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

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.

Rollover IRA portfolio

IRA Portfolio 5/9/13

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.

One year Apple stock chart.

Apple looks attractive in the low 400s.

* 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.

Baidu Chart

Talk about volatility around earnings.

* 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.

renn-chart

Going ballistic a day after publishing my article, not giving me a chance to fill a full position.

* 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.

Sina on fire post Alibaba investment

Performing like a champ post Alibaba’s investment.

* 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!

Shorting The Market With SDS

Down goes SDS the higher the market goes.

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.

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. Shaun says

    Aren’t 2x ETF’s inherently going to lose money over any period of time compared to the asset because of how math works?

    Eg you have 100 dollars of some underlying asset and which you’ve got a 2x etf and it loses 10%.
    Asset:90
    2x:80
    Looks right. But then say the next day it gains 11% so your 2x gains 22%
    Asset:99.9
    2x: 97.6

    Do this enough times and it becomes a real difference.

  2. says

    Well Sam, look at it this way you are learning more and more every time you trade. Hell I would be grateful making 40k in a month but you have done it before so your expectations are set higher. Greed and fear move the market, i say this all the time. Even if the financials look good it doesn’t mean the stock wont tumble. its why its always good to take some profits off the top. Some of your ill-time trades are better then my best trades. LOL

    • says

      Selling at a loss or selling at a profit is extremely difficult. It’s why it’s probably best to get out of positions in 2 or 3 tranches at a time. My problem is, once I sell more than half my position I get completely disinterested in the stock b/c I can no longer make the same type of money. It’s a weird psyche.

      With the markets melting off… maybe my selling of Chinese internet stocks earlier in the week wasn’t so bad after all. Time to get back in!

  3. says

    The question as I read the post is that you can’t look at a month in the rear view mirror or you’ll go nuts! Like if you are playing poker and you have 2 and 7 off suit. Just because the board says 2, 2, 7 doesn’t mean you should have stayed in.

    As of today and at this time (5-23 and 11am) SINA is at $57 – how does that change your calcs?

    • says

      Given I believe the Alibaba deal values SINA at $60 for now, I’m a buyer! Do you have a Punt Portfolio? How have you done this May?

      My portfolio has changed a lot again. Bought back into BIDU, accumulated SINA, increased my Apple position by 65% this morning, and bought IEF as the 10-year bond yield over 2% is too attractive to resist. IEF is my summer hedge vs. straight up shorting the market. Any good trades you’re thinking about to share?

  4. says

    I guess I am a pretty conservative guy. I would not put that much of my entire portfolio in one stock. Not that Apple is Enron, but when will a company by Enron show up again, or GM or all the other single stocks that crashed. High risk, high reward. Congrats on your gains, best wishes for more.

  5. says

    I’ve had to limit the amount of time and money I invest in stocks because it was too distracting for me and I got too stressed out. It’s a great feeling taking gains though! The thing with stock investing is to remember nobody gets it right 100% of the time. Not even the highest paid hedge fund manager can time every peak and trough at the max. Nice job putting yourself out there and taking the risks so you have the opportunity to get the rewards!

    • says

      Yes, stock investing IS very distracting and addicting as well. Now that I have so much free time I can’t help but research ideas. I don’t think it’s healthy to be so involved over the long run so I’m going to keep my activities to under 2 hours a day for sure of investing. Maybe 1 hour is enough.

  6. says

    I don’t think your trades on the Chinese stocks constitute “bad” trades. If you (or anyone else) knew the exact right time to buy and sell stocks, you’d be writing on FS from your own private island!

    Investing is like poker in that you’re making decisions based on incomplete information. These trades equate to a situation where you see you could have gotten more value on your final bet after you’ve seen your opponents losing hand. It doesn’t make your play bad, it’s just a product of not being able to be 100% certain at the time you have to make the decision.

    • says

      Indeed. One thing to find a great idea, another thing to bet big with conviction. I constantly fail at holding onto conviction due to fear.

      At least with poker, if I know I’m an 80% favorite I’m always pushing all I can knowing 20% of the time I will lose.

  7. says

    I remember some investing advice I heard on the radio that seems to make sense. Never invest more than 5% of your portfolio in any one stock (company). Following 3 (foreign) stocks may be a bit too much too. Although I have some (5) individual stocks, I prefer mutual funds because they may the decisions for me.

  8. says

    Sam, I feel your sentiments. I’ve lost money in the markets before and for the first time, I sold today and made a profit. But I also feel regret that I only made 6% from the selling and accumulated dividends and earlier in the year, I could have made 14%. Part of me thinks that I was just lucky to go in this past December when prices were low and ride the bull market and that in the future I may not be so lucky.

    More due diligence and hustle is required I think. Thanks for sharing the juicy details of your stocks and investments – appreciate the detail.

  9. says

    It can be so easy to get emotional when it comes to investing. Even with my written out plan on my desktop I still make stupid mistakes from time to time. My last one was on some AAPL options several months ago. I made a killing on them, and I am happy for that, but I got out too early and could’ve earned another couple thousand. You live and learn though and the key, I find, is to try and learn from those. That said, I am happy overall for the month & the year. I am up 3.5% on the month and just over 20% on the year. I totally think you should start an investing forum, I’d be interested at least.

