The Biggest Mistake

The biggest mistake most individual investors make is buying high and selling low. I know that this sounds dumb, but I'm surprised how common it is. I have a few coworkers who have proudly announced that they have recently reshuffled their retirement portfolios into GICs (guaranteed investment certificates). Indeed, one of the most vocal proponents of this strategy told me this about 2 months ago, when the market was within spitting distance of its (local?) bottom.

Now, if you believe the market is going to go lower before it goes higher, then cashing out what you've got and sitting until things improve is a decent strategy. But these are people have sworn off the markets permanently. They say they are not going to get back into volatile investments. So they've taken the full loss that the market handed them, and are going to make it back at interest rates that are currently about 2% annually, and might optimistically rise to 6% when the economy improves.

Worse...I don't believe they're out permanently. If they're driven by their emotions in this down market, it seems likely to me that when they look at all the money other investors are making in the next bull market, they will be tempted to get back in...probably again near the peak of the market. And so this kind of emotionally driven investing will continue to compound their losses with each cycle.

I think this is the reason for the popularity of the Buy-and-Hold strategy. It allows people to hold over the long term and so, while they won't see the big gains of people who sell during bull markets and buy during bears, they will at least see the overall long-term up trend in markets. It works if you don't chicken out, just as the contrarian approach works if you have the willpower to buck popular sentiment.

I don't know that I have any advice, other than if you don't like the market's ups and downs, you should get out during the next bull market, not now. For me, I'll continue with my current strategy of keeping my speculative holdings until I'm convinced they're not going anywhere, and keeping my retirement savings in fairly volatile, equity heavy mutual funds...they've actually only lost 25% in the bear market, and stand to gain much more when the bull returns.

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Photo by Timothy Valentine, used under the terms of Creative Common By-NC-SA 2.0.

Stress Much?

So my resource intensive portfolio has been melting down of late. FR is now down 23%, WEE down 34%. It's been a pretty nasty couple of weeks.

I keep toying with the idea of selling, but I just feel like these prices are insanely low for these companies, so I'm not prepared to do so. Maybe I'm crazy, but I still think that despite falloff in resource prices, they're still companies with a lot of growth potential. I'm particularly annoyed because these are companies which didn't benefit all that much from price runup, but seem to be taking the full brunt of the downturn in resources.

Anyway, still in them. Don't really want to sell when they're down...not while I'm still confident in their futures.

On another note, I opened a position in Timminco (TSX:TIM) today. TIM makes solar grade silicon, and was a star performer on the TSX last year. This year it had been performing well, but its second quarter earnings missed expectations, and led to a 25% drop in value. While that's cause for worry, I read the earnings information, and it seems like it it's not all that bad. I don't think it fundamentally changes the bright future for the company, which is what its stock price is largely based on. Pretty much the whole drop was in overnight trading, and today it held steady with high volume, so I don't think I'm the only one who smells a deal.

Sell or Hold?

It's been an emotionally intense week. After last week, when BMO continued to drop and I was worried about whether I'd recover any of the $320 I'd spent on August 48 calls, the stock shot up. Too fast, I would say. By the end of Wednesday, I was almost a full dollar into the money, and my calls were worth around $2500. But I had this target...I expect a peak next Friday, so I held off on selling them.

I'm still deliberating on whether or not that was a mistake. Thursday saw all of Wednesday's gains wiped out, dropping my calls by half their value. Today has been very up and down, the value of BMO has been sidelining, occasionally going down slightly, but generally hovering between $47.50 and $47.80. I have a history of holding onto stocks that have had good gains, only to see all those gains wiped out, ending in a loss. On the other hand, I sold my last option bet for a small ($400) profit, only to see them worth thousands more a week later.

So I'm really torn. I'm still telling myself that next Friday is the day. And if I've still got them, I'll definitely sell them then for whatever I can get. But getting that far without pulling my hair out will be a challenge.

Another Option Bet

The past month has continued to be fairly dull. I am hanging on to my positions in FR, WEE and BMO. FR and WEE have recovered from my earlier losses and are now hovering around my purchase price (I purchased FR at several different price points, so it is profitable for me at $4.71). BMO did the reverse, and so my portfolio continues be doing little for me.

But with the BMO drop, I saw an opportunity. August 1 is the day of record for the next dividend. At today's value, the $0.70 dividend is the equivalent of 6.5% interest, with lower taxes. So it seems likely that the stock price will recover significantly before August...the last dividend date saw the price spike up to $52. So I bought some August calls, with a strike price of $48. Currently, they're trading for peanuts - I paid $0.30, and they're currently at $0.20, but it seems like a good deal.

