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  • Investment Journal Update

    Posted by In-Cog-Nito on May 12th, 2004 (All posts by )

    Zapped by TASR

    Ok, that was stupid.

    The funds have cleared and I was itching to short this market. It always feels the worst seeing the market move without you, particularly when youíre waiting to enter.

    My first trade was to short 100 shares of Taser (TASR) at $26.71. The chart is broken, itís over-hyped imo, and holding up during the downdraft. So I figured itís worth giving it a shot. No dice. I got stopped out at $27.75. So a hundred bucks down the tube. Back to an earlier discussion in the comments section, stop losses are important with volatile stocks. Sucks to learn the hard way, but hey another mistake you can learn from me.

    Amazon/Overstock Pair

    So licking my wounds, I put on a new trade, this time a pair trade long Amazon (AMZN)/ short Overstock (OSTK). I got 100 shares of Amazon at $41.65, and shorted 150 shares of Overstock at an average of $32.05.

    The idea behind pair trades is that you try to minimize market volatility and instead rely on stock picking abilities. You donít care whether the market goes up or down, you just want your long to outperform your short. In this case, Iím betting that Amazon.com will outperform Overstock.com. Ideally, you want your pairs to be in the same industry with similar volatility. So if the market completely tanks, the decline in your long will be offset by a similar gain in your short. In a perfect world, your long will go up, and your short will go down, but in a perfect world, Iíd be an NFL quarterback.

    My thesis behind the Amazon/Overstock pair is that Amazon has upside in a rally, but Overstock has less upside. In a market meltdown, Iím betting that Overstock has more downside than Amazon. So the main thesis on this trade is more technical than anything else.

    Fundamentally, Iím betting that Amazon has more clout than Overstock. Amazonís gross margins are in the range of 22-24%. There are worries that Amazon will sacrifice their gross margins to gain market share. But compared to Overstockís 10% or less margins, Amazon has the upper hand in this category. Look at their products, Overstock.com is just that, they sell stuff people didnít want to buy Ė and their savings arenít *that* good. I use Amazon, I love buying from Amazon. Itís not the most scientific of reasonings, but itís a good place to start.

    More later, my day job beckons.

    Update: I changed the symbols in my post to the name of the company to make it easier to read. Itís a mental shortcut that makes it easier to type up too.

    Overstock priced its secondary tonight at $30.50. Itís one of the catalysts I was looking at since more supply on the market generally puts a cap on a stock at least for the short term. It will be important to see how the stock trades after the secondary, particularly if it can hold the secondaryís print price.

     

    9 Responses to “Investment Journal Update”

    1. Confused Says:

      Hmm…that position is exactly the opposite that the Motley Fool thinks is wise. See:
      http://www.fool.com/news/mft/2004/mft04022520.htm
      http://www.fool.com/News/mft/2004/mft04051115.htm?source=eptyholnk303100&logvisit=y&npu=y
      Seems like OSTK is trading some of their over-valued stock for real cash. Not a bad idea. It also interesting that you long (i.e. relatively undervalued stock) has a trailing PE of 130. Well, I hope it works out for your sake.

    2. in-cog-nito Says:

      For some reason, I’ve never been a big fan of Motley Fool. Go figure.

      That’s the beauty of the market, Jeff Hwang, the author of that article, can bet against me with his trade. Incidently, I’m talking my book, and he’s long Overstock, so we both have a vested interest.

      A hypothetical trade I had on my “model” portfolio and have been following since September has been a long EBAY, short AMZN. That worked out nicely mostly due to the run up in EBAY. EBAY is up by 56%, AMZN down by 5%.

      One other angle I’m playing with this trade is that AMZN has been beaten down pretty badly.

      Wife calling, finish later.

    3. Trent Says:

      I hate to be the one to suggest it, but with respect, doesn’t this gibberish belong on some day traders’ bulletin board?

      Alternatively you might just report some results until it becomes clear that you know what you are doing (IMHO for various reasons an unlikely outcome), and add in the narrative from that point on.

      I used to work with a very funny guy who decorated his cubicle with quotes under the title ‘examples of meaningless broker-speak’. This stuff would have fit right in.

    4. Jonathan Says:

      You say that you’re respectful, yet you insult. And you call someone who’s publicly putting his own money at risk an incompetent, but you’re too cool to say why. You’re a class act, aren’t you.

      BTW, how’s your own track record?

    5. in-cog-nito Says:

      Jonathan,

      Thanks, you got my back as always.

      Trent,

      Money is like politics, you’ll piss off half the people all the time. Chalk this up under the “Economics, Markets, Finance” portion of Chicagoboyz. Big picture discussions of the economy are nice, but for me, it’s always more interesting where the rubber hits the road.

    6. Sylvain Galineau Says:

      Trent, if you don’t like it, change the channel.

      Confused, I’m with cog on this one. The Motley Fool is not a reference to me, and I don’t know any reasons why it should be. I don’t really care where it comes from. Let’s hear their rationale for recommending the opposite trade and compare it with cog’s.

    7. Patch Adams Says:

      Seriously.

      It’s their blog, let them do as they wish with it. It’s gibberish to me too, but that is why I’m curious to read more and try to make some sense of these terms that are so foreign to me as a non-investment type. If that isn’t your thing, so be it. Keep posting about this ICG – maybe one day I’ll actually be able to understand!

      Cheers.

    8. Captain Mojo Says:

      I don’t have a whole lot of investment experience, but as I probably will look into seriously investing within the next year or two, I’m fascinated with Cog’s little experiment.

      Keep it up. Although may I suggest more cursing and accusing people of being asshats? This is a blog post, after all…

    9. in-cog-nito Says:

      Sylvain,

      Agreed. Rationale is more important than provenance.

      Patch,

      It’s simple really, just buy low, sell high = ) I seem to do the opposite.

      Mojo,

      With a name like that, why wait, jump in today!