so, back to the fallibility issue. If I am to realise my fallibility, it makes sense only to focus on the knowable, those long-term micro-economic issues that have created wealth in all those who follow the facts to their relevant conclusions and are not swayed by the emotions of the markets. But to avoid the realisation of my own fallibility, to cling to the notion of my undefined and unlikely superior ability to make sense of short-term swings in markets, would appear to be the position that I am currently adopting by having short positions out there in the market.

So, to end, the ultimate realisation that one is fallible, is the major step REQUIRED to become a significantly good speculator, or indeed investor. My own, overriding, fallibilty (on a general level) is to not react accordingly to other areas of my own fallibility (on a short-term predictive level). Or will it be my saving grace that I have finally reached such a state of self-awareness as to be able to truly adopt the mental position of the rational, long-term biased investor that I so dearly want to enter into.

Old father time, as ever, is watching and marching ever forwards. My aspiration is that my knowledge and self-awareness will lead to appropriate actions tomorrow and forever more.

A winter of discontent

How is it already April? My current malaise is due to a few factors, all related, and all a bit sad to reflect upon.

In short, my capital has been depleted by some poor capital allocation decisions. The question of whether I am to become one of the better capital allocators about, is still a significant one for me. However, there is an unequivocal answer as to the question of whether or not I have recently been a significantly better capital allocator than average, using speculation/trading as my means to monetise market insights. And that answer is no.

As is often the case, an inverse of my actions would have brought about some excellent trading results this year. I have been short the Great British Pound, as well as short the Equity Indicies. But my true failing has been to be short shares in Apple Inc.. In this final regard, the tragedy is in the lack of work performed prior to making the decision. It was based on almost no research, and an underlying belief that the company was sound and had good long-term prospects.

Some quick calculations this afternoon led me to conclude that the company would be cheap at around $60bn ($67/share), reasonably priced at around $100bn ($111/share) and expensive at $140bn ($155/share). So, as a value investor, I can only ask myself what was I doing going short at $90/share? And as an aspiring trader, what was I doing doubling up at $100/share?

Well, the losses have run as the stock has risen to around $125 today. Not good.

But, to invert. Had I done the work and seen the shares at around $80, I wonder if I'd have realised that the share price being offered was a bargain, especially given my views about the long-term prospects for the company. And what do INVESTORS do when offered a bargain price for a great company. They buy shares, of course.

All this logic of markets overshooting and trends persisting, I have learned, is nothing when compared to the true test of whether or not someone is a good, or great, trader. It is essentially all about making sure that you loose very little when you are wrong and make a great deal when you are right. In both of these regards, I can now regard myself as having failed over the period in which I've been trading/speculating.

And yet, I feel no sadness or remorse. Indeed, I may find, once the analysis is done, that the lessons have come relatively cheaply to me. And if the lessons have been finally internalised and if I am to go onwards with a renewed focus on my true style and niche area for outperforming in the financial markets, then indeed it will be a valuable lesson. It's just a shame to have not learnt from other people's mistakes.

So, the answer as to whether Mr Buffett or Mr Soros is the one to follow has been answered. And Mr Buffett's lessons hold the key to my future.

His key thoughts on investing, as I understand them, are as follows:

 - It's not what you know and what you don't know that matters, but rather how well you define your circle of competence

 - The key to investing is to close the doors and be greedy when others are fearful and fearful when others are greedy

 - Rule number one - don't lose money. Rule number two - see rule number one

 - A great company at a fair price is better than a fair company at a great price

Will this translate into the seeds of an Investment Partnership by May 2010? Well, interestingly it's now just 8 days until May 2009. Buffett clearly stated that he could make 50% with a million dollars of capital. So constraints on performance with 1/10th of that would seem limited. The key is simply to read hundreds of annual reports, to think of the value of these businesses and then compare them to the prices being offered by the market. Where a large discount is offered, or a small discount for a great business, there is an opportunity to invest.

Today I downloaded the past 5 years of annual reports for Apple, Berkshire Hathaway, Man Group, Hallin Marine, Michael Page and William Hill. So there's a fair amount of reading already. I'm currently listening in to the Apple 2nd quarter results conference call. If I was long, especially at $80 or so, I'd be very happy right now(!) But I'm not sad, or angry, or worried. I'm excited.

