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 why he's in the same Apple basket as David Einhorn, discussed Dennis Gartman's recent "all-out" investment call, and reiterated his explanation of the importance of good defense in investing.

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Einhorn on Apple
Originally published on Friday, Feb. 22 at 12:49 p.m. EST.
  • His analysis and the potential unlocking of value are some reasons why I took a long rental in the shares.

Here are the slides and this week's presentation by Greenlight's David Einhorn on Apple ( AAPL).

Every shareholder and prospective shareholder should read David's rationale for the iPrefs.

This analysis and potential unlocking of value (vis-a-vis some more traditional techniques) are some reasons why I took a long rental in the shares.

At the time of publication, Kass was long AAPL.


Gartman Says That the Game Has Changed
Originally published on Friday, Feb. 22 at 12:02 p.m. EST.
  • Time will tell whether Dennis' move from "all in" to "all out" will prove prescient.
Yes, today I changed my opinion on stocks. I had been relentlessly bullish since last October. I continued to be bullish in November. I continued to be bullish in December. I bought the gap up in January.... And after yesterday's movement, it had very little to do with what the Fed had to say because markets were moving way before the market moved down. The copper market was speaking to me. Sequestration was speaking to me. And at the end of the day, we had reversals in all the indices.... Cash is not a bad thing to be hold. I think this could be a very serious correction, at least 7%, and I'm not one to sit for 7% corrections.
-- Dennis Gartman on CNBC's " Fast Money Halftime Report"

Sir Dennis Gartman has been taking some flack today for his "all out" call on CNBC yesterday. ( Here is the video of his appearance.)

Time will tell whether Dennis' move from "all in" to "all out" will prove to be prescient.

But there is a lesson to Dennis' call for all of us: There are many ways to skin the (market's) cat.

As most recognize by now, I view most technical analysis as voodoo. Fundamentals dominate my investment process, followed (to a far lesser degree) by valuation and sentiment input.

Although Dennis' technical approach to the markets (that the tape's action tells a tale and should be heeded, sometimes even posthaste) is markedly different than my fundamental approach, what we do know is that Dennis holds rigidly to his trading process -- and adhering consistently to a trading or investment process is a good lesson for all investors and traders.

Dennis' approach to trading reminds me of Jesse Livermore's wonderful quote in Reminiscences of a Stock Operator:
I did precisely the wrong thing. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out. Of all the speculative blunders there are few greater than trying to average a losing game. Always sell what shows you a loss and keep what shows you a profit.

Indeed, while Dennis is technically inspired and I am fundamentally inspired, letting profits run and stopping out losses is the essence of a recent column I wrote, "Practice Your Defense."

Stay tuned in the weeks ahead to see if Dennis' "all out" call is the correct one!

Meanwhile, stick to your investment/trading knitting, and don't drift in style.

At the time of publication, Kass had no positions in securities mentioned.


Defense Drill
Originally published on Thursday, Feb. 21 at 10:49 a.m. EST.
  • Remember: It's not your batting average that counts in investing and trading; it's your defense.

Back about a week ago, on Feb. 13, I wrote a column entitled "Practice Your Defense" in which I highlighted that "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."

This is a very important message and has been the principal subject in the comments section this morning.

It is such a valuable survival technique and means for delivering superior investment returns -- that I wanted to repeat the post in its entirety:
When we met in nineteen thirty-eight, it was NovemberWhen I said that I would be his mate, it was DecemberI reasoned he would be the greatest husband that a girl had ever foundThat's what I reasonedThat's what I reasonedThen April rolled around
Strike three, ball four, walk a run'll tie the scoreYer 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.

At the time of publication, Kass had no positions in stocks mentioned.

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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