Monday, November 17, 2014

Doug Kass on the Market

For over 15 years Doug Kass, president of Seabreeze Partners Management, has been a contributor to and has by his own estimate written over 30 million words in more than 50,000 columns (typically at least 15 a day). He makes the rest of us look incredibly lazy.

In this his first book, Doug Kass on the Market: A Life on TheStreet (Wiley, 2014), Kass, with the help of his editor Daniel Robinson, offers a selection of these columns. They document the thinking of a conservative short seller (or, the stuffed animal the cover portrays him holding, a teddy bear) over a range of market conditions.

The book is divided into nine sections: where it began, short-selling, lessons learned, the great decession: subprime and credit/debt crisis, recovery, against the grain, Wall Street personalities, Buffett watch, and surprises. There’s some overlap, and some understandable repetition, but Kass covers a lot of territory in more than 500 pages.

I was most interested in his investing advice. Let me share a few of his pearls of wisdom here.

“Regardless of one’s modus operandi (fundamental, technical, or a combination of both), logic of argument and power of dissection are the two most important ingredients in delivering superior investment returns. Common sense, which is not so common, runs a close third.” (p. 51)

“Under a normally trending (and upwardly sloping) market (and dependent upon my degree of confidence), I would have as much as 67% (when fully invested) of my portfolio in investment holdings (with a majority of longs), and I would have as much as 33% of my portfolio in trading rentals (again, a majority of longs).”

In a range-bound market, “I would be more inclined to trade stocks…. In this case, I might only be as much as 40% committed to investments and perhaps as much as 60% in opportunistic rentals, with a mix of both longs and shorts.”

In a downwardly sloped market, “in theory, my portfolio … would be dominated by shorts, but, in reality, it’s not practical, as the asymmetric risk/reward of short sales would reduce the overall commitment to shorts even in a correcting market phase.” (p. 94)

“Avoid illiquid and heavily shorted stocks. If you don’t, eventually a short squeeze will be the outcome, and there will be heavy losses with it.

“Trade around your short positions, and ladder your shorts with the timing of expected catalysts (in terms of the calendar) to ensure superior performance and participation in market downdrafts.” (p. 17)

Since I devote this blog almost exclusively to books on trading and investing, I’m always interested in what other people read. In 2011 Doug Kass described The Most Important Thing by Howard Marks as “a tour de force, … the single-best investment primer I have read” since Graham and Dodd’s Security Analysis (1934) and Graham’s The Intelligent Investor (1949). I wasn’t so effusive in my review.

Fans of Warren Buffett will undoubtedly turn immediately to the section that describes Kass’s trip to Omaha to ask questions as a “credentialed bear,” one who wrote a column in 2008 explaining his rationale for being short Berkshire stock. They won’t be disappointed.

The final section of the book is devoted to his annual list of possible surprises for the coming year, a practice he started in 2002. I don’t know why anyone would ever want to go through this exercise since, as Woody Allen said (and as Kass quotes him), “I’m astounded by people who want to ‘know’ the universe when it’s hard enough to find your way around Chinatown.” (p. 428) Predicting the future is harder yet. To Kass’s credit, he lays everything out—the prescient as well as the dead wrong.

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