Around the end of 2013 I thought the market was getting very frothy in the tech, biotech and other momentum type stocks and that some of them were in for a decline that would probably affect the overall market. So I sold all of my stocks except NWLI. I did reduce my position in NWLI, but it is still a very large position. In order to hedge against a decline in NWLI, I decided to short Amazon.
The way I looked at it was that NWLI and AMZN represented two extremes of what a value investor would be interested in. NWLI was selling at about 9 times earnings and 60% of book value and AMZN was selling at 635 times earnings and 20 times book value. If that wasn't irrational, what is? So while NWLI has declined
somewhat off of its highs, my short of AMZN has cushioned the loss in my account. I started to short AMZN at about $385 and continued to short it as it continued to rise. My highest short trade was at $405.99.
Today I covered part of my short at $305 and made $100 dollars per share on the highest priced short trade.
I don't think 2014 is going to be a good year in the market. Some of the warning signs are as follows:
So many IPOs of companies with operating losses.
So many companies buying back enormous amounts of stock at very high prices as compared to the very few buybacks in 2009 when they could have bought back the same shares for a fraction of current prices.
Record margin debt.
Many insider sales.
Many dividend increases and companies operating at very high operating margins. (but not AMZN)
The Fed keeping interest rates at 0% going on six years.
Thanks for the update. Good work on the Amazon short - that's been a tough one to get the timing right.
My thought is we are going through a mid-cycle slowdown, which could last 1 quarter or several quarters. This will be followed by rising rates and an economic re-acceleration. The stocks we will want to own during this period will not be the mo-mo stocks of 2013, but larger, value oriented stocks and late cycle stocks like energy and other commodities. We'll see as every cycle is different, but to me, it seems we are more in a period of rotation than the end of the bull run.