EXCERPT: Diary Of a Hedge Fund Manager

Among the signals, Penney and my other analysts were seeing falling gasoline prices, which were significantly boosting household disposable income, allowing for more spending toward discretionary categories. Some other leading indicators suggested that things might be bottoming, including retail sales, a move in copper prices and the news from the early cycle technology names.

Not to be outdone by my colleague—we were all on the same team and on the same page—I followed up Penney’s pinch-hit morning note with one of my own, on March 9, and it was called “The Great Recession.” It began:

"Now that CNBC is running segments titled “Recession or Depression,” and Bloomberg’s No. 1 “Exclusive” story this morning is titled “Depression Dynamic Takes Hold,” what more evidence do we need?"

I gave readers my latest move—as the U.S. stock market hit new lows on the prior Friday, I had started buying U.S. equities more aggressively. I had taken our Asset Allocation Model Portfolio to 24 percent in U.S. equities, and took down my cash position from 70 percent to 58 percent.

As I did, I noticed my inbox was being flooded by the same people who mocked me when I was short Goldman prior to the crash and who were now laughing at me for being long Goldman. One reason I was recommending buying U.S. stocks was because I didn’t have a boss telling me I couldn’t. I ended the note that day saying that the market was close to three standard deviations oversold."

The day my “Great Recession” note was published, the S&P 500 bottomed at 676.

Over the next three weeks it would rally to north of 800, a nearly 40 percent move. Untold numbers of Depressionista hedge funds which were short the market got squeezed royally. This was one of the greatest single squeezes since the era of Jesse Livermore.

Hedge funds that missed one of the biggest down moves of all time had now missed one of the greatest up moves ever, and worse, many of them had been short. Hedge funds, conceived as vehicles to make profits in any kind of market, had once again chased the consensus, using a one-factor model, momentum, copying each other’s ideas.

At Research Edge, we stayed focused on our proactive process. By April, we had 30 long ideas and just 8 shorts, which reflected a view that the rebound in the stock market still had some legs in the immediate term. But longer term, I was spotting a dollar crisis on the horizon. In May, we began to proactively worry about a crash of the U.S. dollar, and we turned a bit bearish, perhaps too early.

Michael Jordan has famously pointed out that he missed more than 9,000 shots in his career and that 26 times he missed game winning shots. "I've failed over and over and over again in my life," Jordan said.

“And that is why I succeed.”

As for what was next, all I could do was keep at my process, keep enhancing it, and keep making calls every day. I’m bound to get some wrong.

But at least I’ll be taking the shots, ones the consensus isn’t allowed to take.