Lessons From WCI’s Bankrupcy
I just found out from The Declining Market that Florida luxury Condo builder, WCI Communities filed Chapter 11.
Over a year ago I shorted the stock at $17. Then that jackass Carl Icahn went and put in a bid to buy the company at $22.50 a share, in order to “unlock the hidden value” of WCI’s assets. That’s when I closed my position at a loss. Apparently, there is no hidden value in the assets and WCI’s stock is now completely worthless!
Sadly, I didn’t have the fortitude or the conviction to hold my position and I cried uncle at the first sign of trouble. That same scenario was repeated when I shorted Countrywide last April. The stock went up 10% and I closed my short position. Then it went straight down!
Right now, I’m short Capital One Financial (COF). But instead of entering my position fully, I decided to venture in slowly and buy more if it goes up. I’ve entered a 50% position so far and I’m hoping it goes higher so I can short at a higher price.
I’m convinced that if people can’t pay their mortgages, then they’re sure not going to be paying the credit cards. However, there’s a chance I might be early, so I should be willing to set a wider stop-loss and be willing to hold my position for 6 months.
On my short positions, I usually set a 10% stop loss, because there is an inherent bullishness to stock prices. This bullishness does not come from my expectation of a continued rise the profitability of stocks, but rather due to inflation. Inflation causes price increases, which leads to slightly higher profits, which leads to slightly higher stocks prices!
One lesson we should all take from WCI’s bankruptcy is that even rich people make mistakes. Carl Icahn was wrong about WCI - there simply wasn’t an value to be had from its assets. Billionaire Jerry Lewis also made a mistake in buying a large chunk of Bear Stearns early this year at nearly $80/share. I was soon sold for only a couple of bucks a share to J P Morgan.
Don’t blindly buy a stock just because some famous investor is buying it!
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August 6th, 2008 at 9:11 am
One alternative that worked for me during the huge sell off in financials was shorting the XLF, or buying an ultrashort (for double the action) like the SKF or UYG. This prevents any company specific news from killing my short position.
I would be very cautious w/ shorting financials at this time due to the falling cost of oil, and the overall beating they have taken in the last year. Sectors beaten down this badly have a pay of rebounding quickly.
August 6th, 2008 at 10:39 am
I am sitting on sirius stock that I kept thinking would go up with a merger, little did I know. I also have odd feelings about Carl Icahn. He generally goes in busts up companies and milks out everything he can. It is really hard to invest around that type of investing. I think Buffet is the one that is pretty solid. Pickens is an oil man, but I am not sure I would bet against him or his future investments.