My stop order to sell PXRE Group (PXT) at $16.91 executed quickly this morning. I am now completely out of the position at an 11% loss.
This is not something that happens very often around here and not something that I enjoy seeing. I usually buy investments on the cheap when I feel confident that even if they go a little lower, we’re safe. I didn’t feel that way this time.
The reinsurance business should have been fine taking care of Katrina. That’s what I was looking at when I analyzed the stock and decided that the market had overreacted in its selling. Then Tropical Storm Rita turned into Hurricane Rita and started heading toward the same already-devastated areas. This sent the street into a whirlwind of selling around reinsurance stocks. Then the Fed raised rates for the eleventh time when many were hoping that it would give the economy a break in the aftermath of Katrina. Then the oil refineries shut down again and oil prices rose again. Then Rita strengthened and is now heading straight for the much-headlined coast covered by PXRE Group, among other insurers.
In other words, the storm became a perfect storm for this stock and too dangerous for my tastes. I took the quick 11% loss and will find somewhere else to make that loss back for you.
Where the market taketh away, it also giveth. To that end, we can derive some comfort in watching several positions on my buy list coming closer to our targets. I hope that we have a chance to pick up some cheap stocks that will rebound nicely over the fall and winter months.
Too, we have already picked up good stocks on the cheap and I’m not worried about them. For instance, is down to $44.50 from The Kelly Letter’s buy price of $45. I’m not the slightest bit worried about that position. Same with , down to $24.25 from our buy price of $25. These are healthy companies temporarily depressed in a falling market. When things turn around, so will they.
I am keenly aware of the trust you have placed in me to find profitable places for your money. This small setback does not change the way I find investments nor the way I manage trades. It’s a consequence of seeking profits in a volatile market, but one that I will nonetheless examine to find lessons for the future. In this case, I think that I would have done well to let the dust settle a little more after the hurricane before looking for places to invest. I was eager to get cheap prices quickly and in this case moved too quickly. While moving quickly has served me well occasionally in the past, this was not one of those times.
Moreover, PXRE Group was so affected by external events that my ability to gauge the stock’s prospects was largely happening in the dark. I could analyze valuation ratios and business strength, but I could not analyze the weather. That was a factor beyond my control, but it clearly affected the stock far more than its earnings outlook. Unlike Bob Dylan, I do need a weatherman to know which way the wind blows. Unfortunately, the weathermen didn’t know either. Hoping that the wind blows a certain direction is not an investment strategy. It’s a coin toss, a pure speculation. I did not intend for PXRE to be a speculative play, but in retrospect that’s what it became.
Those of you who have read The Neatest Little Guide to Stock Market Investing will recognize this discussion as coming directly from my Reasons And Limits Worksheet. A main reason for buying PXRE was that I thought the street greatly overestimated the costs of Hurricane Katrina and that reinsurers would emerge far healthier than investors expected. When Rita entered the scene, that reason dissipated as an unexpected layer of costs became possible. Add to that the fact that my Stocks To Watch list is filled with good companies getting cheap and NOT facing external circumstances, and all the factors were in place to cut losses on PXRE.
Now, keep in mind that PXRE is a solid company. There’s a chance that it’ll keep falling right down into a ridiculously cheap price range. If so, I’ll consider buying again. On the flip side, if it rebounds strongly in the short term after we locked in an unnecessary loss, there will be no need to feel bad. The prudent move here was to stop the losses.
That was our own form of insurance. Sometimes, though we’re hard pressed to remember it now, insurance is not claimed.
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