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.
MY IRA PORTFOLIO BEFORE THE BAD TRADES
You might be thinking I’m being greedy for being disappointed with a $40,000 gain within a month. And you’re right. I have made similar amounts of money trading in the past so $40,000 is not that unusual, even in this short time period. It’s all relative at the end of the day.
What really gets to me is leaving so much money on the table. With $20,000 – $60,000 I could go around the world on a luxury cruise for three months. I could get 13 year old Moose some fresh new tires and spark plugs. If I wanted to cheat on Moose, I could get a nice new 2013 Nissan Sentra for $20,000 or wait to get the 2014 BMW 335i couple coming out this fall for $60,000. I could even treat myself to some fresh ramen noodles instead of always buying the $2 instant stuff I’ve been eating as punishment for being unemployed.
Here’s another kick in the nuts. My portfolio was over $450,000 just a couple weeks ago! The high was actually closer to $455,000 but I failed to take a snapshot that one fine day. The fact that the markets have moved up over the past two weeks while I proceeded to lose ~$15,000 from the top is maddening. As you can tell from my positions, I take very concentrated positions with Apple at one point accounting for $178,366 or 40% of my entire portfolio.
SO WHAT THE HELL HAPPENED?
So what on earth made me bleed $15,000 of profits in a couple weeks? I want to share with you in as visceral a writing style as possible an inside look on how a neurotic trader’s mind works.
* Apple scared me stupid. Apple has had quite a rebound after hitting a low of $385 before announcing their 2Q results. I went relatively huge in Apple in the low 400s by buying around $160,000 worth of stock. When the stock was at $457 as you can see in the chart above, I was thinking, “Who were the idiots selling at $400 or below? I’m riding this thing to at least $500 baby! New product cycle in 2H2013 and 2014 for sure!”
Then one day news reports came out saying that Julian Robertson and David Tepper, two hedge fund giants exited or lightened up significantly in 1Q2013 causing the stock to plummet to $420 from $460 in just three days. I was then thinking to myself, “What kind of idiot starts selling after these hedge fund giants sell after the stock has collapsed by 40%? Are people really that stupid to sell based on after the fact information? Getting these two giants out is actually a positive because that means there’s less stock for them to sell!”
I wanted to buy more stock at $420, but was I really supposed to build a $200,000+ position in Apple out of a portfolio size of only $400,000? Besides, I already have an Apple structured note that is either going to lose me $10,000 on June 17 or make me $1,400. It felt irresponsible to accumulate more, and I was also too scared to pull the trigger. One thing I thought about during the Apple crash to $420 was that I can’t fight stupid. It’s like playing poker. It’s very hard to bluff an idiot because they don’t think in multi-level scenarios.
When Apple rebounded to around $435, I began to sell a total of around $115,000 worth of stock like a coward. I was in the process of discovering my risk tolerance, something no investor really knows until they put real money on the table. Not being able to completely relax when I was in Hawaii for two weeks was annoying. 40% of my portfolio in one stock was too gut-wrenching. I’ve come to realize that 20% of my portfolio in one stock is probably the maximum level where I’ll be able to relax. Suboptimal trading led to $3,000 less profits.
* Baidu earnings miss. Baidu actually rallied around 9% into their latest quarter results in April and I was feeling like a champ. When they missed, the stock plummeted from $92 all the way down to $83 again, wiping out all my gains. I shouldn’t have been so greedy with a 9% move in one week, yet I was fearful the company would blowout earnings and surge after results. I cursed myself for not selling while I had a chance and promised that if the stock ever rebound back to $92 or higher that I would take my 15% and run like Forest. “What the hell is wrong with Baidu’s cost structure?” was my biggest concern.
Not only did the stock rebound to $92, but the stock hit $100! I began to think, “Who the hell was selling at $83 just the other week? Those fools! Thank goodness I didn’t capitulate.” I ended up selling my entire position at an average price of $95, leaving roughly $5,000 on the table. What’s more concerning is that I won’t be able to get back in because I think Baidu could go to $115 this year. Here’s another case of selling too soon due to volatility. I should have at least kept a token $25,000 position and see what happens.
