Double Journey

Bear markets are very dangerous.  No matter what side of a trade you take, you can lose money.  Even if you yourself are a bear, chances are you will lose your shirt as well.

On Friday, the market decided to make sure I understood this point.   The worst job numbers in recent memory came out on Friday.   The numbers, while they look horrible, are actually worse then they look on the surface.  I have always had a problem with the employment rate and how it is calculated.  It counts as employed people who are underemployed.  That is, people who work part time but want to work full time or people who have a job that pays them much lower then they are qualified to make.  It also does not count people who have just given up.   In this type of economy, there are many people who fall into these categories.  People must also remember, that the financial and credit crisis are just starting to make its way into the economy.  That means, we are only in the first half of this problem with plenty more to come.

Anyway, the market was down after the numbers came out, as it should be.  I decided to get short the market.  But then a funny thing happened.  The market decided to shrug it off and rally, ending the day up by about 3%.  Now, there was no news that should have made the market rally.  In fact, there was more bad news after the job numbers came out.  But bear markets just do not care.  They move, very rapidly, in directions that do not really make any sense.  Since I was double short the market, I instantly lost about 7% of my investment

Now you could argue that the market has bottomed.  And you might be right.  I personally don’t think so as I think people still have not quite digested just how big of a bubble we really had for a year.  How do I know this?  I just look around me for the data.  I have been scanning the house listings seeing how much houses are going for in my area.  Housing that are selling are at about 2004 prices.  Houses that are listed are around 2006 numbers.  Now I live in Southern California, the epicenter for the housing collapse.  Yet people are still insisting on premium values for their houses.  2004 housing prices are still about double what they were in 2000 when the bubble started.  Does anyone actually think housing prices should have doubled in four years?  Further, the average house in the area is still selling for about 8x income.  This is more than double what it should be.

If this market bottoms, I am certain it will not be a violent ride up like this.  It will hover at the bottom for a while because the United States has a long way to go to work through all the issues that we have.   I still have an appetite for risk, and will continue to try and trade this market.  I jut hope that hungry bear does not get me before I get it.

I went short the market last Wednesday.  I did it by my normal method; I bought the Exchange Traded Fund SDS.  I bought this ETF when the market turned negative in the morning.  After three days of Rallying, I figured we would get at least one day of a correction.  My plan was to get in and out of the ETF as quickly as possible.

Unfortunately for me, it was also a travel day for me.  I was returning from my trip in San Diego so I was in the car for the middle part of the trading day.  In the car, I was listening to the news, and the market continued to go higher.  It ended the day several percentage points higher, meaning I was down almost 5% just that day.  Thursday, the markets were closed, so I was forced to hold on to the position.  I resolved to get out on Friday.

I woke up early on Friday to find the market trading relatively flat.  I was still certain that there was no way we would get five up days in a row in a market like this, so I waited until the market dropped a little bit, and I was going to sell.   The drop never came, the market inched higher and higher throughout most of the day.  Since it was a short trading day the market close before I could do anything meaning I had to hold on to my position throughout the weekend.  I was now down 10%, right at my stop price, and I was for certain going to get out on Monday.  I was hoping the market would not open up sharply higher, as this would increase my losses.

Well the market gave me a gift today.  The market tanked, dropping 8% in one day.  Since I was double short in my position, I made up my losses and more in one day.  While I was going to sell in the morning, it was clear the market was weak so I held on to it till the end of the day.  I sold half the position at the close and made a small profit after taking some very big losses.  I will get rid of the rest of the position as soon as it is reasonable.

The point of the post should be pretty clear.  I got REALLY lucky in this trade. I should have gotten out way before I did.  I almost had to take some big losses and the market bailed me out today by falling apart.   If you were me, you would also understand this.  Trying to play this market can really drive you nuts.  There was really no good reason the market was rallying last week.  There was no bottom reached.  Even if the bottom was reached, there was no reason stocks should have been up 15-20% in a week.  That’s insane.  That is not a sign of a healthy market.  But the fact remains, just when you think you have it figured out, the market does crazy things.

I did something stupid today, I broke my own rules.

I’ve been, rather successfully, playing the volatility in the market.  I have avoided playing the long side since it is extremely hard to do in this market , but when the market touched a low and bounced, I decided to go long the market.  I bought SSO at $21.62 a share.  I was willing to take a 10% haircut on this,  which would have put me at $19.42.

But one thing I have followed during the last few weeks was to not be on the wrong side of momentum in the last hour.  You see, this market has consistently accelerated in the direction of the day in the last hour.  That is, if the market was up the whole day, it goes even more up in the last hour.  If it was down, it goes even more down.  When I bought the stock I told myself I would not be on the wrong side of the momentum at the end of the day.  If the stock was down, i would get out before the last hour.

