Another tough day on Friday -- CME and more on DFR

Market was down 1.6% but the secular value investor's portfolio was down only 1.35% -- another 25bps of outperformance or close to 160 for the quarter and over 300 for the year.

This time AB in a delayed earnings driven boost as well as CME were the standout performers going up on a big down day. In hindsight, CME was the opportunity on Thursday as the stock was down but exchange volumes (i.e. revenues) were soaring. Over the weekend, Barron's had positive comments on CME so its possible the stock will move higher on Monday too.

Is it all over? I have seen some commentary that suggests the market will return to its lows of near 800 -- around a 50% drop and that you should sell now! Its always possible but I believe very unlikely. A fast scary correction designed to get as many investors out of the market as possible so they miss the rebound? you betcha. Right now many investors are afraid and are searching for safety and for liquidity. At some point investors that have liquidity will step forward and offer it to those who want out -- and those that sell will later regret they panic'd. Are we there yet? Hard to say -- my advice as always is to focus on companies and industries and not get so tied up in macro concerns.

That said, I realize now in hindsight I screwed up -- it happens to everyone. I reread a post written a few weeks ago titled "Yeah but what about...." where I tried to address all the concerns being talked about in the market. At one point, I made the comment that I would not want to own high yield bonds right now. That has proven correct as credit spreads have widened -- meaning high yield bonds have lost value. Unfortunately, my ownership of DFR means that I DID OWN high yield bonds in the form of CDO's or CLO's in DFR's portfolio. That stock has dropped hard because of that exposure. What was I thinking? I was too focused on the bullish story with DFR and not on the risks -- or what could go wrong. A mistake I would warn you not to make. This is partly the "value" part of being a secular value investor -- finding situations where the probability of significant upside is far greater than the probability of significant downside is by definition finding value.

I continue to believe there is significant upside in DFR -- a potential $30 stock price in 2-3 years. On the otherhand, it would be foolhardy of me not to recognize that the liquidity issues and widening spreads in high yield bonds translates to a potentially lower probability of that $30 goal being reached. For me its more of a question of position size -- when I bought more recently it was with the goal of making it one of my larger positions because I thought it was one of my best opportunities. In hindsight, I realize I made the position size too big given the risks. If we get a good bounce back in the stock, I may decide to sell those shares I just added as a way of keeping the position size reasonable. All that said, I do not see a reason to panic -- no reason to believe that DFR is about to suffer a permanent loss of capital -- a cyclical one maybe but I believe the stock has value and that its value will hold up even if the market's continue to struggle.