The whole equation

Some people have asked me whether I had any strategy in my mind when I bought FAZ and BGZ.

Here goes the whole story!

I had written this very short email on 9^th Nov 2008,

–But I must say god sure moves in mysterious ways.  USA passes a stimulus plan that ends up helping China.  China passes even a bigger plan that is going to end up helping Europe and USA.–

Now look at the China stimulus package. There is no doubt that companies are hoarding a significant part of the stimulus and a significant amount of money has gone into stock market or housing.  What is more important is that about 30% of the stimulus has gone into capital investment.

Now look at this blog that I have written.

Hu Jintao must be really mad at US consumers.

So what was the idea?

The idea was to kick-start the cycle.

China invests in production and USA keeps on consuming. As China reaps the benefits of production the money will flow through to Chinese consumers which will in turn lift domestic demand. The Chinese leadership thought that they could then slowly wean Chinese economy off US.

But what went wrong is that the US consumers have refused to kick-start spending.

And this problem is going to turn into a nightmare.

All Chinese stimulus has gone to waste. Worse it has artificially lifted demand for raw material that must crash through the floor again. This is going to negatively hurt sentiments. Read this stuff China buying boosts Baltic index . There is a huge population out there that is getting into stock without understanding the whole story.

What I have said so far is going to be obvious some day and that is the day when we come crashing down. A crash feels worse that what it is if it comes after a period of elation.

I bought FAZ/BGZ 2-3 days back when I thought we were at the top of the curve. At this point of time it looks like I am off by a day. However, there is still a risk. Consumer sentiment is a funny thing. DOW might end up going higher before crashing down.

So this is how I am doing my risk management.

For BGZ I am going to get out if my loss exceeds 5%. For FAZ I am going to get out if my loss reaches 50%.

I have not got these figures out of a hat. My luck started changing 2 months back when I started applying Elliott Wave Theory and after I wrote my own software to track short term trend. Within these 2 months I have covered my previous 10% loss and stand at 10% gain on my entire portfolio.

About 25% of my entire portfolio is in BGZ/FAZ. So with the above losses I will be giving back my profits.

Why would I be willing to give back profits? Because I see major upside potential with these two stocks. I see no problems with being a bag-holder on bearish stocks for the next year or two.

Listen, business is easy. If you’ve got a low downside and a big upside, you go do it. If you’ve got a big downside and a small upside, you run away. The only time you have any work to do is when you have a big downside and a big upside.

 IMPORTANT: Read follow up on this post

Tags: BGZ, China stimulus, FAZ, US consumer

Friday, May 15th, 2009 | Economy | Comments RSS | Respond | Trackback