The Best of Kass

NEW YORK (TheStreet) -- Doug Kass of Seabreeze Partners is known for his accurate stock market calls and keen insights into the economy, which he shares with RealMoney Pro readers in his daily trading diary.

Among his posts this past week, Kass explained what Super Bowl ad spending means for stocks and reviewed the past week's economic indicators.

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Gold, Apple and the U.S. Stock Market
Originally published on Friday, Feb. 15 at 11:05 a.m. EST.
  • Look at the subsequent price drops following gold's high in September 2011 and Apple's high in September 2012.
For those who are of the view that the U.S. stock market feels like it will never decline, I suggest you look at the price of gold in mid-September 2011 and the price of Apple's ( AAPL) shares in late-September 2012.

At those times, investor sentiment was at an extreme.

Now look at the subsequent price drops following those heights.

Position: None


Gold, Apple and the Stock Market (Part Deux)
Originally published on Friday, Feb. 15 at 12:53 p.m. EST.
  • Applying Jim Grant's insight to current conditions.
Let's continue the thread of the last post (above).

When looking at the stock market optimism today, I am reminded of Jim Grant, who once wrote in Minding Mr. Market:

Progress cuts with a manic edge...in bull markets there is no clear demarcation between progress and fantasy...there is little or no permanent truth in financial markets...financial ideas have their seasons...the higher the market, the easier it is to sell but the more disingenuous the sales pitch becomes...and the biblical injunction about the first and the last trading places often has literal truth.

Jim Grant went on: "The country's most admired companies are frequently on their way to becoming the least admired investments."

The same may be said for asset classes like U.S. stocks today compared to gold in 2011 and Apple's ( AAPL) shares in 2012.

Position: None


Practice Your Defense
Originally published on Friday, Feb. 15 at 8:33 a.m. EST.
  • It's not your batting average that counts in investing and trading; it's your defense.
When we met in nineteen thirty-eight, it was November
When I said that I would be his mate, it was December
I reasoned he would be the greatest husband that a girl had ever found
That's what I reasoned
That's what I reasoned
Then April rolled around
Strike three, ball four, walk a run'll tie the score
Yer blind, Ump,
Yer blind, Ump,
Ya mus' be out-a yer mind, Ump!
-- Richard Adler and Jerry Ross. " Six Months out of Every Year," Damn Yankees

This week pitchers and catchers report, as baseball's spring training gets into swing this month.

As I have repeatedly written over the years, the real key to delivering good investment and trading returns is not your offensive ability and swinging for a high batting average; it is importantly about your defense on the field.

Let me explain.

A high batting average and an impressive display at the plate (measured by the number of stocks that rise in your portfolio as measured against your total positions taken) is important, but it is not as significant as many think.

The key to delivering returns is defense, controlling your risk by stopping your losses and, when you are up at the plate, letting your profits run.

When I mention a buy or a short on my diary, it is almost as important as how I manage the position as the actual performance of the stock.

Below are the two basic tenets that provide the foundation to good investment returns:

  1. Let it ride. If I buy Altisource Portfolio Solutions ( ASPS) at $17 a share in late 2009/early 2010 and let it run to over $100 a share, it has an outsized positive impact on my returns. But only if I let it run.
  2. Stop your losses. If I buy Apple ( AAPL) at $625 a share and stop my loss at $605 and don't let the loss expand on the stock's way to $450 a share, this is also a win. I have exhibited discipline, and I have contained my losses.

Now let's try an exercise.

Go over your profit and loss for your 2012 stock trades and investments. Now figure out an attribution of your returns by gains and losses. If your gains are large (no matter how few there are) and your losses (no matter how many there are) are small, you are successfully controlling your portfolio's risk and likely achieving good investment returns.

Please consider this in the future when I discuss that I am buying a stock that fails to appreciate or short an equity that rises in my face.

Position: None


Henry Schein Looks Tarnished
Originally published on Wednesday, Feb. 13 at 12:29 a.m. EST.
  • I am attempting to add to this short position today.
I would deduce from Henry Schein's ( HSIC) fourth-quarter earnings conference call that first-quarter 2013 results will be challenging. If my concerns regarding the consumer are valid, electable dental procedures will be postponed, and the company's second half will be difficult both absolutely and relative to consensus expectations.

I am attempting to add to this short position today.

Henry Schein is a serial acquirer (especially over there), and, as such, Europe's economic woes -- Spain and Italy are particularly weak -- will likely continue to weigh on the company's results. Moreover, favorable U.S. tax policy has expired, which has previously pushed forward equipment sales into 2012.

Trading at 20x trailing results, this consumer-based company seems over priced both for the short term and intermediate term.

Let's go to the tape of the call. (Registration required.)

Position: Short HSIC

At the time of publication, Kass and/or his funds were short HSIC, although holdings can change at any time.

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

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