* Something fishy with RenRen. As soon as I bought half my desired position in RenRen at $2.75, the stock began surging to $3.20 for a 13% gain on 6X average volume in a matter of two days. It was as if the penny stock traders of the world got a hold of my article and all piled in. As a result, I bought the other half of my position, about 11,000 shares at a less than ideal price of $2.90. The company then reported uninspiring results and guided on the low end for the upcoming quarter. The stock fell down to around $3 and steadily kept going lower back down to $2.8, wiping out about $5,000 worth of gains. I was pissed.
What was annoying was that I had about a $30,000 order sitting on the bid at $2.85 for three hours and didn’t get filled. “God damn market makers manipulating the markets again! How the hell can I not get filled when RENN is trading on multiple times average volume? What a bunch of crooks.”
When the stock inexplicably ramped higher on 5/20 to $3.10, I got the hell out at an average price of $3.08 because I have no time for difficult executions. Of course the stock continued to rally higher to around $3.12 after I sold, but it eventually came back down to below my selling price. Renren’s costs are out of control and lacks focus. The CEO actually sounded scared on the conference call when talking about Tencent, its largest competitor. Renren was my punt stock, and I walked away with a gain. If the stock gets back down to $2.80 or less, I will be back in. Not selling at $3.20 cost me around $2,500 in profits lost.
* Sina has been a home run. I actually bought the majority of my Sina position before Alibaba announced its acquisition of a minority stake in Weibo, the Chinese Twitter. Sorry, I can’t tell you all my trades beforehand. Alibaba’s purchase values Sina at roughly $60 a share on my own calculations. As a result, I sold 70% of my Sina stake at $61 a share and will just let my remaining 300 shares ride, or will I?
My biggest regret with Sina was not going bigger. I only had a $58,000 position (13% of my portfolio) in the name as I bet on the wrong horse, Apple. If I was smart, I would have built a $160,000 position instead which could have turned into more than a $40,000 gain. My greatest fear is that I won’t be able to rebuild a chunky position as the market discovers the name and the Twitter IPO hype resumes. The mistake of not going bigger realistically cost me over $20,000 in lost profits.
* Shorting the market. Due to my fear of a pullback, I decided to short ~23% of my portfolio by buying $48,000 worth of SDS. SDS is a double short ETF, so the short value at risk is closer to $96,000 instead ($96,000/$440,000). The idea is to short a frothy market and outperform with individual stock picks. The markets have continously moved higher in May to my surprise and I ended up losing around $2,500 in this hedge trade which I quickly covered. If I didn’t sell my SDS when I did, I would have lost another $2,000, so I guess that’s somewhat of a win in my book. The reality is, I should have gone double long instead of short. “The market wants to go crazy and I’m being an absolute idiot by going against the Fed! I guess it really is true that everybody is making lots of money and employed again except for my stupid self! To the moon baby!” I facetiously thought.
SDS will continue to be my imperfect hedge of choice and I’m considering putting on a new trade with the shares at $38.XX. Right now I’m assuming that everything I’ve sold will continue to go up and never let me back in at a lower price. I hate the feeling of missing out, but I’ve also got to balance the horrible feeling of round-tripping a stock or losing money. With gas at $4.50, the 10-year yield at 2.03% and the summer doldrums here, what could go wrong with stocks shooting to the moon? Only time will tell!
YOU MIGHT LOSE YOUR MIND INVESTING
As you can see from my writing, consistently making market winning trades is difficult. Instead of the $40,000 in profits I made in May so far, I’m thinking about the realistic $20,000 – $60,000 more in profits I could have made! Greed is bad! Investing is a very emotional process that quickly finds out what you’re really made of. This is why I get annoyed at folks who say that investing is so easy. They make me feel worse by being so scared and stupid.
What’s even more frustrating about so much lost profit is that I wasn’t thorough enough in my research on Chinese internet stocks. I never believe one should fail due to a lack of effort, and I failed BIG TIME in May for not being diligent enough.