I like calls for a few reasons. They magnify the effects of normal market movements, so you can actually make a significant amount of money off of them, with limited downside. For instance, even in the worst case scenario that I hold them to expiry and they never go into the money, the most I can lose is $300. On the other hand, if the price were to repeat the last spike - to $52 - I would take home $4000. Somewhere in between would be fine by me.

It's Bike Month

I've been a bit delayed in getting my bike out this year - I've been deferring some major maintenance - it's needed a new drive train - on it for a couple years, and since I walk to work, there's not much financial benefit to biking. But I love my bike, and can't go the summer without riding, so I buckled down, spent the money and replaced my chain and gears the DIY way, and it now works better than it has in years.

And not it's got me thinking about bikes as an investment. Well...owning a bike is an investment to start with, particularly when it's an alternative to recurring fuel or transit costs. But with gas prices on the upward march, and increased concern about climate change, might there be some buying opportunities in the bike sector.

So I've been searching for bike related companies. This seems to have lead to a bit of difficulty. It seems like most manufacturers and dedicated retailers are privately owned. The ones that are publicly traded tend to do bikes as one of many things...and in a general economic downturn, I'm not sure that making or selling consumer products is generally a good place to be looking.

Shimano, which dominates the parts industry, is publicly traded, but only on the Tokyo exchange. While I'm not restricting myself to Canadian companies in this search, I'm actually not even sure my broker is set up for trading in Japan.

Bah...frustration.

Anyone know of any publicly traded bike manufacturers in North America?

Profit and Loss

By many measures, my portfolio is a risky one. My relatively small investment fund means that I can't reasonably hold enough securities to have a truly diversified portfolio. Of the stocks that I do hold, 2 of the three are young companies with no history of profit. And I have been seeing some decline in both of them.

But good news on that front. One of my largest holdings, First Majestic Silver Corp (TSX:FR) reported its first quarter earnings today. One million dollars.

The price reaction seems positive so far, finally breaking through the 4.22 resistance where it has been peaking lately. This also means that my performance since I started this blog has moved into positive territory by about $200 (representing a 2% gain). Time will tell whether it can maintain this momentum, but I now feel like my confidence that this company would rebound was well placed.

A Decision

Dull as it is, I've decided to stick with my current holdings. I think once I do decide to sell, I might try out the swing trading stategy I discussed on Friday, but before I jump in with both feet, I'll keep a watch on a few stocks that I would consider based on that strategy.

The two that I'm watching are Dragonwave (TSX:DWI), and IGM Financial (TSX:IGM). I guess it's clear by now that I'm very focused on the Canadian market. I've concluded that I don't really want to be taking any currency risk at this point in time.

I picked those two from a few that came up use stockchart's stock scanner. DWI showed up as an uptrend, while IGM was showing as a down trend. Of the options, they were the two that seemed to exhibit the patterns that I would be looking for in a swing strategy.

The difficulty I have with technical strategies is that technical patterns are easy to see in hindsight, but are, at best a guessing game while they develop. Patterns with opposing meaning can appear very similar before they complete.

So, I'm not risking any money on it, but if the stocks perform as I'd expect them to, I'll definitely try swing trading on live trades next.

Finding a Strategy

When I started on stocks, I had intended to trade them regularly in order to lock in profits and move on to the next opportunity. It hasn't really worked out that way. Currently, I'm hovering around the point where I break even since I started this blog. I believe I'm up slightly due to the BMO dividend, but I haven't recieved it yet.

So today, I started reading a bit. At first, I was mainly interested in how to read candle charts, as that had not been well explained in my class. But the website that I linked also discussed one type of trading strategy - swing trading - which makes a lot of sense to me.

Essentially the strategy revolves around identifying stocks that are in an uptrend (or downtrend for shorting purposes), and buying during "swings" in the trend...slight corrections in the middle of a larger trend.

So, I took at look at the technical strategy outlined there, and compared it to my own current holdings. While the news is optimistic on two TSX:BMO and, I think, TSX-V:WEE, it's a little less so on TSX:FR. Indeed, the chart seems to show that its recent recovery could just be the first swing in a downtrend.



So I'm left with a dilemma. I still think that FR is a solid company, and will come back, but I might potentially make more money if I were to cut my losses and try to catch a stock that is actually moving up right now.

There's conflicting emotions, too. (Anyone who can trade stocks completely on technical aspects must have balls of steel.) On the one hand, I am tired of holding on to the same three stocks hoping for good things to happen. But on the other, I am hesitant to sell stocks that I am optimistic about just because they've hit a rough patch.