The stock actually touched $22.71, and I should have gotten out when it did.  Unfortunately, I was waiting for $23 and it never came.  Well it became noon, the last hour of trading, and I froze with indecision.  I couldn’t decide what to do, even though my own rules told me to get out.  At noon, the stock was right around $20.80.  The trend was down, and I should have taken my losses and gotten out.  I didn’t.  The stock, predictably kept going down.  I did a rookie mistake, and kept waiting for the stock to go up just a little more so I could get out.  It did not.   The stock went right though my out point and did I sell?  No.  I held on to it and saw it touch $19.10.   Some sense finally did return to me, and I sold half the position at $19.62.  That actually ended up being a local maximum, and the stock dipped below $19.00 before settling at $19.10 for the day.

One day, about $1000 lost.  Pretty sad if you think about it.  I really should have limited my losses better but I did not.  I could still lose even more considering I’m not out of the position yet.

The moral?  Know your rules.  Stick with them.  They are there for a reason.

I guess I just don’t learn. I took two short term positions in the market, and I got burned on both.  The financial play is a complete disaster for me.  I correctly called that the government would do something stupid and pass the bill, but the market reacted in a way I wasn’t expecting.  I could understand if the market went down slightly, and stayed flat on the news, but instead it decided to tank, and took off 5% from the top of the day.

You can attribute most of this to profit taking.  It’s a simple Wall Street strategy, buy on the rumor, sell on the news.  In this case, people were buying in anticipation that the market would rally, and as soon as the news hit people began to sell.  This dip in financials really doesn’t make any sense.  This is fantastic news for the banks and financial institutions in the short term.  The government is essentially telling them that they will buy all the crap still left on these financial institutions’ balance sheets.

I decided, probably mistakenly, to stay in this trade.  I saw the selling as a short-term knee jerk reaction to the news, and I hope that the market will come to its senses on Monday morning.  But given my track record so far, my advice to people should probably be do the exact opposite of me, short the financials.

This is why you don’t do short term trades.  I woke up early this morning to check my long positions to find out that what was going on.  But what I thought would happen went the exact opposite way.  The market started down, which confused me, and continued to go down.  I kept watching it go down, and then closed half my position as I reached a 7% loss threshold.  I’m going to hold on to the other half for probably a move 3% either way and then close it out.

Like I said, wild ride.  If you don’t have the stomach for it, better to just stay out.  I will close out my long market position but I will probably open up positions somewhere.  I’m interested now in Novartis (NVS) becasue I want a drug play and I want an international play, and it does both for me.  I also want to buy a bank somewhere as I think the strong banks will do very well going forward.  Maybe US Bank (USB) which has weathered the storm very well.  And of course I want to buy Berkshire.  Seriously, Buffet is a genius, but I’m going to write about that tonight.

I was having lunch with a former colleague from Microsoft. She was telling me how she was reading the book Rich Man Poor Dad and thought of me as she read it. In that book, Richard Kiyosaki describes how each job he took he took more for the experiences he would have and the lessons he could learn rather than the money he could earn from the job.

It is true. Each job I have taken I have taken with purpose. I have done this because I know that life is much more a marathon than a sprint. It is like my lesson on compound interest. Small sacrifices now can have a big impact down the road.

Now, that being said, I’ve been pretty lucky.  It’s not like any job I took forced me to live in a box and survive on Top Ramen.  But as I was considering whether or not to take a certain job, I definitely focused much more on the characteristics of the company and the job than on what my paycheck would look like.  This continues to pay off with each subsequent job I take as I’m very easily able to articulate why I took the job and what I gained from it.  This actually means I can generally get a job that paid me significantly more than what I made previously because I have had great experience and have a career with purpose.

So I am not advocating ever taking a significant pay cut just to get a job that gives you slightly better experience and learning opportunities.  Doing so has other bad side effects later on down the road.  But never ever make salary your primary concern.  Working to learn not earn will keep your career trajectory aimed very high.

I KNEW we had a housing bubble. On another blog, I called the top of the market in October of 2005. I was dead on in California. I was tempted to short the stocks of a few homebuilders and mortgage insurers but never did. I figured that Wall Street had to know that these businesses were in trouble and had already priced it into the stocks.

I KNEW that the Wii would take off. In fact, I told my friend Scott to buy Nintendo stock. I didn’t myself because I was too lazy to call my broker and place an order since Nintendo only trades on the Japanese exchanges. I knew how hard it was to get a Wii. People were snatching them up faster than they could be shelved, and I knew Nintendo had something special. I figured Wall Street knew too so, and I was lazy, so I did nothing. Stock doubled in a year.

I KNEW that Guitar Hero 3 was the must have item of the year. I was actually going to buy it a few weeks ago, and then Vivendi announced that it would purchase them. The stock jumped over 20% that day and hasn’t looked back.

