Chicago Boyz

                 
 
 
What Are Chicago Boyz Readers Reading?
 

 
  •   Enter your email to be notified of new posts:
  •   Problem? Question?
  •   Contact Authors:

  • CB Twitter Feed
  • Blog Posts (RSS 2.0)
  • Blog Posts (Atom 0.3)
  • Incoming Links
  • Recent Comments

    • Loading...
  • Authors

  • Notable Discussions

  • Recent Posts

  • Blogroll

  • Categories

  • Archives

  • Even a blind dog finds a bone some days…

    Posted by In-Cog-Nito on October 3rd, 2005 (All posts by )

    Here’s a 1 day chart of today’s trading in Protein Design Labs (PDLI). Beautiful isn’t it?

    Do you see the flat part of PDLI’s chart on the left, oh around 10:20am EST? That’s when I sold my 600 shares of PDLI, missing out on $800 of gains. Hurts don’t it? The market has a particular knack for making one feel stupid. My original reaction is a bit less academically objective; more along the lines of “AAARRRRRRRRRGGGGHHHH”…

    So as a public service to the Chicagoboyz, here is a lesson in what not to do in the market. (Don’t worry, there’s a happy ending)

    To back up, I originally invested in PDLI due to a highly sophisticated screening method. I was frustrated at another position, Biogen (BIIB) sold at a loss, but wanted exposure to biotech, so jumped into PDLI. Deep eh? It was another “AAARRRRRRRRRGGGGHHHH” moment, but to a lesser scale. It was a stupid trade, which brings up a useful lesson:

    1. Don’t get emotional in the stock market. Jonathan had a good quote from a famous trader “Losing your position is aggravating, losing your composure is fatal.”

    So I rashly bought into PDLI at $29.50, and rode it down to $27-$28. Genius eh? PDLI was, however, already on my watch/buy list, so it wasn’t completely blind, but it sure did suck to buy a stock and have it go down immediately, and keep going down.

    PDLI got onto my watch list through another highly sophisticated screening method. I read Motley Fool’s Rule Breakers newsletter, and thought, “hmmm… that looks pretty good”. As a plug, I highly recommend their newsletter. It’s free for 30 days, and they’ll give you a refund any time if you don’t like it. There are some good ideas in there. I used it to get quickly up to speed on the market, with trading ideas. And I think that’s the main value of any good information source, to get you up to speed on something you don’t understand. In this case, I smelled a bull market in biotech, and wanted exposure (ie make money). So I bought into PDLI, the thing bled until $27, and came back up to $28 as of this morning.

    My original intent was to hold PDLI back to break even and then decide what to do with it. It’s a well run company. They have a good royalty business from licensing out their patent for humanizing mouse antibodies, which Genetech (DNA) used to good effect on their blockbuster drugs. PDLI gets 3% off the top. PDLI has some good drugs in the pipeline, and is a year ahead of schedule in getting to cash flow positive. All well and good right? That’s the cerebral part of the game. Trading is the animal instincts part of the game, and almost a separate game in its own right.

    So I’m sitting with PDLI at $28 this morning. One of my other holdings, CV Therapeutics, came out with good news this morning for their primary drug Ranexa. Here were my main rationales for selling PDLI at the time:

    a. PDLI hasn’t gone anywhere since I bought it (opportunity cost)
    b. I wanted more shares of CVTX. CVTX was at a good entry point this morning of around $27.25 when I bought it.
    c. I was already using a good chunk of margin, so wanted to fund the buy as oppose to taking out more margin
    d. I am sitting on losses for PDLI. I have taxable income this year from working before starting law school, so can reduce my taxes with a realized tax loss

    And sold I did. Literally minutes before the sucker took off. Jim Cramer has a good saying “I’d rather be lucky than good”, which in this case, drives it home even more. This isn’t the first time impatience got the better of me, and I’m sure it won’t be the last. Which leads to more useful lessons:

    2. Be patient in the market place.

    3. Scale into and out of trades (Jonathan again). I have been scaling into and out of positions more with other positions, but impatience got the better of me with PDLI. See lesson #2.