Markets are closed for the weekend now, so I've got a few days to mull those thoughts over. It's really a decision between finding and sticking to a strategy, whether that be the buy and hold stocks with good fundamentals, or frequent technical trading. We'll see how I feel about it on Monday.

Update - Picking a Brokerage

The first thing I did when I started this blog about a month ago was to go through and pick a discount broker. I ended up going with Questrade, and, despite opening the account being a painfully slow process, I've been pleased with them.

Yesterday, they announced a change to their commission structure. And it's a good thing. Under the old system, you had to pick between either the 1c/share ($4.95 min) plan, or the $9.95 flat rate plan. You could only change on the first of a month. While this was still a great deal, there were some problems with it. The big one was that if I, as someone who normally makes small trades, were to find a 10c penny stock that I wanted to buy 10 000 shares of, I'd end up paying $100 in commission on it.

Some, my girlfriend for instance, might think that dissuading me from reckless behaviour is a good thing, but I like choices are better. The people at Questrade seem to agree with me, and they changed to a single fee structure: 1c per share, $4.95 minimum, $9.95 maximum. Options commission remains at $9.95+$1/contract. It's simple, it's cheap, and it should suit almost everybody. I'm impressed.

Fighting the Emotional Response

I think one of the easiest traps to get into in this game is to watch your money fluctuate daily. On the one hand, you need to keep track of how things are performing, but on the other, it's an emotional roller coaster as things bounce up and down and all around.

In short, this week I wiped out my previous gains, and then some. I had made $600 on Wavefront (TSX-V:WEE) last week, when I sold for $3.18 a stock that I'd bought for $2.10. Since this appears to be a company with great growth potential for the future, I bought back in at $2.90. Now it's $2.70. I also jumped on to Bank of Montreal (TSX:BMO), a stock I've been considering for a while. Unfortunately, while waiting for my account with Questrade to open, I missed out on some of its best bargains, and the price has backed off a good 5% from where I bought it. And lastly, my holdings in First Majestic (TSX:FR) continue to languish, and despite a small rally, I'm still down a couple hundred dollars on them.

So the problem I'm having is this - I'm confident in all of these companies. I believe they're great long term holdings. But in the short term, I'm watching my market value wither, and I can't help that gut response "sell...it'll be cheaper later." I think there are times to sell losers - when there's reason to believe that the market is near the top of a cycle, or if new information is comes out that doesn't look good. But this isn't one of those situations. The market is at least mid-way down, and I personally think it's closer to the bottom than that, so selling even stock that largely moves with the index - BMO - seems to pose an equal risk to holding.

And WEE and FR could be poised for a breakout year. WEE's technology is now market ready, and they made a major sale to a Texas oil company last week, so I see no reason to believe more won't be on their heels. FR's production is way up, and it would not be unreasonable to expect them to start posting profits this year. There's a Warren Buffett quote to the effect that stocks are the only thing that people start buying as they get more expensive. I'd rather be in now than wait for the next announcement.

So, I fight the emotional response. It doesn't make sense to sell solid companies just because they're declining in the short term. But it's sure a tough urge to fight.

Ups and Downs

I have concluded that markets are psychotic. I suppose this was obvious before, but this is the first time I've had money in more volatile investments where it becomes really obvious.

So, my three holdings up to today were First Majestic Silver (FR), Wavefront Energy (WEE), and iShares Gold Index Fund (XGD). Yesterday, the market was expecting the US Fed to cut interest rates by 100 basis points, and it only did 75. This seems to have caused some kind of major overcorrection in gold prices, and XGD has dropped significantly over the past couple of days. FR has been going downwards ever since it made a private placement a couple weeks ago, and today dropped below 4.60.

On the flip side, WEE announced a major sale of its technology to a Texas oil company, and went from 2.59 at open to 3.56 at its peak today. It's now bouncing between 3.22 and 3.30. While this one was great for me - it hit my sell price of 3.18 around noon and leaving me with a $600 profit on a $1600 investment - in just two weeks - I think that perhaps this is my greatest confirmation of market psychosis. None of the news releases that I found seemed to indicate the value of the deal, but I'm having a hard time picturing it increasing the company's worth by 50%. More if you note that it also posted some hefty gains yesterday.

So here's what I'm trying to figure out - when do you bail on a losing investment. I'm still confident that FR will come back once the market's had a chance to digest 8.5 million shares, but XGD I'm iffy on. I bought it based on some discussions that while gold was in record dollar territory, it was a long way off its inflation adjusted highs. However, because gold is so high, I'm not confident that holding it will come back if I hold onto it in the longer term.

