Are You A Real Investor If You Do Not Produce Alpha?

Positive Alpha On 5/24/13

A rare positive alpha day.

Although I’ve admitted to disliking the stock market, there are those rare days when everything goes right and I just love it. Those days are when your shorts go down in an up market, when your longs go up in a down market, your longs go up more during an up market, and your shorts go down more in a sell-off.

Plenty of people proudly proclaim their investment prowess now that the stock markets are back. You’ve got recent college grads who can’t even get an interview at a investment house recommending stock ideas on Motley Fool and Seeking Alpha as freelance writers. Are they confusing journalism with investing?

You’ve got grocery store clerks highlighting their latest stock ideas to customers during check out. Why work at Safeway for $9.25 an hour when you could make more trading stocks full-time?

You’ve got folks who put all their net worth in the stock market and think they’re brilliant because they’ve never seen a bear market having only started four years ago. The best attitude is when asked what if the markets go down? They say they’ll just buy more, as if they have infinite capital and courage.

Even people like me are writing more on the topic of investing while working on a new investment forum. Bubbly bubble perhaps? Probably. At least we’ll focus on short ideas as much as long ideas. A large reason why I’m writing this post is to remind myself not to be delusional in my investing abilities.

It’s very rare to meet someone who has admitted to losing money in the stock market. Perhaps it’s natural to talk about our winners and keep our losers hidden. If you’ve never met anybody who has lost money in the stock market, well let me be your first. I lost about $30,000 in a company called Gastar Exploration (GST) in a span of six months when I kept doubling down thinking gas prices would rebound. Now that was an expensive lesson in commodities trading!

What I do wonder now is whether people are once again being led to slaughter by becoming overconfident in the stock markets. If you start extrapolating 15% a year returns in your portfolio due to the past four years, many of your other assumptions change e.g. age of retirement, rate of savings, spending decisions, and so forth. You might think, “Why work hard and save as much if my investments are going to make me so much money? My $100,000 investment portfolio will turn into $1 million in 10 years!” I recommend everyone run scenario analysis on their portfolios. Be conservative in your assumptions please.

Are people confusing investing with simply the process of saving? When you are mindlessly buying a index fund, mutual fund, or a set list of dividend stocks on a list with every paycheck are you really an investor, especially if you consistently underperform? Let’s discuss.

THE DEFINITION OF ALPHA

The Refinance Window Is Closing: Historical Charts Of The 10-Year Yield

10 Year Yield Chart Over 1 Year

Those who’ve been waiting to refinance for the past 12 months have missed the boat with the US 10-year treasury yield surging to 2.15% as of 5/31/2013 vs. a low of 1.4% in July, 2012. Everything from 5/1 adjustable rate mortgages to 30-year fixed rate mortgages have all moved higher by similar, but not exact magnitudes due to durational differences.

I recommend refinancing as many times as possible if existing rates are at least 0.5% lower and you can break even on the refinance costs within 24 months. Not refinancing due to laziness or fear is quite stupid. It’s interesting to note that the larger your mortgage to refinance, the lower your explicit refinance costs. Given I believe the ideal mortgage amount is $1 million dollars (if you can afford it) for tax purposes, my refinance costs are often “no cost” with fees simply embedded in the new lower rate. There is no free lunch, but it sure feels that way when a bank says do you want a 0.5% lower rate that will cost you nothing out of pocket!

SO WHAT IS A HOMEOWNER SUPPOSED TO DO?

How To Make A Lot Of Money In The Stock Market And Still Feel Like A Loser

Sea turtles on the beach

Slow and steady often wins the race.

On May 5, 2013 I wrote an article called, “Should I Invest In China? A Top Down And Bottoms Up Perspective.” My simple thesis was that with the Yen depreciating to 100+ due to Abenomics coupled with strong world markets, China must inevitably catch up in a risk-on environment. I then identified the Chinese internet space as the most laggard sector where investors should consider putting money to work. Chinese internet stocks have been going straight down for two years. Stock picks included BIDU, SINA, and RENN.

So what happened with the stock picks since then? And more importantly, did I put my money where my mouth is or was I just pontificating like some useless Wall St. research analyst does with Neutral/Hold/Wait And See ratings? I hope you know by now that I don’t like wasting time writing about things I don’t know or care to act upon. Of course I invested in my thesis. I just didn’t invest enough.

Almost like magic, every single name ramped higher by 15-25% within three weeks after publication while the broader markets climbed 2%. It was almost as if someone got a hold of my article and forwarded it around, causing a buying frenzy. If there’s a chance this is true, is there any wonder why hedge funds keep their holdings as close to their chests as possible?

Since publishing my post on China, my IRA grew by roughly $40,000. Sounds OK right? Not really since I started off with $400,000 at the end of April. I will usually take a 10% gain for the full year any day. However, a 10% gain is a 5-15% underperformance of my stock picks, equating to roughly $20,000 to $60,000 in money left on the table.

So what the hell happened to cause such a leakage in performance you ask? Ill-timed accumulation and exiting of positions as well as FEAR. Remember, I am the King of bad trades. The below chart shows the value of my IRA portfolio today. The pending activity is pending cash as a result of $209,913 worth of stock sales as I’m continuously worried about a market correction. I already sold $168,006 worth of stock several days earlier. At the same time, I’m not willing to place massive short bets either because the market is being artificially propped up by the Fed.

Current IRA portfolio.

