Portfolio management: lessons learned from Lehman collapse

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I have NOT added any new money to my brokrage account since Sept 15 2008 Lehman Brothers collapse, so it’s easier to calculate the performance of my portfolio (+25%, from Sept 30 2009 to today Sept 14 2009), and compare to benchmark (S&P -16.75%, from Sept 15 2008 to Sept 14 2009). We can not predict catastropic events, if we really want to predict future or talk about any lessons for industry, I think one thing is clear:

one either becomes too big to fail (like AIG), or becomes the first to fail (like Bear Stearns), the last thing one wants to be is being No. 4 investment bank, leverage heavily and caught in the financial and political turmoil. We all know the day before Lehman fall, Merril Lynch (No. 3 investment bank) got bought by B of A, and shortly after that No. 1 Goldman and No. 2 Morgan Stanely converted into bank holding company.

For me personally, I can think of the following.

1) Always have some cash (liquidity). I was “all in” long stock positions on Sept 30 2008. Now I don’t. I like to have 15% cash most of the time;

2) Learn the rules before I play. I was not very clear of the FDIC rules when to take over banks (or S&L/thrift). I bet some money on Washington Mutual shortly after Lehman event, hoping for a miracle, and I sold it a week later for a nearly total loss;

3) Tax and transaction fees are secondary compared to profit/loss. Some “buy and hold” proponents, primarily money management industry, like to sing this song all the time, touting Buffett’s “buy and hold”, to me this is mostly crap. “Buy and hold” is meaningful for real long term investments (401k), and for index fund (passive investment). Some implied attitude from “buy and hold” such as “patience” is useful. But this does not mean we should “buy and hold” when the market is going down rapidly. For speculative accounts, we should trade in the market to minimize the cost of positions. So that we can really “hold” (because our cost becomes lower);

4) How to play the recovery. It seems to me the market is in the recovery mode now that credit market has been stablized. Economy will take a while to recover, the consumers will never be the same, the job market has not started adding jobs, but the general sentiment is becoming better. On the other hand, note the Insiders sell like there’s no tomorrow. We should be vigilant but I decided to climb out of bunker and be more aggressive, bought some stocks like Huntsman (NYSE:HUN), and Emdeon (NYSE:EM). I think those position itself well in the global recovery and US healthcare need (reform or not, aging population means more healthcare need).

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