Here I am in Chamonix, with a depleted capital base from highs less than 4 months ago, and yet with enough to live off for a few years. I have a few months to get some exams over with (and hopefully enjoy a few days out in the mountains). Then I am looking at either working for a major Investment Bank, or setting up Sherman Asset Management. Whatever I've been through in the past is gone now. All that remains is what's ahead. 30 is approaching, and the greatest thing that I have in my favour is that I know where I want to get to. Some days clarity is obscured, and details are unclear, other days the bigger picture returns. But, broadly, managing capital away from the crowds is a huge and inspiring goal. How I will get there is uncertain, but the journey is enjoyable, and that's what counts.

Planning to climb for two days up high now - a last jaunt before hitting the books hard for the CFA in June. To date I've managed 4 routes in 4 months, which is nothing really to write home about (or blog about). But I've met potential climbing partners and have sorted out what life here is like, so if I make a long-term life out here, then the 4 months that have passed so far will not have been in vain. And even if that is not the case, I'm sure that living out here for a winter will be a very special experience that will leave me feeling more whole as a person forever.

Expectations may have not met reality, but the past is always something that should teach you how to live your life better. Dwelling on mistakes, or wishing for a different history is not going to change it. All you have is your future. One life. Live it well.

3 months in

What to make of the picture three months on? Perspectives have been altered and the reality has not quite met with expectations. Emotions have waxed and waned with the markets and days out in the hills. A trip back to life as I knew it, perhaps 'reality' as I will come to know it again soon enough, gave the perspectives that I sorely needed on how different life out here is, and how different life back in London would be too.

And the confusing part is that neither is necessarily an obvious choice as being better or worse than the other.

In simple terms it is very easy to see that a life involving many days in the mountains would be far more easily served with a relocation to somewhere an hour or so from the great peaks and vistas that surround me daily here in Chamonix. But equally what has been left behind isn't all bad. The relationships built over 6 years in London have become important to me. The lives of people I've come to know well are ones in which I wish to share time with in the future. This does not obviate an extended trip away from London life, or even a move completely away from it, but it does mean that something has been left behind that would not be so bad to return to - the proximity of people that I care about.

And then there's the question of how I am to earn a crust in the future.

Ay, there's the rub, for in that sleep what dreams may come. And in Chamonix, dreams of a life with more varied stimulation than mountains and mountain people is permeating my thoughts. What of all the other great things that life has to offer? The people and places that add spice and richness to life's possibilities. And the personal growth that comes from seeking to become something that you are not currently ready for. Whilst this feeling can be nourished in mountain life, the unfortunate reality is that a price often paid for excellence in the mountains is a relative poverty outside of them.

When speaking of poverty, I do not mean to imply that people who dedicate their lives to mountains are impoverished. I would rather indulge in a love of mountains than fill out my days in a grey office repeating essentially the same actions day in and day out. The poverty lies, as will all focussed pursuits, in that all other aspects that life has to offer are necessarily subjugated to the over-riding aim. For the pluralist, this is a sacrifice too far. And the personal growth that can come from work is sorely lacking in my life out here. Sadly, it will remain so if I do not add direction and resolve to my daily activities.

Another unfortunate reality that is setting in is that it is going to be rather difficult to convince potential investors to entrust their savings to a man with a track record that does not exactly scream of 'high probability' investments made for the long term. And why should they? I do not believe in myself enough to commit 100% of my capital to my long-term ideas, partly as the timing of my next form of income is highly uncertain and my outlook generally still bearish. This love of mountains is not taking me where I want to get to in terms of my future as a great investor and therein lies the rub.

A few years ago, aged 22, I commented that I would like to make half a million pounds and start a hedge fund by 26. Later this was revised to 36 (as events collided with reality)! The path set out on once I'd revised the timings was to work in a bank as a research analyst, make a name for myself, work as a junior in a hedge fund, get a track record and then set up on my own. The first step, to work in a bank, wasn't too appealing as I knew that time in the mountains would be massively curtailed, so instead I worked as an auditor. This nulled any sense of wanting to work ever again in a similar corporation, but bought me time to get over health problems and create a foundation for future success.

The last 3 months has opened my eyes to how life is out here in Chamonix, and how it could be living nearby in Gevena, or Lausanne. My climbing dreams are still with me, but the balance of life has perhaps swung too far over to the mountain side, and away from the longer term investment management dreams. For sure I'm still passionate about spending time in the mountains, and will continue to aim to do so whenever possible, but the sad reality is that I need to subjugate this to time spent building a reputation, a track record and an array of investing skills and contacts in order to become the investor that I know I have the potential to be.

