Stock Shaming - It's Bad to be the King

It had been a few years since I bought a stock that I regretted (maybe someday I'll be able to speak of buying GM on the way down, all the way down /sigh).  That said, I don't usually have ideal timing, it's excessively difficult to consistently pick a top or bottom in the best of markets and the current market has been only slightly more rational than a Texas Hold-em river card.

But as I sit here today, I am racked with buyer's remorse.  This week I clearly made a frivolous trade, (definitely not an investment) which I knew was a mistake almost the minute it posted.  And I doubt very much that anyone out there will argue that it's not a stupid trade.  So I'm hoping that deconstructing this debacle publicly will cleanse my mo-jo and maybe we can learn something.

Hi.  My name is Cat, and I'm a King Digital Entertainment PLC shareholder

Everyone: Hi Cat

#1 I'm admitting I'm a momentum addict 

I have a bad habit of getting over-confident and overly risk-seeking after success. I have a history of playing a low entry fee hold-em tournament, ending in the money and then I get all sure of myself.  Next, I enter a mid-level entry tourney and flame out before the first break. I play very differently after I've ended in the money once, even though I know it was my normal play-style that led me to finish in the money in the first place!    

In this market there have been very few long-term losers since the financial crisis (when I first got into stock picking), so I should know better than to think I am an expert stock picker just because I have had gains. A positive outcome doesn't mean it was a good bet!

#2 I have a strategy that works when I follow it 

I have been quite successful when I stick to the fundamentals of value investing (as touched on in the Investing Manifesto).  I can't think of a single stock pick that was not profitable when I followed my principals.  I get into trouble when I have compromised my better judgement for some fad of the moment, or use an alternative strategy. 

#3 If timing is relevant I'm investing for the wrong reasons 

Using Sharebuilder.com*1 early in my investing history set me up with a good mindset, and I need to return to that.  If a day-to-day or hourly or *gasp* minute-to-minute change will have a significant impact on my decision to invest in a stock it's not an investment it's a trade.  See #1 & #2: I am not a trader, I am prone to stock market motion sickness even when it pays off. 

My danger sign (which I was aware of but still ignored) was the level of excitement and desperation I felt to get in quickly. When I have gotten this anxious in the past it has not worked out, it's never been the bottom and it's never been the top. And, most importantly, it means I am trading on emotion rather than fundamentals.

This doesn't mean I should lose my sense of urgency and drop the ball on keeping up on my investment research.  If I invest, I have to understand the company and keep an eye on the chicken coop.  It's amazing how quickly the foxes sneak in when you turn your back.   

#4 Only you are looking out for you 

Cynical perhaps, but absolutely accurate; listening to investment talking-heads is a fools-errand. Everyone has an agenda, whether it's bolstering their own position or causing controversy to drum up publicity. You cannot count on CNN or CNBC or whoever to have vetted and validated their analysts. They aren't focused on accuracy, they aren't focused on your strategy, they are focused in drumming up more investors to throw their money into the market for the smarter people in the room to get a crack at. 

You have to know your sources. If you don't personally know your source you need to do your research before you dare "trust" them.  And even then it should always be trust, and verify. 

There really is no one's advice I should take blindly, even Buffet's moves can't be taken at face value. Look at the position he is in, he is not just one of us.  He controls enough power to manipulate boards and markets and he uses it. Look at the sweetheart deals he made during the financial crisis. Going in with Buffet generally has benefits (if only from the media frenzy) and he isn't a short-term move maker, but you have to beware when he exits a position and whether he is investing with special circumstances. 

#5 Contrarian isn't any more of a safe point-of-view than the one from the bandwagon 

There is no foolproof way to look at the market.  No one is 100% right and no one is 100% wrong. My irrational desire to take the opposition side to a smug Jim Cramer*2 was definitely a proximate cause of my ill-advised move.   

I am a natural skeptic which often holds me in good stead since the media seems to be perennially focused on the last move rather than really anticipating the next.  But that doesn't mean going against the grain always works. It has to go back to the fundamentals of the investment not a "system" or gimmick. If you always bet against the broken clock you are still wrong twice a day.   

#6 Never gamble with anything you can't afford to lose 

My (financially) conservative nature has consistently protected me from complete disaster. The one thing I have consistently done right, is that only 25% of my portfolio is set aside for stock picking and at risk to my day-to-day irrationality and of that only a small % is in any one investment.  So even though this ill-advised trade is embarrassing and foolish, all I am doing is eating into a bit of my already realized gains and even if it went to zero it is not a significant loss.   

It's going to be OK. 

So as I lick my wounds and fight the urge to just as irrationally dump the stock just so don't have to stare at its sunk cost in my portfolio, I will take a few deep cleansing breaths. I vow to stop the bleeding and make the next move intentionally and not out of excitement or fear.

*1 - Sharebuilder's original business model was to offer a regular scheduled investment that commanded a much lower commission price than the standard trade commission (at one point $4 scheduled, vs $19.95 market order).  This incentivized regular contributions and long-term strategy. The company has since switched hands and online investment commissions have dropped drastically across the industry ($6.95 market order) reducing this gap and therefore reducing the incentive.

*2 - Jim Cramer, CNBC's clown prince of investing has become a larger and larger contributor to their business coverage which, in my opinion, is dangerous. Anytime your investment information is coming from a less eclectic mix, bad things happen. I don't have a fundamental objection to him, he has provided valuable information and frankly has been pretty entertaining.  But now that I see him show up multiple times through the day, and CEOs and analysts on their coverage mention something he has said as evidence, I think his investment strategy has permeated CNBC's coverage too fully and it's starting to sound like an infomercial. He has been a successful investor, but even by his own admission in his early books (especially Confessions of a Street Addict), he has made some very stupid moves. I enjoyed his early books and felt they were quite honest and good cautionary tales. I have to shake my head when now it seems he feeds into exactly what he rails against in his books.