Tuesday, May 12, 2009

BAC Raising Capital & Another Way the Past Finds a Way to Live in the Present-MJH Purchase and Baggage from the Past

I noticed a few articles today claiming that Bank of America sold part of its stake in China Construction Bank for about 7.3 billion at over a 14% discount to CCB's Monday close. NYTimes.com   I mentioned that the BAC's position in that Chinese bank would be a likely source of capital needed by BAC according the the results of the recently concluded stress test. BAC & the Stress Test/BMY/AVY/BAC Preferred
BAC sold the shares that it owned which were not under a sale restriction, and it still holds about a 10.2% stake.

The following point is well known to investors with a history.  One mistake can have repercussions extending beyond the loss generated by it.  I mentioned in several posts last year that I decided to hold onto my common stock shares in Bank of America throughout 2008.  I still own them.  I viewed that decision to be a mistake, of course, since I was negative on financial institutions to the point of even buying SKF (the double short ETF for financials)   in late 2007.  SKF was the spookiest ETF that I have ever owned.  I digress.  My reasoning at the time was that I might be wrong about the likely course of events in 2008 and I had a misplaced faith then in Ken Lewis.  I also owned 10 grand in BAC bonds at that time of that decision, and I added in the 4th quarter of 2008 a small position in one of its floaters, BACPRE.  A reader of this blog would have noted a profound change in my opinion  of Lewis during the 4th quarter of 2008. 

 So, where am I going with all of this? When making a decision on how many shares of MJH to buy, I came loaded that day, March 9, 2009, with all of this baggage from the past, rather than a clean slate.  The past had a far greater impact on my decision making that day than the present or the future.  If I had a clean slate, no position at all in any BAC security, I would have most likely bought 300 share of MJH at $7.5 rather than just 50 shares.   So, rather than having a larger position in a TP that has more than doubled in price since its recent purchase, and which would have provided almost a 24% yield for the next 16 or so years at my cost, I have a negligible position in it, and a good sized loss on  my 200 or so shares of BAC common stock.  I give myself an F on all of that. I knew the problem when I had to make a decision and understood how the past was influencing my decision when I decided how many shares of MJH to buy.
Buy of 50 MJH at $7.51/ Pop in My Animal Spirits Balloon/Japan/ Zulauf/CNBC/Meet the Press   I did correctly decide to sell 5 BAC short term bonds when I had the chance near par value and plow those funds, along with other funds raised, in an asset allocation shift from short term bonds into common stocks in early March.    Or, I should say that decision was correct up to this point in time.   

Another way one mistake can generate another is through what I call failures to manage the risk of lost opportunity, an important risk that needs to be managed as an investor copes with asset allocation issues in the portfolio.  Long Term Stock Risks and Situational Risk/Managing Lost Opportunity Risk in a Long Term Secular Bull and Bear Markets/ Novartis or Sanofi

If I use my funds to buy a stock at $20 in a secular bull market, ride it up to $40, possibly do some minor selling, and then ride it down to $2.5, then I am not managing my risk in that security very well.  I have missed the opportunity to not only harvest good gains at $40, but also have lost the opportunity to plow the proceeds from stock sales at $40 into more shares at $2.5.  Then there is the hugh psychological issue that comes with trying to buy more at a good price because of all of the baggage being carried with the investor on that stock from the past.  I am not giving the reader a hypothetical here.  I am talking about my correct decision to sell CB Richard Ellis and to buy it back at $2.39 and  at $3.49, while some well known fund managers rode it up and then down. 
  I will not classify my purchase of just 100 shares as a mistake when made given the circumstances existing at the time.   I try not to classify a real time decision as a mistake based on future price action as the primary criteria.  Was it a good or bad decision based on what I knew at the time it was made? 

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