    Taking a loss burns, and it burns even more when the thing shoots straight up after you sell it. My original thesis pegs PDLI at going to $35-$40 by year end. When you see a sold stock run, you will think of everything bad: It’s going straight to $40, someone is going to buy them out, they’re going to cure cancer tomorrow, etc, etc. The market is truly built on regrets. So to emphasize it more, don’t get emotional. Jonathan summed it up better than me:

    Take loss, reevaluate if necessary, move on. Minimize hindsight
    self-criticism once you have drawn whatever lesson you can from a
    trade. It might be that you did the right thing even if you would have
    made more money by holding. If yes, forget trade. If no, try to figure
    out what to do better the next time, then forget trade. To quote
    famous trader: Losing your position is aggravating, losing your
    composure is fatal.

    The good news is that CVTX went up as well after I bought it, although not as much. I made about $400 in moving to CVTX by the end of the day. It makes up for part of it, but it still bugs me to no end that I missed out on PDLI. Aagh…

    And herein lies another huge irony of the market place. My biggest holding is Vertex Pharmaceuticals (VRTX). The stock has been on a rampage lately:

    I’m holding 2000 shares of VRTX, so today was a $4000 day for VRTX. The irony is that the $800 loss from PDLI feels worse than the $4000 gain from VRTX felt good, ie the magnitude of the PDLI bad was bigger than the magnitude of the VRTX good. Funny how that works eh?

     

    7 Responses to “Even a blind dog finds a bone some days…”

    1. Sandy P Says:

      I could have bot more CME at 170, but I followed Brinker’s 4% rule. Out $15K in 4 months.

      My 90s greed is returning.

    2. incognito Says:

      Nice Sandy. I get that feeling too that the 99-2000 greed is returning. Good and bad. Good that there’s money to be made. Bad in that there could be another blow up. We’ll see. This time, it’s different eh? haha

    3. MP Says:

      I got my ass handed to me a number of times trading individual securities. I never took the time to do the planning and research required. I gave up and now rely on mutual funds.

      It sucks to watch other people make out well on decisions you know you are smart enough to have made if you invested the time in it. It sucks worse to get your ass handed to you. So I’ve turned into a big puss when it comes to investing, but at least I’m not losing anymore.

      I’m still mulling over doing a bond ladder, as was suggested on a previous post. I appreciate the investing insights mixed in with the other content here. Thanks all.

    4. incognito Says:

      MP, glad you like. Yes, I’ve had my ass handed to me on more than one occasion. Half of it is luck. Sometimes the way I look at investing is to increase your chances of getting lucky. Jonathan pointed me to a book “Fooled by Randomness”. I say that guy found the magic bullet to getting rich: write a book on how to get rich.

    5. w so vason Says:

      There are four rules traders live by:

      1. go with the trend. The trend is your friend.

      2. bulls make money. bears make money. pigs never do.

      3. if you keep your head when all those about you are losing theirs, then you haven’t heard the news

      4. A speculator who dies rich has died before his time.

      Although long term price movements are rational, short term movements are random. In the long run yyou are an investor, in the short run a gambler. If you gamble only in stocks with good fundamentals you can either take your losses like a true gambler or become an investor.

      Also, take a thorough look at past tax court cases on traders (go back to 1920) to determine if you are one. You will be pleasantly surprised
      at your status and its benefits.

    6. incognito Says:

      Thanks W So Vason, good advice, especially the trader tax status one. I’ll have to look into that. I will have no income apart from trading in 2006, unless I find a job for the summer, but assuming no. Ideally any cap gains I want to try to defer until then, and take as much tax losses as I can in 2005. The ordinary income treatment of gains really piqued my interest. Presumably, without normal income my tax rate will be super low (unless I make a killing in the market). I’ll have to look at the tax table to determine and calculate estimates for both cap gain and ordinary scenario. Let’s hope I keep my gains until 2006. Excellent tip!

    7. GFK Says:

      correcting the line in an above comment, the saying goes:

      “Bulls make money, Bears make money, Pigs get slaughtered.”