Diary of a Hedgehog: Biggs' Final Words on the Markets

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The hell chart that is so easy to print now tells the story. Hell was from July 7 at 1,356 on the S&P 500 to 1,074 on October 4—a decline of 20% in three months with incredible volatility. There have been worse bear episodes in the spring of 1970, September of 1974, the Crash of 1987, and on some dark days in 2000, but this one really got to me. By late August I was down 9% and committed to not lose more than 10%, so I had reduced my net long to 20%. In the month of September my big contributors to performance were my large short positions in the S&P 500, Brazil, and the DAX index. My large long-standing position in global oil service stocks hurt a lot, as did China.

Perched on the ledge I am haunted by the exquisite, agonizing dilemma of the abyss versus the opportunity. The violent rally of the last few days, particularly the afternoon when the S&P 500 jumped 4.5% in 30 minutes on a Financial Times story, highlights the vicious riptides of sentiment. Nevertheless I’m still inclined to play markets cautiously with a moderate net long. My problem has been that with about half of that net long concentrated in high-conviction positions in Thailand, China, and Indonesia I have been hurt by the manic investors’ panic-selling last weeks of stocks in markets that haven’t gone down yet. Both Thailand and Indonesia had a day last week when the entire market fell 8% to 9%. This kind of action is usually a sign that the end is near.

October 3, 2011

I was in Europe ...