All of life's choices negate the options and paths not travelled. Each journey takes us to crossroads and turning back is never an option. All you can do is make a decision and enjoy the journey as well as possible. There is no right and wrong when complex decisions arise, but there is often a sense of compromise. And where long-term goals are firmly embedded, it currently seems that taking the high-probability trade to get to where you're going, not necessarily as fast as possible, makes the most sense. But, sad to say, a life less ordinary it is not.

On Trading Financial Markets

Well, it should probably be noted that not only is trading financial instruments not for everyone, but it's almost certainly going to end in disaster (in the form of financial ruin) for the vast majority. It's an odd phenomenon that exists to create a world that sucks people in and spits them out in such an astonishingly repetitive and predictable manner. I've discussed with friends in the past a trading algorithm that does exactly the opposite of what a new market participant chooses. We concluded that such an algorithm would be a phenomenal money-spinner!

So, in relation to the above, I have had to concern myself recently with a point posited by my old housemate. In relation to quitting my job and moving to Chamonix, he said, "Is Oli Sherman brave or stupid, that's the question."! Well, I can add to that the possibility that my trading history over the last few years is more likely to fall into one (or both) of the above categories than any other.

My favourite quote on leverage comes from Joel Greenblatt. He likened the use of leverage to running through a dynamite factory with a lit match. You may get away with it, but you're still an idiot. Well, I almost didn't get away with it over the last couple of weeks, which I guess puts me in the category of idiot, which is a shame as I thought I was some sort of financial genius!

However, all this trading is for the purpose of learning about market dynamics, as well as to understand better my own mind in relation to trading decisions. The last 2/3 months is a good case in point.

So, my view since mid-2008 has been that the Great British Pound will fall. Badly. I was calling for it to fall to around 1.60 versus the US dollar. I also thought that the dollar would fall against the likes of the Yen and Swiss Franc. So I decided to try and monetise these views via bets in the spread betting market. The results were favourable. For a period.

The last month of 2008 was a pretty disastrous one for holders of pounds with any international debts and/or future liabilities. But it suited me rather well as I made enough on my currency positions alone to fund a winter in The Alps. As 2009 started, the pound fought back, and I missed it as I wasn't checking prices at all for the first week. My £5k loss for the first week of 2009, it was kindly pointed out to me, translated to a quarter of a million loss for the whole year, which is significantly more than my net worth! Anyway, the loss didn't phase me too much as I understand how markets can undergo consolidation periods during trends, i.e. a rising pound didn't meant that I was wrong about the pound being in a strong downward trend.

As if to validate my position, the pound promptly continued it's slide through the next two weeks, and my loss for the year was rescinded. That felt good. Then something odd happened. The pound had found some friends, and it rose back to regain the pre-New Year levels.

OK, so markets fluctuate, what are you going to do. Well, my view hadn't altered on the pound, or on the dollar. I felt strongly that the fundamentals were in line with my view and that the trend (of both currencies declining in value) was still in the process of adjusting the exchange rates. So I increased my position size to profit from the consolidation.

And the pound continued to rise... And rise... And rise.

Whilst the movements weren't particularly large, my positions were. I was effectively short £200k of GBP, mostly against the Swiss Franc. This was starting to hurt.

Anyway, as the losses mounted, I continued to check the logic of my position, and I hung on. Then, over the weekend, with time to reflect, I decided to cut my positions in half as any further losses would wipe out more than next season's skiing (which I'd already lost over the past 2 weeks). As I was implementing the reduction in risk, I got carried away and decided I didn't know anything useful about trading currencies, so I should get out of it all together. So I did. I cut almost all my currency exposure.

Of course, what happened next, but the Great British Pound lost it's friends and fell. A lot. So I reinstated the shorts in half the original size. Then it fell some more, and here we are today.

Now, for future reference we're at 1.6825 for GBP/CHF and 1.4544 for GBP/USD. And that's not going to stay the same for too long. Markets move further than most people expect, and once a trend is in place, it tends to persist for longer than most people expect. So, I should be true to myself and stick with it all. Not value investing, sure, but a fine way to make a living if you can control your risk and your emotions. Interesting to see how this all pans out!!!