The Curious Investor

As you can see, the month of December was rather disappointing for me personally and it was the result of a few investments that resulted in some powerful lessons for me. When in November, my returns were near 30% and well above the returns of major market indices, December saw a mean reversion of my portfolio that resulted in a year-end return of 16.3% that brought my returns in line with the Dow Jones, just above the NASDAQ composite index, and 2 percentage points below the S&P 500. While anyone should be happy with 16% returns, in a year where the market does as well as it has, this represents to me a rather disappointing result.

Stock choices which I learned the most on were more often than not the ones which I lost money on. Overall, I picked near 70% winners this year (stocks whose price rose in the time period that I owned them) and I know that given the frequency of my picks, this is not necessarily sustainable. The key to future success will be finding stocks which will provide significant price appreciation (15%+ as opposed to the 5-10% I make on most of my successful picks) and sticking to a very disciplined stop loss policy (which I set to 8% of the buying price).

Specific trades I look at as areas where I could have performed better were in the buying and subsequent selling of Chipotle Mexican Grill (CMG) and Old Dominion Freight Lines (ODFL), my March and April picks of Amdoc (DOX) and Concur Technologies (CNQR), and the December disaster of picking Nucor Corp. (NUE). With respects to Chipotle, this was an impulse buy at its worst. The only reason I had for buying it was that I was excited over buying the IPO of my favorite burrito chain in New York City (if you read my personal blog you’ll realize I’m a big foodie). Having no idea of the company’s actual valuation and very little technicals to go on, I held the stock for just over a month and sold thinking I had made a mistake. The stock ended up soaring but this was not the point. The point was that I made a choice without any real idea of what I was getting into and thus could not make further educated choices on when to buy or sell. Old Dominion taught me a lesson about taking in gains. After the stock stormed up 25% in just over 2 months, August trouble in the Middle East sent the stock plummeting. I held on telling myself, “Don’t worry you’ll at least be able to get back to the 25%.” The stock never recovered and I ended up selling for no gain. From now on, I am going to make sure to establish regular stop loss points as the value of my stocks increase (it would have helped to understand Parabolic SAR in August!). My purchases of Concur and Amdoc in March and April were during periods of time where the stock market was not doing overly well and was not necessarily providing many great breakouts. I should have been happy to hold onto cash and look for the right fit, but instead made gambles on stocks with questionable technicals. It seems after looking at my December results, I did not learn my lesson. For those of you that are short term traders/investors like I am, BE CONTENT TO HOLD ONTO CASH! Finally, the pick of Nucor that resulted just days later in a huge loss for me still leaves a bad taste in my mouth. The company’s stock had been hot but I failed to realize this was the result of merger speculation as opposed to actually strong business. Some further time spent researching the company would have been a much better investment of my time and money especially given that Nucor turned out to be a rather highly covered company. Once again, my rush to put my money back in play after selling two very strong picks (Coach and Rogers Corp.) resulted in a rather poor stock choice.

Surprisingly, I made almost as much (15.6%) in the last six months with Portfolio B (in percentage return) as I did the whole year with Portfolio A. I beat the NASDAQ and Dow Jones (both with returns of 11% since July) but fell short of the S&P500 (16.4% in the same time period). I am happier with this portfolios performance, though a closer look shows that there is still much refining that I need to do with my strategy so as to continue to reap consistent returns (and hopefully to be the S&P500 which is my gold standard as far as performance goes).

The biggest chunk of the gains I made in portfolio B was in a rather lucky decision to hold onto Apple Computers (AAPL) when I inherited the portfolio from my friend. In the following three weeks, the stock price stormed up 25% (and would continue to go further though I decided to lock in gains) as a result of a flurry of new product releases and some favorable sales reports. From then on, the portfolio never outpaced the market and the portfolio, like my other one, seemed to suffer a disproportionately bad December compared to the rest of the market. There aren’t really any picks here that I am overly disappointed with. I started with a rather aggressive approach picking West Pharmaceuticals, Gildan Apparel, and Wesco International as companies in the later part of strong basing/consolidation periods and poised to break out. I made good returns on two of three of the picks and Portfolio B reached a high water mark of around $2100 in mid-November. At this point, I felt that the market as a whole was severely overbought and really believed the alarmists announcing that a December market correction was imminent. It turned out I was wrong about the correction, but I had already bought more conservative stocks Southwest Airlines (LUV) and Tiffany’s (TIF) which represented stocks of strong brands that had been battered as a result of recent consumer sentiment. Both stocks have tread water over the last month, but I do remain optimistic about holding them in the longer term.  It would seem to me that unless a  “can’t miss” stock (based on technicals or otherwise) were to jump onto my radar screen or one of these stocks decides to tank, I am going to have to take a long term approach to this portfolio for the next 3 to 6 months.

So, what could I have done better this year? (And, these will constitute my investing “resolutions” for the New Year.)

1. Stick to my investment strategies. Disciplined investing is the key to consistent performance. I need to make sure that I buy stocks that match my criteria exactly (3 month+ long basing periods and strong breakouts and companies with strong brands trading at a discount). I should be content to hold cash while I look for these companies as opposed to driven by a desire to constantly be fully invested.

2. Improve my market timing with regards to selling. With several of my picks, I could have significantly improved returns had I sold at appropriate times. For Old Dominion, I should have realized when the week of correction did not climb back passed its peak price that things were not going to go well. (Diversion principle which you can read about in the RSI tutorial.) For Garmin, given that my price target was higher than the price which I sold at, I should have waited to see that the hit to its stock in late March was merely a hiccup on its road to significantly beating even my initial valuation of the stock.

While my strategy of momentum/technical investing has yielded regular positive returns, it seems that the big returns come from being able to find price bottoms and ride all the way to the breakout and beyond. I think that with a better understanding of value and an application of the market timing skills offered through technical investing, I should be able to further improve returns on my portfolios.