IRA portfolio 5/22/13

MY IRA PORTFOLIO BEFORE THE BAD TRADES

Why I Dislike Investing In The Stock Market Even In Good Times

Poker table with scattered cards and chipsSell too soon. Buy too early. Sound familiar? Welcome to the club. I am the King of making suboptimal trades due to fear and greed. Whenever I’m about to make a trade, I begin to have delusions thinking I’m smarter than the market. After all, I need to have conviction if I’m going to put tens or hundreds of thousands of dollars to work.

When my bid gets lifted or my offer gets hit, I’ve already made a mistake. Why? Because there are two sides to every trade and in that brief transactional moment the other side is usually always getting the better deal. For example, let’s say you want to sell a stock with a limit at $10 a share. As soon as you sell, the stock will probably move higher with momentum. You start cursing yourself for not holding out a little while longer.

If you’re looking at buying a stock that’s been beaten up, chances are high that if your buy order gets filled the stock will continue to move lower due to an imbalance in sell orders. You then kick yourself for not being a little bit more patient to buyat a more favorable price. You can enter an order way below the existing share price, but nobody will be willing to sell.

If you focus on getting the best price possible when you’re building a position, it’s very easy to get frustrated with the volatility of the markets. If the stock performs well after purchase over the long run, your purchase of the day doesn’t really matter. However, I’m focused on the short run and the long run. A lot of money is made or lost on the initial entry price.

Despite the stock market enabling me to buy my first property by 26, I’m going to highlight why I actually dislike investing in the stock market even if I’m making money. A lot of you folks will respond by saying “that’s why I just buy and hold” which is fine. But those of you who want to go beyond plain index investing and are hooked to fortune hunting like me, this post is for you.

STOCK MARKET INVESTORS / TRADERS BEWARE

The Virtual Currency World Of Investing With Olim Dives

Olim Dives Banner In JordanWhen I first began investing in college with the money I earned from odd jobs in high school, I had no idea what I was doing. Online investing was a new concept back in 1997 and I couldn’t believe I could randomly press some buttons to buy and sell stocks. I was hooked and would purposefully arrange my college classes around market hours to get in some feverish trades.

What took exhaustive summers of working minimum wage jobs to save what little money I had quickly got wiped out making ill-advised trades. One time I bought a software company named Macromedia which I thought was a bank. Another time I bought a graphics chip maker named TDFX at the absolute top. The good thing about only having $3,000 to my name is that the most I could lose is $3,000.

It’s been 17 years since I first made my first trade online, and I’ve developed a much more thorough and systematic approach to investing. During this time, I’ve literally made and lost hundreds of thousands of dollars in the process. When you lose money, you start cursing the world and your stupidity. Just look at all the folks who bought into the Facebook IPO hype at $38, Apple at $700+, and any Chinese internet stock a couple years ago. Oops!

If only I had some type of platform where I could trade with virtual currency as realistically as possible for a couple more years. Maybe, just maybe I wouldn’t have made as many investment errors as I did since college. Maybe I would have been smart and shorted the home builders in 2007. Maybe I would have hedged out my company stock during the crisis to make sure I don’t receive a double whammy of a lower bonus and a lower share price. Who knows for sure. What I do know is that if you plan on investing your own money,do as much due diligence as possible. You won’t know your true risk tolerance until your positions start going the wrong way.

For those of you who are inexperienced investors, I’m pleased to introduce a startup called Olim Dives. Olim Dives means “future wealth and prosperity” in Old Latin and was started by Ben Hubbard and Roshan Vani. Olim Dives is a social investing site which allows users to trade a virtual $100,000 as close to real life as possible. You can also share ideas, compete for prizes, and learn from fellow users in the process as it’s a social investing site. Where was this stock market game when I was growing up?!

A CONVERSATION WITH OLIM DIVES’ FOUNDER, BEN HUBBARD

Main Ways To Use A Financial Advisor For Experienced Investors

Larry Ellison's Mega Yacht Musashi In OahuThe two week vacation to Hawaii was perfect except for one thing. My financial advisor from Citibank failed to call me the day a particular deal was closing as previously discussed. This investment offered between a 15% to 20% guaranteed return on the Dow Jones over four years if the Dow closes above the initial strike price plus any upside beyond the guarantee and a 10% downside buffer. I wanted to know whether the guaranteed return was 15%, 16%, 17%, 18%, 19%, or 20% to determine how much to invest. I already made up my mind that I would lob anywhere between $20,000 – $30,000 into this note.

Instead of getting a call on the day of closing, I get an e-mail two days after the close saying he got his calendars totally mixed up. Sigh. At least give a believable excuse! You know like, “I went binge drinking the night before and called in sick on Monday.”

Tim’s lack of follow up is costing me around $1,000 in paper gains in just a couple of weeks as the Dow has moved from 14,300 to over 15,000 at the moment. As an early retiree, I’m investing all the disposable income I’ve got because I’m looking for capital appreciation and income to help replace my lack of W2 income. Leaving cash in a money market account yielding 0.1% is a financial crime I refuse to commit.

Lesson learned. For those of you who are interested in an upcoming IPO and plan on going away for vacation, put in your IOI (indication of interest) before you leave and stagger your order size depending on the final price. My financial advisor might still forget to input the order, but at least there will be an e-mail trail indicating my IOI, and the firm can fill the order in arrears.

THE MAIN REASONS TO HAVE A FINANCIAL ADVISOR