Let's use this up opening off the Europe deal as a microcosm, an incident that explains much of what happens in the stock market today.
First, a proposition. Let's say I was a bear going into the EU drama session last night, a bear meaning that my book was net short, classically meaning that I make money if the market goes down and expect to lose if it goes higher.
If I wanted to be honest with myself -- and believe it or not, that's not always easy for a hedge fund manager -- I needed to see a total collapse of the talks. That was the home run. That's where I would have distinguished myself among my peers. That's what I would have told my staff I was betting on.
The "collapse" did not come about. So, intellectually, I was WRONG.
Unfortunately, saying you are wrong out loud is considered a colossal sin. I know this. Believe me, if I NEVER admitted I was wrong I would be chastised and pilloried much less than I am. But if someone admits he is wrong, the critics say, "Even he admits he is wrong," and then they blanket everything with that self-assessment.
In reality, though, of course, it was a wrong bet. Consider it in sports: You bet run, they passed, they got a touchdown.
So, what do you do if you can't say you are wrong -- and what do you tell your staff? Two different things. Publicly, you do what I saw some manager on Bloomberg do this morning: He spewed the negative litany:
- Not enough money. We were looking for 2 trillion euro; we got 1 trillion.
- The devil is in the details, and we don't have the details.
- Fifty percent haircut means 120% of GDP for Greek bonds, which is still wildly unrealistic.
- It is just a plan for a plan, and that means nothing.
Here's the rough part of that analysis. It could conceivably be right. It might actually be the case. But today at the opening at least, you are going to have a gigantic loss while the long-only funds are going to have a gigantic gain, so it is truly intellectual sour grapes.
However, you have to stick to your story or look like a total buffoon.
Nevertheless, let's just distinguish for the moment between good investing and bad investing. A good investor should have placed a bet that some deal would go through, and he's in a place now to reach the conclusions that it isn't enough, and he can start selling into today's rally.
In fact, a great investor would be someone who didn't believe for a minute that a deal could be reached of any real gravity, but bet that the market would love any deal with a trillion-euro fund, and that was well within the probabilities. That fund manager would be 200% long going into the close. He would then take off half that long at the opening and then, throughout the day, work his way toward a more market-neutral position if the market keeps climbing.
Ideally, it would be terrific to be about 50% long at the end of the day if the market ends up 2%-3% higher.
That's how it would be if you got it right.
Frankly -- and let's be really brutal about it -- if you weren't hugely long going into today, you missed a big one ... and I would rather hear from someone else.