Trades and investments, part II
Cramer makes so many lists of what to do that it's laughable. If you put together all his top 10 and top 20 lists of rules to trade by and invest by, you'd have a couple hundred rules.
Today I want to talk about "Never turn a trade into an investment." Looking back over the last 3 years of trades I've done, I notice that I've caught a number of nice pops and sector rotations; I've been up overall between 23 and 28% each of the 3 years, counting my entire portfolio including indexes and the two bond funds, and those would be 05, 06 and 07, which were decent years for the market overall.
What I find, though, reviewing the way I've done this, is that I'm not investing. I am spending a lot of time analyzing the fundamentals but in the end I am holding on average for 3 to 6 months. This goes along with data about the average retail investor, who holds on average for 3 to 6 months.
I'm not necessarily opposed to this. With the information that 50% of a stock's price action comes from its sector, and with the basic understanding of sector rotation, and with the absolute nimbleness that comes from being able to trade as I wish in a tax-advantaged retirement account, all those trades made sense at the time. I also am a little bit picky about my entry and exit points, and this is really important - if CAPS has taught me one thing, it's that you just need to grit your teeth and wait for the right entry and exit points to come along. Because they usually do, and because probably half my gains are coming from price movements on the day I buy or sell the stock.
I don't trade my S+P index or my bond funds, and that's fine. They've also been spectacularly consistent performers - I picked them up from 05 through 07 using dollar cost averaging, and when you do that averaging and figure out what I paid for them, that's what they're worth today, to within a percent or two. I am not thrilled with that kind of performance but it is quite consistent. All the growth in my portfolio is coming from my trades; I'm averaging +35% on them, more or less.
I have a definite preference for good companies with no debt and real dividends, dividends > 2% per annum, and one of the reasons is that these stocks have treated me very well. But I'm surprised at how much time I've spent thinking about the dividend yield and then ended up selling the stock after 3 to 6 months. I happen to think that for a certain kind of company, the dividend yield (in the context of the dividend record and the payout ratio) tells you a lot about the company's fundamentals and the priorities of its management, and so I use it as part of a way to value a company and look at its fundamentals (I've written about that before); but I haven't actually collected all that many dividends.
Right now I am holding a fairly large GM position that has been nothing short of catastrophic and it is bidding fair to wipe out all of my 2008 gains to date. I got into it the same reason I got into Altria, more or less - I think its foreign operations are seriously undervalued and well-positioned to outperform, given the weak dollar. (I sold off my MO stake last week, right before this breakdown; kept the PM.) The $68 billion writedown, which I still do not understand, came out about a week after I took 75 shares at 36; I picked up another 150 at 22, afraid I'd missed the boat. Well, the boat has come back into port, what with this week's oil shock and Bernanke's caws of doom.
I don't know quite what to think. The American Axle strike, the other strike, the horrible domestic conditions, and the prospect of a global oil shock seem like a pretty negative story going forward. I didn't specify, buying GM, whether it was a trade or an investment, but it sure as heck is not going to turn out to be a profitable trade. The question I'm asking myself now is do I make it an investment and buy another 150 at 17, or do I run for the exits and try to stop the hemorrhage. I do kind of feel that, since I am not understanding how a 206B cap company can have a $68B 1-quarter writedown, what is to stop them from surprising me with another one just like it next quarter?
"Never turn a trade into an investment," says Cramer. I guess I need to s*** or get off the pot.