Thread by @EmmySobieski

June 2000, I profited from the greatest semiconductor short of all time while being mocked by my partners.

Me: " I bet my career this morning."
My friend: "That's nice."

My boss listened and made the trade.
Most thought I was crazy.

First the story, then how I did it...👇

2/

I was hired as the technology analyst at Palantir Capital in November 1999

My boss: I hired you to call the semi cycle. The analyst I just fired got it wrong.

Me (happy I knew what he wanted): OK

3/

I had gotten every semi cycle "right" since 1995.

Buying 1-2 weeks from the bottom
Selling 1-2 weeks before the top.

They said it couldn't be done, but that's what I did.

How? Trust Systems at moments of high emotions.

4/

November 1999 - I join Palantir

Feb 2000 - I'm in Taiwan - see a stat - 80% of the semis needed for the YEAR have already been made (with 10 months to go) SCARY

April 2000 - industry bookings start to decline, semis dip 30%

I recommend buying more

My boss resists.

5/

I hit him with data points every day.

•Bookings decline isn't correlated with stocks
•Strong earnings coming, still more to run
•Factories strong, lead times increase

April 2000, he buys the dip. It works, stocks go to all-time highs.

6/

June 19, 2000 - I'm on a bus tour visiting companies in Texas

•Over 2 days all 5 metrics I look for in a top hit at once.
•I normally sell with 3 of 5. 5 of 5? Unprecedented.
•My days as a quiet analyst were over.

Me to my friend: "I bet my career this morning"

7/

On our fund's morning investment call, I say:

•All 5 of my metrics have hit at once.
•While we normally keep our quality names, nothing will survive.
•We should sell all $1 billion of semi stocks and short $1B, for a $2B swing

These stocks were rising 2% every day!

8/

My boss makes the trade.

We went from $1B long to $1B short, selling into strength, over 5 days.

My two partners call me: "Your bet will destroy our firm."

Two weeks pass. July 5, 2000, a top broker downgrades the semis.

He receives death threats and hires bodyguards

9/

Mid-July 2000, semiconductor earnings start coming in

•Earnings are very strong.
•I want to hide under my desk.
•Forward guidance is shared on the calls...

Guidance is terrible. They saw what I saw.

Stocks gap down 30%, making us 50% profits in one month.

10/

Over the next two years, semis went down over 80%, making us 4X on our shorts.

So Steve Cohen of SAC Capital interviews me for a job...

Spring 2003, the famous hedge fund boss Steve Cohen interviews me

•I told him about my system
•Steve: It's too simple, it'll be beaten.
•Me: Systems win at tops and bottoms.

Investors get overwhelmed by emotions, abandoning systems, while I still have mine.

The market is a mass psychological voting machine

•Crowds rule
•Patterns exist
•Emotions drive

And turns are counter-intuitive

I looked for and consistently found turns in the semiconductor market

Tops:
•Commodity pricing (often 4X normal)
•Double ordering - Book to bill 1.3+
•Factories at full capacity

Demand exceeding supply blurs all signals. No way to tell what's real.

Bottoms:

•Mass cancelations - Book to bill gaps down
•No one wants to own semi stocks
•Slight uptick in orders

Once all orders are canceled, the slate is wiped clean.

Bookings for parts start improving the "optics" of orders.

Then people order out of FOMO. 🚀

I have seen this happen at the bottom many times.

•Go to a conference, zero orders on the books. Canceled.
•Someone orders parts for factory maintenance.
•Rumors start that the book to bill is improving.
•No one wants to get behind someone else.

FOMO begins

TL:DR

Calling turns is dangerous work.

Emotions beat systems in bull markets - momentum carries the day.

Systems beat emotions at the turns, where emotions blind us.

Find your systems and train your eye on which market you are in.

I write on how you can use 360-degree listening to improve your health, wealth, and happiness.

twitter.com/EmmySobieski