In late 2006 and early 2007 I payed a dear price for a very important lesson. The market was going up in a straight line and overbought and extreme sentiment did not matter. We were in the middle of an LBO and stock buyback boom where nearly every week had new announcements of LBOs and buybacks.
I was certain that the real estate boom would turn to bust but I failed to appreciate that when there was well over $10 billion a week being injected to the market via buybacks and LBOs the market was going to go up. I was nicked pretty badly and was having second thoughts about if I were any good at investing.
Two lessons emerged from this experience for me. The first was that one cannot be so focused on the long term as to ignore what is in front of them. The second was that LBO activity, cash M&A and buybacks are very bullish for the market in the short run. Eventually, I bought LEAP SPY Puts with the VIX at 10 figuring that they gave enough time for my thesis to play out. That turned out to be my personal Greatest Trade Ever. That trade recovered my losses and soon after I had enough money to trade full time.
The reason I bring up this story now is that we learned that Seagate received a bid yesterday from private equity groups. Earlier in the week Pfizer announced a deal to buy King Pharmaceuticals. Deal making is clearly heating up as is buyback activity. We are nowhere near the point where we were in the heyday but this is worth monitoring and will likely have me taking profits very quickly on the short side.