There is the theory that the market always perfectly prices in all news to a stock. That’s a bunch of bull. Wall Street will often over react or under react to news. It’s up to you to figure out the real story and play things correctly. If you know deep down inside that the so-called-experts have it wrong, chances are, you are correct. There is a fantastic book by Peter Lynch called One Up On Wall Street where he talks about advantages that individual investors have on the street. One of the many advantages you have is that you see things at the ground level. Much easier for you to spot the trend starting than the analyst on Wall Street.

Happy New Year everybody!  I hope we have a great year going forward!

Wow, what a ride. I honestly didn’t think I would be in and out of this stock so quickly, but that’s what happens when you play in the small cap space. So overall, this was a pretty bad trade for me. Jamba opened higher but then traded down all day on pretty much no news, but the bears were firmly in control.

I actually didn’t check on the stock until it was down around $4.90 today. I should have sold there, but I was waiting for a better price. It didn’t happen. Like I predicted, as soon as it broke through its support it was straight downhill from there. Good to know I was right, but bad because I didn’t get out of the stock in time. Truth be told, I did not think that the stock would hit my stop loss point in one day, but it did. At $4.54, my stop loss executed, netting me a 10% loss in just under two days. Yikes! Lesson learned.

So that means I took a loss, including commissions of $243.42. Kind of painful.  Probably won’t trade rest of week and remain in cash.  I’m on my way down to California to start a new job.  Wish me luck.

Every once in a while, I’ll talk about something I learned along the way that has helped me build a pretty sizable nest egg at a relatively young age. So to start things off, I will give you my best tip. The secret to building wealth is to start building wealth.

I know what you are saying. What? Well the secret to building wealth is recursive. For all you non computer geeks, this basically means that the definition of something is contained within its own definition. As soon as your head stops spinning let me explain through my own personal story.

I wasn’t always on the path I am today. I started out of college with a good job that paid well. However, living in New York City, I had a lot of expenses. The two bedroom apartment I was renting was $3400 a month. My share of it was basically eating up half my paycheck. Somehow though, I managed to save some money and even put a little away in my 401K, almost $5000. After a year, I left my job and had to pay for my own move back to California, and that ate a big chunk of my savings. However, I still managed to keep enough for an emergency fund.

Over the course of the next few years, I was careful with my money, always remembering that sometimes, unexpected things like leaving your job and moving across the country can pop up and you need to be prepared. I still managed to max out my 401K every year and slowly but surely it was growing to quite a bit of money. As I became more successful in my career, I continued to see promotions and pay raises, but each time I kept my lifestyle pretty much the same. In fact, I began living more frugally. I’ll explain why.

The effect of getting more income and spending less money was VERY POSITIVE on my bank account. The higher I saw it go up, the more I wanted to see it go higher. The more money I got, the more interest I could earn from my savings account. As I started investing my money, I realized that the more money I had, the faster the whole pile would grow. This became almost addictive. I would find ways to save more and more money so I could funnel it toward these accounts. The power of compound interest is really displayed when you have a big bank account, and it just starts to snowball on itself. It almost becomes a game as you try to find more ways to save money or earn income to see the wealth grow.

So this is the best tip I can give. Just start trying to build wealth by any means you can. As you do it, you will find you really like it, and you will find other ways to increase your wealth. You will start getting into a feedback loop and you will soon realize that building wealth just becomes a habit. I now earn well over 2.5 times what I used to when I lived in NYC but I probably spend less money. All because I have become addicted to building wealth.

So one of the things I was thinking about doing was to buy some shares of E*Trade. I actually own shares in my regular portfolio, and have been getting KILLED lately. The stock has probably lost about 80% of it’s value over the last year or so. So why the heck would I want to continue with the pain?

Friday, a Citibank analyst came out and declared that there was a chance that E*Trade would have to file for bankruptcy because it had several bad loans, many tied to the subprime mess. The stock instantly went down 60% from its already low price. Now, It’s not that I don’t believe they are in a mess, but I thought the selling was a bit overdone. This blogger seems to agree with me. I was contemplating taking another, short-term position in the company, and wait for a dead-cat bounce. For those that aren’t that involved with stocks, you should think of this phenomenon as something that happens when a stock gets pummeled in a very short time. It tends to “bounce” back as people cover their short position (they sold the stock without owning it, and have to buy back shares, hopefully at a much lower price, to pay it back). I wanted to get a few percentage points and then get out, and I would have sold if the stock dipped another 7% or the very next day, whichever came first.

But I’m not quite set up to do this yet. I’m holding off trading stocks for another week or two. If I had taken a position in E*trade at $3.70, which I was planning on doing, and held on to it until right now (which I would sell) I would have made a tidy profit of almost 50%. I would have taken a position of $5,000, so that would have given me $2500 toward my goal. Oh well, it could have easily gone the other way.