Thursday, March 20, 2008

Lessons on Stocks and the Economy: My Experience

Back in June of '07 I decided to play in he stock market. I had no idea of what I was doing, all I knew is that I wanted to make a lot of money. As you might guess, the market doesn't always do exactly what you would hope and since I bought in the market has crashed. Some of my stocks have rallied recently to he point where I am breaking even again with them but the others are still looking pretty bad. The following is my experience and the lessons I have learned in the world of stocks and the economy.

First and foremost I wanted a stock that would earn me a lot of money. I didn't have a lot of money to begin with so I was looking for a cheap stock that had potential to grow a lot. I started reading about small-cap businesses and what analysts were saying about them. I read one article on that talked positively about a company called Gigabeam that makes high bandwidth wireless transceivers that are supposedly poised to disrupt the market for land-lines used for cable-internet. Since I believe that wireless internet, via WiMax and the advent of the iPhone and more portable wireless devices, is the future of computer technology this stock looked good so I bought some shares at $4.

Within two days the stock price jumped up over 40% and then the next day it was up over 50%. I was making a good amount of money and only three days had passed. Why not hold onto the stock for another few months and make 1000% profit, right? Not so. Now, less than a year later, the company is delisted from the NASDAQ and I had to sell it at $2 loss per share. The lesson from this is don't get greedy. If the price reaches a point that you are making reasonable money--sell. You can always reinvest the money again if you have reason to believe it will go up a lot.

The next two stocks I bought were based on instinct: Apple and Intel. I just really like these companies and as I already mentioned I thought the iPhone was going to be iconic (and I was right). I bought Apple at $132 and Intel at $24. Both went up and up. Apple hit over $200 and Intel was up over $30. It seemed my instincts were paying off. Did I sell? No. And in this case I'm not unhappy about that either. I still believe that Apple will reach $225 in 2009, and Intel is ruling the market and should bounce back. Currently though Apple is at $130 and Intel is down to $21. These stocks fluctuate with the market though and will grow rapidly once we start seeing the economy grow, I hope.

The last stock that I bought I tried using some statistical analysis to pick a good one. Using online software to sift through all the companies I came up with a filter for what companies I wanted to invest in. The basic structure of the filter was a mid-cap company, on the NASDAQ, in the healthcare sector (because I know a lot about science I figured I could determine the strength of a healthcare company), share price less than $10, profit margin above industry standard, low P/E ratio, earnings per share growth of around 20%, high volume of trading, and a lot of analyst coverage. Also, I didn't really care about dividends.

Using that filter I came upon OraSure. OraSure has created a fast and reliable HIV test that can use blood samples as well as saliva. They recently hired someone to their board of directors that is very capable of getting a product through the FDA for over-the-counter sales (the HIV rapid test is already used in hospitals and clinics but has not yet been given the ok for OTC use). The price I bought at was $8 and it is now down around $7. The market is weak but the company is strong so I figure it will bounce back soon. I will also make the prediction that once they are given the approval to sell their HIV test OTC the share price will jump up to around $12 to $13 or more. This is a good stock and I am very happy with it so far even though I am currently losing money on it. In the future I will definitely use a similar filter strategy for picking stocks.

I'm glad I went through this little experiment in stocks because I believe I have learned an enormous amount about how the market works (well it's really simple actually: fear drives the market down, speculation drives it up).

More to come soon from me regarding how I think individual stocks move and where the economy is headed regarding the sub-prime mortgage fiasco and the dropping value of the dollar and the correlated increase in oil prices. For now I would just like any comments on my stock decisions. Anyone out there?


Chris Grierson said...

werd. stock market. no good, unless you have goals. in fact, i am going to go sell my shit that's doing well right now, which is pretty much just netflix and sigma-aldrich. dolby, my star pick, was up something like 40% consistently for the past 6 months, and then fell like a rock in the past week or two. here's a good lesson for you: follow your own rules.

i had "trade triggers" set up to sell my stocks at market value if they dropped 10% from whenever i set them up. the idea would be to recalculate the 10% point ever so often, so that the (static) threshold wouldn't be too low when the price (presumably) went up over time. only problem is, when this actually triggered for dolby, 1) i hadn't recalculated the threshold in about a month (so it was more like 15% of the local max) and 2) i flagrantly ignored it, rationalizing that it, "oh, it must just be having a bad week." i promptly repurchased the stock at market value, blindly banking on the fact that it would go back up. it of course did not.

so, had i just been content with the triggered sale, i would have still made a pretty good profit, but instead, after repurchasing, the price dropped another 15%. and what's worse is that it reached that 15% over a week. i actually watched 6%, 7% etc. daily drops and rationalized a reason why not to sell immediately... insult to injury.

moral of the story: stick to your guns. the system i had was/is still pretty sound in my mind, since it's automatically executed in real (enough) time. that said, if you undermine it by manually repurchasing the stocks that clearly are tanking, what the hell is the point??? nothing.

of course, all of this is bad advice, since short-term trading will probably end badly for most. conventional wisdom: find a stock you want to keep for at least several years, buy a bunch of it, and actually hold for the long term (it helps not to peek at its value). repeat for a handful of diversified stocks.

Andrew said...

Good point, Chis, that I also should have made: setting a sell point is a very good idea. You don't want to let the stock drop through the floor like I did with GigaBeam. typically you can set that point through your brokerage and not even think about it which is nice if you don't check your stocks every twenty seconds like I do.

Another good rule of thumb as you point out, for stocks as well as life in general, always stick to your own personal rules. It really makes a world of difference. You can't say "oh, I htink the stock is just going to keep going higher now that it already reached the point that I wanted to sell." Just sell it! You'll probably make more money.

Wolf said...

so this is what you do all day?