Yesterday I sold off my entire portfolio. After nearly nine months of high churn and mediocre investments, I decided that I was lucky to be at break even and that it was time to chart a new course.
The market is rallying and I do not know why. I don't understand what the market is anticipating. I do not see 2011 as being a good year. The US treasury market is in a bubble, China is experiencing a real estate bubble, the labor market is not recuperating, and the Fed is about to start another round of easing by buying government bonds.
Does any of the above sound like a recipe for a buoyant stock market? I don't think so. I can't think of a single reason why stocks should continue to perform well. Well, what about the earnings?
JPM and AA reported earnings this week and were in line with expectations. As I type this AAPL has hit a new 52 WH. GOOG has just reported earnings and the stock is up nearly 10% after market. NFLX is just off its 52 WH. All three of these stocks have not been in my portfolio in the last 12 months. In general, these companies have done well on the bottom line. But are they reflective of the overall stock market? Perhaps they are and people are laughing their way to the bank as I write this blog.
But when I put my glasses on I do not see anything that remotely resembles signs of optimism. Cheap money is what is driving today's economy. And when money is cheap strange things happen. I think we are in the midst of the last sprint before the proverbial falling off a cliff. The same mistakes that were made at the burst of the dot com bubble are being made now. Except that now we have no new wars to stimulate the economy, no new tax cuts, no housing market to generate jobs and riches, and no breakthrough technology.
Furthermore the geopolitical tensions in the middle east are simmering. There is a high likelihood of another military incursion taking place which may embroil powerful nations putting further strains on the oil supply and ultimately leading higher oil. That is without taking into account the continued slide of the dollar because of the continued money printing by the Fed.
So where are the good news? Where are the bright spots? Perhaps this is the story of two Americas. The employed and the unemployed. Perhaps I am projecting my own fear into the investment landscape. But I just do not see what will move the economy forward. Where is the growth going to come from? I do not see it, which is why I sold off the portfolio.
Thursday, October 14, 2010
Tuesday, October 5, 2010
Speaking of Profits!
I took some profits yesterday when the market swooned 1%. I paired back my investments thinking that the market was headed towards a bad place. As soon as I paired my losses, I felt this nagging feeling that I was doing the wrong thing.
Today the market rallied nearly 2% and yesterday's nagging feeling turned today into real regret. Yesterday I sold RIMM at 49, BIOD at 4.75 and EK at 3.9. All were profitable positions, but less so yesterday than they were on Friday at the close of trading.
I wanted to hold RIMM for a significant time frame, but in the end I was only able to hold it from an average price of 46 to 49. Why did I sell it? Well, I did not want to see all the profits disappear. Some profits is better than a loss! Unfortunately, I did not pare back on my SH position. As a result, I am currently net short the market, and today's 2% rally set me back by $500. The loss of $500 did not bother me at all. It was the knowledge that if I had not altered my portfolio that loss would have been a net gain today.
Why did I sell on Monday? Well, I was nearly 100% invested on my retirement account. I was nearly break even once again, and I did not want to see the portfolio take another swoon if the market began to crack. In essence it was an emotional response driven by the news of the day. Nothing had changed other than my own perception of the news, and my perception turned out to be incorrect.
So now what do I do? I have altered my portfolio to the point of confusion and I feel like I should sell it off and wait for a more opportune moment or a few months to see how things play out.
This week is a big week. AA reports earnings, and MON reports earnings. If the past is prelude, the earnings are likely to be good, but the guidance poor. There are so many signs that companies are going to be guiding lower for the next quarter and the next year. Currently the game is turning towards what will happen in 2011. It's no longer about 2010. Perhaps that is what is bugging me at the point. I have no idea what is going to happen in 2011, at least I don't see anything good happening.
Euphoria has seeped back into the markets, and I truly think that the euphoria is about to end.
Today the market rallied nearly 2% and yesterday's nagging feeling turned today into real regret. Yesterday I sold RIMM at 49, BIOD at 4.75 and EK at 3.9. All were profitable positions, but less so yesterday than they were on Friday at the close of trading.
I wanted to hold RIMM for a significant time frame, but in the end I was only able to hold it from an average price of 46 to 49. Why did I sell it? Well, I did not want to see all the profits disappear. Some profits is better than a loss! Unfortunately, I did not pare back on my SH position. As a result, I am currently net short the market, and today's 2% rally set me back by $500. The loss of $500 did not bother me at all. It was the knowledge that if I had not altered my portfolio that loss would have been a net gain today.
Why did I sell on Monday? Well, I was nearly 100% invested on my retirement account. I was nearly break even once again, and I did not want to see the portfolio take another swoon if the market began to crack. In essence it was an emotional response driven by the news of the day. Nothing had changed other than my own perception of the news, and my perception turned out to be incorrect.
