The Curious Investor

Well, it’s been a while since I last posted due to some power outages from the recent storm here in Massachusetts as well as a week long ski trip. Given the horrible sell off we’ve seen over the last few weeks, it seems almost unnecessary to go into the trades made over the last year as the gains have largely been erased in just two weeks. It’s a trying time to be an investor. But, we all must trudge on. Hopefully, some analysis of the past will give us an idea of what to do going forward. So, let’s go over some of the best and worst trades made in Portfolio A over the last year as well as a guidance of where I think I’ll be going in the future. The percentage gain or loss on the positions that I will discuss here are based on the end of December 2007. As you can imagine, given the events of the last two weeks, the gains are likely lower in actuality.

The Good

China Mobile (CHL, 82.5% gain) - I found this stock as I was doing a screen of Chinese ADRs. While almost all Chinese stocks at the time had pretty impressive technical momentum, I was trying to find a company which I thought had strong competitive advantages and could withstand the test of an impending bubble especially given the fact that I believed that the Chinese markets were reaching a peak. The stock outperformed even my rosiest projections and at one point delivered my first ever double. Unfortunately, it is down 20% from its $100+ highs and, in fact, has fallen badly today to $78. This is worrisome as it violates what was looking like an intermediate term base. I held onto this stock because the current tumultuousness in the markets led me to believe that it would be difficult to find other technical winners for this actively traded portfolio. It would seem that the technicals are beginning to fall apart and I will be looking to sell this stock in the near future. I will not today simply because of a personal aversion to selling into market sell-offs.

Google (GOOG, 31% gain), Apple (AAPL, 32% gain) - In just three months, my plays on Google and Apple after the August sell-off reaped truly impressive return. The idea was simple for both. The companies stocks were punished unfairly due to market volatility and I believed that impending earnings reports would restore faith in both companies performance and stock price. Once again, it seems that I may have held a bit long. Here in January, the two stocks have fallen off of their bull runs. Apple’s stock is teetering on the brink of breaking its intermediate term uptrend while Google’s is teetering on signaling a double top. I may be liquidating one or both of these positions very soon. Though, recent news on Apple’s strong showing in computer sales over the holidays has me holding out for one more earnings report.

Humana (HUM, 5.3% gain) - A stock I bought based on my earnings breakout theory. It turned out that my anticipation was correct, but unfortunately other external events prevented Humana from holding onto its earnings report gains. Humana, a health insurer, makes much of its money off of its Medicare Advantage program. Stellar earnings triggered immense debate over whether or not a company could ethically make such outsized profits on a government program. Technicals lead me to believe that the market was merely mulling over this controversy and Humana’s stock was building a slight handle formation after its very long cup/saucer looking base. My patience was rewarded as Humana’s gains in the past two weeks have brought the gain on the position up to 21% and have helped to soothe some of the pains I’ve felt in other positions.

The Bad

Cosi (COSI, 22.4% loss) - Here’s a trading position that I allowed to turn into a long term position in direct violation of my sell discipline. After reading rosy projections on the company’s decision to switch to a franchise model and enjoying a few Cosi sandwiches at a packed Cosi location in New York, I convinced myself that this company was on the verge of untold success. I fell in love with the position and, after a poor earnings report erased minimal gains, I held on convinced that the stock would turn around.

Proshares Ultrashort QQQ (QID, 10.9% loss) - After the February 28th sell-off, I freaked. Rather than go to cash and wait, I wanted to regain my losses from the sell off and quickly made bets without enough research or thought. Reading a lot about the potential for a bear market, I made a bet that either tech or financials would lead the market down. I made this bet in both portfolio A and portfolio B and it turns out I picked absolutely the wrong industry here. Techs ended up leading the recovery. The position dropped 10% in just two weeks as the market recovered quickly and I sold the position quickly. But, not without paying a heavy price for my over trading.

Piper Jaffray (PJC, 18.4% loss) - Piper Jaffray is a middle market investment bank that I bought as markets recovered and M&A activity began to rev up again. The company positioned itself beautifully for  being taken out by selling off its asset management division and keeping large amounts of cash on its books. After Wachovia bought AG Edwards, Piper’s stock hit 52-week highs. The technicals looked beautiful, but my inexperience clouded my judgment. While my MO is typically to allow an uptrend to run and wait for a clear turn around, this was not the right situation. The Piper uptrend was based on transient speculation and, having gotten that right, I should have sold right then and there rather than hope for an actual buy out to materialize.

Lessons Learned

Well, as you can tell, this year was marked by several very poor decisions and a few very good ones. I’ve highlighted 7  here and all told I took 10 positions over the course of the year. In the end, I made money on only 4 of the positions, though all of the picks were up within 30-60 days of buying the stock. So, what went wrong? Well, my technical strategies were correct but my sell discipline was lacking. I had an aversion to holding cash through tough times and a bad habit of selling irrationally into sell-offs.

It would seem that this habit may have continued this year as I’ve waited quite a while to liquidate some of the positions I hold in Portfolio A. But, I do have an underlying reason for this and that is because the companies I hold now are of decidedly higher quality than those which I owned earlier this year. Not having enough money in the account to open a margin account and begin shorting, I will likely begin selling and moving towards cash if this market disruption continues.

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