I'm having a hard time pegging exactly what makes gold tick. I would have thought a rate drop of 0.75% would have been good news for gold. But it's dropped a lot in the wake of it. So I've got some reading to do, and if I actually have any readers, would appreciate anyone's thoughts on where gold is going from here.

Banks? Good Value?

I'm currently thinking that, despite all the market turmoil at the moment, that it really might not be such a bad time to be starting out in the investment world. I mean, the market has fallen significantly, so there should be some good buys around, if only I can accurately gauge when things are near the bottom.

So I'm looking at the banks, which have been very hard hit by this credit crisis. Bank of Montreal (TSX.BMO) is off 45% from its 52 week high, as is CIBC (TSX.CM). The much better performing ScotiaBank (TSX.BNS) and Toronto Dominion (TSX.TD) are down around 20% from their highs. Price-Earnings ratios for most are in the 10-12 range - CIBC is the exception, with a PE of 22. The historical average for PE is 16, so it's looking to me like there just might be a bargain to be had. Nothing I've read has suggested that these banks might be going under, so when the recovery comes, they should go up quite a bit. Right?

The problem with using PE to base your buying decisions is that it relies on earnings remaining fairly constant. Right now, the professionals seem to be saying that bank earnings are unpredictable, and it would be a good idea to instead look at price-book value ratio. One article I was reading suggested that they're still overvalued using this ratio, when compared to other market troughs.

So I'm not sure what to think. I'm waiting until I get an account open with a lower-cost broker - I decided on Questrade - before I buy anything else, since the TD Waterhouse commissions really hurt potential profits, and do nothing but increase the pain on losses. But I think that if the banks seem to have flattened out by the time that's complete next week, that I'll buy into one of them, I'm currently leaning towards BMO, but I need to look into it further.

On Private Placements and Warrants

Well, just last week I started buying into some stocks, two specifically, both ones that had been discussed in my investment class, and, after I'd done some more research, appeared to be good buys. One is First Majestic Silver Corp (TSX:FR), a small silver mining company that is rapidly developing mines in Mexico. The other is Wavefront Energy and Environmental Services (TSX-V:WEE), a company that has developped a patented technology for better distributing fluid injected underground - the major upshot of which is being able to extract significantly more oil from depleted wells.

Yesterday, both of them made announcements that had to do with private placements, and warrants, so now seems as good a time as any to share what I've learned about those.

What is a private placement?
Since this blog is about being a beginner in the investment world, and I'm expecting any readers (should there be any) to also be beginners, some explanation is in order.

Essentially what happens is that new shares are created and sold to raise capital. It's not a public offering, you have to be invited to get in on it, and usually that only happens to people and companies with deep pockets. Additionally, most private placements include warrants.

So, then, what's a warrant?
A warrant is a type of options, and from the holder's perspective is a lot like a call. They allow the warrant holder to buy a share at a fixed price for a fixed amount of time. The difference - aside from warrants being free as part of a placement - is usually the length of time, and the source of the shares. When you buy a call on the options market, usually the longest ones expire in 6 months, while warrants are typically good for 1-3 years. Then, when you exercise a call, you are just buying existing shares from someone else, and they lose money on the deal, whereas if you exercise a warrant, new shares are created by the company and sold to you...meaning that even though you're probably buying them at below market value, the company still raises extra capital when they're exercised.

Some warrants are traded on the markets as well.

Make sense?

And what happenned yesterday?
Yesterday, First Majestic announced that they were entering into a private placement with several underwrites, including CIBC World Markets, Blackmont Capital, Cormark Securities, and GMP Securities. They will sell those two companies a total of 8.5 million shares at $5.35 per share. One warrant will be issued for every 2 shares, with a strike price of $7, and good for 2 years. Before this announcement, FR had been trading at $5.65...great news for me as I'd bought it last week for $5.10.

So what's it mean...basically it seems to mean that I'm not rich enough to make the serious money. More specifically, what it means in the short term is that the stock will likely decline...that's a lot of extra shares out there diluting the value of the company. I'm not sure how low it will go, it opened this moring at $5.14, and has hovered around there for a few hours so far. Only one trade was below my own buy in, at $5.07, so I may be alright. Also, the effects of warrants are interesting. In my class, we've looked at a couple of stocks with outstanding warrants, and what seems to happen is that the big players who hold the warrants start shorting the stock when it hits their strike price, causing the stock to drop, because they have insurance that they won't lose money on the deal if other trading manages to counteract the short. Since the strike price is $7, this would still be a significant profit for me, so I'm not all that hard done by. However, when I got into FR, I was expecting it to be a quick turnaround...maybe a month or so, as it was significantly undervalued and looked poised for a breakout. Now I'm expecting to have to hold for several months to see the gains I wanted.

