A Contrarian Changes His Ways

 | Oct 24, 2013 | 2:00 PM EDT
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Late last week, I bought SolarCity (SCTY). Until recently, I hadn't bought very many stocks like SolarCity in my life. 

I was born a contrarian and value investor. My first-ever trade, in 1999, in my newly-opened Ameritrade account seeded with a few thousand bucks, was to buy shares of Philip Morris (PM) right before the conclusion of the Engle case. I paid $19 and change for it, just about the all-time low. The end of that trade is much less interesting -- I sold the $25 strike calls against it and watched helplessly as it got called away and subsequently went 10x.

It was the tech stock bubble. You'd think I would have been buying Internet stocks. Au contraire, I was shorting them. Quite unsuccessfully. And sometimes my contrarian streak bordered on suicidal, when I bought Owens Corning right before the bankruptcy. If there was one thing I hated, it was doing what everyone else was doing.

Over time, over a long period of time, I outgrew that mentality. As it turns out, there is more money to be made doing what everyone else is doing. It's inherently risky, but there's more upside. Bull market or bear market, there are always stocks like SolarCity.

Remember Taser International (TASR) back in 2003-2004? I was trading index arbitrage for Lehman Brothers at the time. I was legitimately a professional investor, and I wouldn't have bought Taser with your money. I thought it was a stupid retail momentum stock. All of us did. But a lot of people got rich off Taser, and I made zero dollars from being scornful of them.

In my current occupation, I am pretty plugged in to professional investor sentiment. After the massive Netflix (NFLX) intraday reversal and the subsequent poor performance of some of the momentum stocks (such as SolarCity), the professional community is busy battening down the hatches. But it doesn't take much to make them nervous. That's to be expected -- as professionals, they are always worried about the downside and are easily shaken out of trends.

In the world of retail investing, active traders have squared up positions in the momentum names, but a lot of investing (and life) is about being in the right place at the right time and really believing in the long-term prospects of a company. I believe in SolarCity's business model, and more importantly, I believe in its chairman, Elon Musk.

Yet, at the end of the day, we are all traders. Can we sustain a drawdown from $55 to $35 if we think it is going to go to $105? Or do we have confidence in our ability to trade around it, to buy it back lower? I don't. You can't be in the right place at the right time if you aren't any place at any time. Nobody scalps his way to riches, at least not anymore. If a name like SolarCity is a core position, then the problem becomes how to sustain or manage the drawdown, rather than avoid it.

It is worth pointing out that Mark Zuckerberg is still long Facebook (FB) from that night he started it in his dorm room, many years ago. Probably the only stock he sold was for PR purposes, to give $100 million to Newark city schools. That's strong hands. That's staying power. It's also worth pointing out that Warren Buffett hasn't traded around any of his positions. He still owns them all.

I've had quite enough of calling tops and catching falling knives, and I have found much more success as an investor doing more of what works and less of what doesn't. The last two days have been an absolute orgy of top-calling. Thirteen and a half years ago, it was worse -- and nobody got it right. The trend is your friend until there is incontrovertible evidence that the trend has been broken. The price action is less than ideal, but to me, so far, it looks like noise.

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