Crystallizing losses

I recently read a piece of marketing fluff posing as research from a financial advisor. It recommending holding firm in the face of losses in the stock-market to benefit from the bounce back.

A lot can be learned from how an investor reacts to losses and continuing uncertainty.

One option is to hold tight. All markets have historically turned around so eventually the investment come good.

The other option is to sell and crystallise a loss. Wipe the slate clean and begin again. Remember you may be eligible for a tax deduction on the loss (capital or income).

Thirdly it may be possible to sell part of the investment and holding part. Let’s ignore this for now. Just note you may want to do that.

What are the risks of following either strategy?

The first exposes investors to ruin if the investment collapses and below-average long-term returns if it plays catch up.

The second strategy leads to over-trading. Nobody can time the market perfectly over a long period of time. Transaction costs of entering and exiting investments can be exorbitant.

I am constantly evaluating investment opportunities. My money must work so hard it sweats. Therefore I prefer to cut losers free and allocate the funds elsewhere. This only works if I identify a better investment. If I don’t have an alternative need I ride out the storm.

I do head-miles when I make a bad investment decision (for that matter I do mental gymnastics when a deal goes well). I take pride when I admit my error and get on with life; reminding myself that investing is part of life.

As I make more investment decisions, they become easier. It also gets easier to deal with the inevitable mistakes.

Ask yourself how do you deal with your mistakes. Don’t try to act in a way inconsistent with your values and makeup. Look for what makes you feel physically uncomfortable. Compare crystallising a 10% capital loss followed by a 20% gain to the thought of holding on for a year or two until the poor performer turns around and goes up 8%. This is the same result via different paths.

Sell 5745 ALZ @ 1.44

The pre-determined sell point is reached and my sell order kicks in. As I held for more than 45 days I am eligible for the franking credit. I’ve held for 46 days ;).

Return before franking credits
0.03 Dividend
0.04 trading gain
0.07 on 1.40 = 5% for 46 days holding (before brokerage).

$402.15 (0.07 x 5745) less $43.78 brokerage = $358.37 plus franking credits.

What if ALZ recovers back to it’s 52 week highs of $1.93? I didn’t research this as a value stock so I don’t know. But I’ll take a 2.5% per month return anyday.

Foray into CBA Warrants

A broker from my past called me. He’d changed brokerages with the closure of Barton Capital and asked me if I had a full-service broker. I said I’d give him a go.

Full service brokers can be useful in the following areas:
1) Trading out of market hours;
2) Accessing research;
3) Short selling and derivatives;
4) Margin facilities are easier to set up;
5) Learning something about the markets or getting a perspective from other markets;
6) Potential access to lucrative IPO’s and capital raisings (don’t hold your breath).
7) Easier execution of orders.

Now these benefits come at a cost:
1) 1.1% brokerage rates are up to 10 times what I pay;
2) He wants to sell me stuff;
3) The risk I may start thinking he knows something.

Anyway, in July he casually mentions writing a covered call over margined CBA as it goes ex-dividend. I’m told CBA normally runs into the dividend. Could give a 20% return.

Hey I know the theory but never tried it. I’m in!

Sadly it all got too hard to do in the time available. But the research I’d done exposed me to CBAIMG. Similar outcome, and a chance to play with instalment warrants as well. Why not?

I get in on 12 July at $5.56.

The roller coaster takes off. It’s up 10%, it’s down heaps. The dividend covers most of the down-side. So I set my stop-loss at 10% below ex-dividend.

It doesn’t perform as expected. Am I really surprised? No and that was ok as I didn’t mind holding CBA longer term if required.

Anyway it comes back over the last little while. I start crunching numbers and realise that I could get out for a net 3% gain on a 2 month holding. That’s fine in my book.

Today CBA runs like crazy. By the afternoon, Dow futures are down 74 points. I’m expecting the All Ords to get caned tomorrow if the Dow bleeds.

Time to POP the chute – out at 3:55pm at $5.35. Add in $0.82 fully franked dividend and I’m up 8.8% after brokerage before tax and interest. Not bad for two months and a deal that didn’t go as planned.

Lucky first foray?

Strange questions from smart people

I was writing and publishing paper-based ‘zines and newsletters back when the Apple Macintosh was first released. They were a beautiful piece of kit and introduced the phrase WYSISYG to the world (What You See Is What You Get). Strangely, new writers asked published authors which computer to buy to write their novel.

Did you know that Jack Kerouac typed On The Road on a big roll of paper?

I progressed to publishing children’s books and adult non-fiction. Again the questions were about the tools not the technique nor discipline. I moved on to writing, editing and reading movie scripts. This time I was asked how to bind a script, what font to print in, whether to use US Letter or A4 paper.

These days I build businesses and invest in creative real estate like wraps. I get more questions about what software I use to track buyer’s payments than I get on negotiating strategies.

I think this is because we need to feel in control of our environment. Investing involves conquering fear and taking action. I always feel butterflies in my stomach until I take that step. In the early days, my response was to look for something to explain that discomfort. I used to hunt desperately for anything to logically hang that feeling on. Until I recognise what happens in my guts, I waste time and energy fixing problems that don’t exist. Am I installing an accounting system because I have legitimately identified a shortcoming? Or is it something from the to-do list that feels like progress?

However fear is not logical. Logic can sometimes overcome fear, but it really takes courage to recognise the situation and take action in the face of fear. If this step is missed, we don’t learn from our previous deals. The internal battle must be fought for each new deal.

Am I counselling a headlong rush without considering support systems? No, of course not. Take the time to set up, NASA is a good example – the countdown doesn’t end at zero.

The mission begins with Lift-off…; T+1…; T+2…; T+3…

Your preparation steps are for the main show. Focus on what gets you paid.