With Wavefront, the event was almost the exact opposite. Wavefront had previously concluded a private placement, and has outstanding warrants as a result. Their announcement was that because their 20 day, volume weighted average closing price was above $1.50/share, all warrants - which had previously had expiry dates of either Dec. 24, 2008, or January 31, 2009 - had to be exercised within 30 days.

I'm new at this, so exactly what this one means required a bit of research. Essentially, it's a good thing, because removes the warrants from circulation, which, as previously discussed, allows big players to play with the stock price with no risk. Share dilution - the new shares created when existing warrants are exercised - already shows up on the financial statements, so the share price should already be taking into account the existence of these shares. So, the effect of this should be negligible or good. And today's results seem to confirm my understanding, as the stock is continuing to slowly increase.

On the chart below, you can see the overnight effects of this news:

Picking a Discount Broker

I've been a TD customer since I was a child, and have had a discount brokerage account with TD Waterhouse since I first bought mutual funds 7 years ago. Until now, I'd only ever used that account to trade in TD mutual funds, and saw no commission. Now that I'm branching out, I've quickly realised that for investors with less than $50k, and fewer than 30 trades last quarter, it costs a wopping $29 per trade. Since I'm starting out small with trades around $2000, that means my stocks have to go up 3% just for me to break even, clearly not an acceptable situation.

So I'm in the market for a new broker. As it turns out, picking a broker is like picking a long distance plan - everyone has a completely different fee structure, so you have to guess at your useage in order to pick the cheapest. I've laid out the prices I expect to pay as a beginner in the spreadsheet below. For other types of investors, there's also a summary over at the Stingy Investor.



If you find the spreadsheet confusing, you're not the only one. It's my attempt to present the complicated fee structures as consistently as possible. Basically, unless you meet the discount threshold, you will never pay less than the minimum trade cost.

Price isn't everything, research tools are also important, so I'm going to have to give some thought to that as well, before making a decision

Types of Investors

From what I understand, there's three broad groups of investors in the market:

Long-term Investors -
These sorts look at the fundamentals of a holding and buy for the long term, weathering out the ups and downs in order to see long term gains. Most consumers seem to long term investors, and it's certainly the mentality that's pushed by the financial services industry. The good thing is that over long periods of time, stocks and other investments do rise, so for things like retirement funds, long-term investing does work.

The downside is that because long-term investors hold on through the down cycle, they have to see higher returns on the up side in order to arrive at the same place as others. In recessions, markets usually lose around 30% of their value, and have lost as much as 50%, so when things recover, long term investors need to see a gain of 42%, and as much as 100% just to get back where they started. Another problem, particularly with small individual investors, is the panic psychology...many of us, and I include myself here, will panic when we've lost 10%-20%, and end up selling off, and then missing the recovery. This has been one of my biggest problems in my past dealings with mutual funds, and something I'm hoping to avoid going forward.

Traders -
Traders keep an active watch on the market, look for bargains, and then sell when they've seen the return they're looking for. Some traders also look for overpriced stocks to sell short, and again, cover them when they've seen their target return. From what I know, this involves taking into account the fundamentals of a company, as well as technical analysis on how it's trading. I'll discuss what I've learned about analysis in another post.

Speculators -
These are your high risk, high reward types. There's a lot of grey space between trading and speculation, but basically what makes a speculator different is that they completely discount the fundamentals of a company, and focus entirely on short term movements in the market.

Myself, I'm aiming to be more of a trader than anything else. Shorter term profits, hopefully, but still keep track of the fundamentals of a company, so if it doesn't go up as expected, I can confidently hang on until it does.

The Back Story

I have long felt that I'm under educated when it comes to investing and managing my savings. I have some vague understanding of stocks and mutual funds, but couldn't tell you how to judge a good buy from a bad one. As a result, I have had mixed results with the mutual funds I've held in the past, tending to lose money almost as often as I profit.

So, when my grandparents gave me a large gift for my 25th birthday, I finally decided it was time to do something about it. My first step was to sign up for an investment course. I decided to skip out on the free seminars provided by the banks, figuring that they exist to push their own products, and signed up for a course offered by the University of Alberta called "The Art and Science of Investing." I'm now halfway done the course, and have received far more information than I would have thought possible in 6 2-hour sessions.

Now it's time to put some of this new knowledge into practice. I'm starting this blog to share what I learn, keep myself motivated, and hopefully help other beginners.