  10. says

    You’re right, investing is an emotional game! That’s why in the last 6 years, I’ve only invested in mutual funds, rather than individual stocks. As we all know, none of us are Warren Buffett. I’ll do the numbers on my mutual funds and post them on my blog one day soon. Right now all I can report is that I’ve been doing “pretty well”.

  11. says

    Ha, I spent most of the 1st quarter freaking out over Apple, but I stuck with the stock. As a company, they are at a lull now and the new product cycle that you talked about should help them out. Also, come on China Mobile deal!!

    I too remember reading about those hedge funds dudes and remember the big kick in the nuts that $AAPL took. Really though, I think it’s all nonsense. Everyone was going nuts over friggin’ Apple when the stock was round $700 (buy! buy!! buy!!!). Now, you see the exact same mentality with Google. Of course, the error is that these ringing endorsements are coming after massive run ups. Its just dumb-ass bandwagon/follow the herd thinking.

    • says

      Google to $1,000! The Bay Area economy needs more wealth influx!

      Funny thing is that I’ve had 5 Google employees submit applications for my rental this week. The money really does flow over to the rest of us.

      • says

        Ha, the Bay Area has shitloads of money already! Google is slowly but surely taking over the world, so I see nothing but increased rental income in the future for you.

        We just bought our first rental property today and I ready through your other post. Thanks!

  12. says

    I’ve been resiting the urge to trade in and out of my portfolio, that consists exclusively of dividend paying stocks. So far that has worked well, with the influx into dividend paying equities by those in search of income.

    I added shares of AAPL at $435, mainly in anticipation of dividend growth over time. I was disappointed when they did not split the shares, I think that would have helped overall investor psychology, as I think the $400 price tag scares a lot of the retail investors off.

    I’d be interested in an investment forum as well.

  13. says

    Sounds like you have the same issue that I do (I do some currency trading on occasion). It definitely takes a lot of guts and smarts about a person to be able to make the most of the situation. Just keep examining and perhaps diversify into something like bonds if you get too nervous.

  14. i can hear you now says

    I want to say (like they used to say in those old Westerns…) “WOAHH, NELLIE!!”

    You are trying to time the market. Therefore you are buying yourself all the frustrations and anxieties that doing that kind of activity implies. You will lose money, guaranteed. Sometimes you will make money, guaranteed. Maybe sometimes your investments will hit it out of the park (would be nice, huh). But in no circumstances will you always make money, it is not possible with this style of investing.

    So, if you like what you are doing and are willing to live with the variegated results, then fine, have a good time. If you like what you are doing but cannot tolerate the variegated results, then you have a problem that is either an indication you need to change your behavior, or you like theater.

    Perhaps you are too impatient to buy for the long haul, for example by focusing on dividend investing. But it certainly an alternative to the nail biting and panic emotions of trying to time the market.

    There are plenty of people who do the dividend route, it just does not get as much play in the popular press. For me, it removes the stress. I buy only high quality companies that have paid dividends for decades and have a strong track record. In fact, I dont mind when the stock price goes down, because it means I get more for my reinvested dividends.

    This style of dividend investing might be considered old fuddy-duddy by the marketeers of Wall Street, but I sleep well at night.

  15. says

    Thanks for the update! I got a few shares of apple when it hit $400, but sold too early at $430… I’m terrible at optimal trading too. I’m finding out that I’d rather just buy and hold. It’s much easier than sitting on cash or trying to time trade. It’s stressful and I don’t need it.
    I’ll stick with it through the rest of this year and see how it goes.
    I probably will go back to buy and hold for the long run. I’m really afraid of big corrections too. It’s tough when you don’t have income to buy more shares during the pull back.

    • says

      I’m seriously waiting for a mega correction like Japan just experienced before I dive all in again. Maybe it will never come, but I’ve got 70% of my IRA in cash now waiting to pounce if it does.

  16. says

    Nice to see you’re human Sam. We’re all emotional, especially when it comes to money. I had a punt portfolio. Let’s just say it got punted! I know leaving money on the table isn’t fun, but at least you managed profits. My frustration with my some of my moves is if I had done nothing, kept it in the bank, or followed the S&P I would have been better off than eating losses. An investing forum would be fun and educational. Sounds like a great idea!

  17. says

    So have you read my post on stops and how I love to use trailing stops ? :) Seriously though, you can’t beat yourself on bad moves. We have all had them and will have them again. The worse thing you can do with a bad move is to let it interfear (intentional misspelling) with your future investment activities!

  18. Martha Beck says

    Thanks for the update. I am bad with optimal trading too. Its tough to accept loss, but am glad that you managed profits.
    I’d be interested in an investment forum as well.

  19. Jason says

    All of this analysis makes my head hurt, FS! It reminds me of the bad old days when some of my friends day-traded. They were always nervous wrecks, even when they DID make money.

    If/when I seriously get into stocks, I’ll probably just go for the Vanguard 500. That is, once I figure out why there are 2 funds, an ETF and a “regular” one. Any idea what that means and which one is “better” or more appropriate?

  20. says

    Hey Sam, Trust me when I say it’s way better to sell early for a gain then to get greedy and hold on for more, only to get slaughtered. You’ll never go broke making money on trades. You will go broke(and insane) continually chasing that last penny. Be happy with your 40k trade, that’s more then most people make in a year.

    • says

      Oh I trust you alright! Round tripping is the worst! Fighting greed is hard though, especially when this is my Punt Portfolio. I don’t know why I’m still fearful and greedy.

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