So now what do I do? I have altered my portfolio to the point of confusion and I feel like I should sell it off and wait for a more opportune moment or a few months to see how things play out.
This week is a big week. AA reports earnings, and MON reports earnings. If the past is prelude, the earnings are likely to be good, but the guidance poor. There are so many signs that companies are going to be guiding lower for the next quarter and the next year. Currently the game is turning towards what will happen in 2011. It's no longer about 2010. Perhaps that is what is bugging me at the point. I have no idea what is going to happen in 2011, at least I don't see anything good happening.
Euphoria has seeped back into the markets, and I truly think that the euphoria is about to end.
Monday, October 4, 2010
When To Take Profits
Taking profits is one of the toughest aspects of investing. In many ways selling a stock is like parting with a friend with whom one has spent time and effort to know and to understand. After all, one never leaves when the relationship is going well and there is still much to give each other.
Similarly, who wants to sell a stock when it is making money? Who's to say the peak has been reached and that there are no more profits to follow? Why abandon a good investment?
In investment parlance, one is seeking to maximize investment returns, and if stock has reached the peak of its earning potential then it should be sold. The idea is elegant and straight forward, but in reality it's difficult to implement.
What after all is a maximized investment return? Is it 5%, 10%, 15% or some other percentage? According to the theory, the return needs to be risk weighted. A riskier investment should return more than one with less risk. Fair enough. But again the question remains: how can one implement this risk adjusted rate of return theory?
For example: BIOD was up 40% twice since I bought it. Most recently it was up 2K, and I did not sell it because I expected more. Now half the profits are gone and I only have 1K left. Do I sell? RIMM is up about 10% since I bought it. It's gone from 46 to slightly over 50. Do I sell?
How can I judge what is a fair price to sell these stocks? Before I answer that question I also have to state that both of these positions were down about the same percentage, 40% for BIOD and 10% for RIMM.
The market has no friends. It's a cold, erratic and often illogical amalgamation of opinions. The market focuses on one thing today and another one tomorrow. Bad news are greeted with price increases and good news with price decreases. In the mist of this madness, how is one to implement this elegant risk adjusted return theory.
Min-Max is my answer! As painful as it is to part with a good friend, profits have to be taken at the max level. For BIOD this would be the $6/share level and for RIMM it would be $55/share level. One of the fundamental rules of trading, one which I have not yet learned, is that before making the trade I should have a stop loss and a profit target. This rule makes sense but implementing it seems to require discipline.
Again, it's a nice theory, but then I would not have held on to NFLX, APPL or GOOD during their meteoric rise. How then to know when to use this stop loss/target profit idea and when to discard it? A small profit sometimes is not better than a small loss if it means giving up bigger profits. In retrospect this is always clear, but peering into the future to see this is what makes it difficult.
Similarly, who wants to sell a stock when it is making money? Who's to say the peak has been reached and that there are no more profits to follow? Why abandon a good investment?
In investment parlance, one is seeking to maximize investment returns, and if stock has reached the peak of its earning potential then it should be sold. The idea is elegant and straight forward, but in reality it's difficult to implement.
What after all is a maximized investment return? Is it 5%, 10%, 15% or some other percentage? According to the theory, the return needs to be risk weighted. A riskier investment should return more than one with less risk. Fair enough. But again the question remains: how can one implement this risk adjusted rate of return theory?
For example: BIOD was up 40% twice since I bought it. Most recently it was up 2K, and I did not sell it because I expected more. Now half the profits are gone and I only have 1K left. Do I sell? RIMM is up about 10% since I bought it. It's gone from 46 to slightly over 50. Do I sell?
How can I judge what is a fair price to sell these stocks? Before I answer that question I also have to state that both of these positions were down about the same percentage, 40% for BIOD and 10% for RIMM.
The market has no friends. It's a cold, erratic and often illogical amalgamation of opinions. The market focuses on one thing today and another one tomorrow. Bad news are greeted with price increases and good news with price decreases. In the mist of this madness, how is one to implement this elegant risk adjusted return theory.
Min-Max is my answer! As painful as it is to part with a good friend, profits have to be taken at the max level. For BIOD this would be the $6/share level and for RIMM it would be $55/share level. One of the fundamental rules of trading, one which I have not yet learned, is that before making the trade I should have a stop loss and a profit target. This rule makes sense but implementing it seems to require discipline.
Again, it's a nice theory, but then I would not have held on to NFLX, APPL or GOOD during their meteoric rise. How then to know when to use this stop loss/target profit idea and when to discard it? A small profit sometimes is not better than a small loss if it means giving up bigger profits. In retrospect this is always clear, but peering into the future to see this is what makes it difficult.
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