September 25, 2003

Mistakes of Commission

One of the points Robert Miles made in his talk the other night is that Buffett counts two different kinds of mistakes. Mistakes of commission--the thing you did that went wrong, and mistakes of omission--the thing you should have done but didn't. Exhibit A for Mistakes of Commission: the Amex Defense Index (DFI). An Orderly Retreat to 514 Begins On September 3rd, I made the following comment in my weekly e-mail to Strategic Investment subscribers: "from an investment perspective, the large-cap defense stocks have the most to lose from this development. Big dollar Pentagon contracts are the bread and butter of the big 5 defense contractors. Without them, look out below. "AMEX lists a defense index (DFI) that includes all the big names in the industry (Raytheon, Boeing, Lockheed Martin, Northrop, and General Dynamics). DFI is making new 52-week highs on a daily basis in the last week. And it's not far below the high it made in its post 9-11 run up. "I'd look closely at put options. But I would not buy front month contracts. Technically, the index is in the kind of rally you don't want to get in the way of in the short term. But it might make a nice hedge if you have a bullish position in any of the defense stocks I've recommended." My mistake? Not buying the puts. Granted, DFI puts aren't exactly liquid. So it's not a whopper of a mistake. I'm eager for the day when indexes like DFI reach a critical mass of investor interest. By then, we'll have accumulated a precise repertoire of trades to benefit from moves like the one below. And speaking of that move...DFI went up almost 200 points from it's March launching pad to its recent high. If it gives up half that, it could decline, rather quickly, to about 514.50. That's an interesting level. A year ago the index stopped for a breather at around 514 before heading down to its March level of 415. And it paused for breath there in May on its way up to a new high. It could be a natural place for it to test the strength of this bull run.


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