Dang Dang (DANG), the “Amazon of China” is up a whopping 80% in May alone. If I had a stronger work ethic, or if I was simply just a little bit smarter I would have discovered Dang Dang and invested probably $50,000 into the name. My investment would have then gone up by $40,000 for potentially a $100,000 additional gain in May to $540,000 instead of just $440,000. Suddenly, $40,000 in one month is like pocket change. My goal is to build my IRA into a significant enough amount of money where I can enact Rule 72(t) to withdraw money penalty free before I’m 45.
There is always a bull market somewhere. Remember this line. It’s up to all of us to put in the EFFORT to find hidden gems. If I decided to sleep in until 8am one Saturday morning instead of write my Chinese investment article, I never would have invested in anything. At most I would have made maybe $8,000 (2%) in my IRA if I dumped everything into an S&P 500 ETF like SPY. But I don’t think I would have because of my short-term bearish view on the overall market as evidenced by my ill-timed SDS purchase.
I’d much rather make money the slow, boring, easy way and just buy and hold forever. Making 20%+ through my long term structured products investments since June 2012 is much more enjoyable because I haven’t had to think. Yes it’s taken 12 months to make slightly more than I made in the past three weeks, but it’s worth waiting. Having a downside buffer and knowing that I’m locked in for two to four years never felt so good. Not having to experience fear or greed is the reason why real estate is my favorite asset class. There’s no choice but to hold on due baffling monopolistic commission rates!
The only problem with buy and hold is that I’ve seen too many violent corrections in the markets: the Asian crisis in 1997, the Ruble crisis in 1998, the dotcom implosion in 2000, the housing market correction in 2006, and financial Armageddon in 2008-2009. All these corrections make me uncomfortable in setting and forgetting large sums of money in the market and hoping for the best. Companies have life cycles and corrections always happen. Japan down 7.3% on 5/22/13 anyone? The good times will eventually end, but in the meantime, party on and stay all over your investments!
Readers, anybody get a little too emotional when it comes to investing? Do you have a “Punt Portfolio”? How has your month treated you so far? What do you guys think of me starting an Investing Forum on Financial Samurai geared towards seasoned investors? I’d like to be able to voice my opinions and test my ideas to the community on a frequent basis.
Important Disclaimer: Please do your own research when investing in stocks and don’t follow my advice because my portfolio positions are changing on an almost daily basis. I’ve used my trades to help show you how you can make suboptimal trades as an investor due to emotions. My IRA portfolio is my trading portfolio where I take aggressive positions which are NOT recommended for folks who depend on their portfolio for retirement purposes. I’ve got other long term index fund focused portfolios that are earmarked for retirement and multiple passive income streams to survive. My IRA portfolio is also less than 10% of my net worth to give you more perspective. I do not recommend having more than 50% of your overall net worth in stocks using my base case scenario for asset allocation. Invest at your own risk and expect to lose money. If you really want to go fortune hunting, but have no real experience, consider participating in a virtual stock market game first before putting real money to work.
INVESTMENT PLATFORM RECOMMENDATION
Invest In Ideas Not Stocks: Motif Investing is a terrific company based right here in the San Francisco Bay Area. They’ve raised over $60 million dollars from smart investors such as JP Morgan and Goldman Sachs because they are innovating the investment landscape with their “motifs.” A motif is a basket of 30 stocks you can invest in, which are aimed to profit from a specific idea or underlying theme. Let’s say you think new housing construction is going to quicken in the US next year. You could buy a housing motif which might contains Lennar, KBH, Home Depot, Bed, Bath, and Beyond, Zillow, and more in various weightings.
You can buy a basket of 30 stocks for only $9.95, instead of buying them individually for $7.95 through a typical broker. You can build your own motif, buy one of the motifs created by Motif Investing, or buy a motif by a fellow Motif Investor with a great track record. You can even buy retirement motifs, much like target date funds, except you don’t have to pay the 1% management fee. You get up to $150 free when you start trading with Motif Investing. Given my focus on buying winning long-term ideas and ignoring the short-term volatility, I really like Motif Investing’s value proposition for retail investors.
Updated on 12/1/2014. Let the bull market continue. Just don’t forget to rebalance and manage your risk exposure.