One method I’ve used to make tons of money investing is through buying shares of good (or in some cases only decent) companies when they’re distressed. It’s not rocket science. After many years in the market my mind is trained to look opposite the people screaming and running away. You only have to fall off so many cliffs following the herd of lemmings that you learn to become a salmon…..
Sometimes this backfires, and generally things go wrong when I purchase shares emotionally. That’s why, in the next several weeks, I’m going to begin a project that I haven’t done before (I know what you’re thinking….there’s some financial concept Joe hasn’t yet personally explored? Say it isn’t so!).
What I’m Going To Explore
I’m going to try to build an algorithm that captures good companies when they head south and sell them before the party ends.
Here’s why this is funny:
– I know zero (and I mean ZERO) about building an algorithm.
– I only have a cursory idea of what I’m trying to accomplish. I spoke with PK at DQYDJ.NET and I’m fairly certain he thought I’d been smoking something funny before I sat down at the keyboard.
I won’t call this financial planning. It isn’t. I also won’t call it responsible. I’m the guy who encourages people to stick to indexes, to asset allocate your portfolio (diversify appropriately), and leave it alone.
So why am I going to start making some stock trades?
I’m intrigued by books like Stock Market Wizards, where people have found algorithms that produce consistent results that beat the pants off the market. I also know enough people who read this blog who are afraid of the market that I’d like to show that while it’s a wilderness out there, you can find established pathways.
The Basics:
Here are a few areas where I’ve made money that I’d like to see if I can systematize:
– When Eli Lilly a number of years ago was denied FDA approval for a new drug, investors fled. Knowing that Lilly wasn’t going to go bankrupt, I jumped in. Within six months I’d gained well over 40%.
– When the financial crisis hit some firms in late 2010 I jumped all over it. I purchased shares of a quality financial advisory firm, Boston Private Financial Holdings, and have doubled my money.
– When Bank of America was in trouble with the government, I swooped in and made a purchase. I doubled my money in just less than 14 months.
– When Yahoo! Announced Marrisa Mayer as the new CEO, I purchased.Maybe this one doesn’t qualify, but Yahoo! shares dove and I jumped in, thinking that the new CEO would (at least through her fame) make some headway in the stock. Yeah….it’s rockin’…nearly 40% in seven months.
I’ve also stepped in it:
– I purchased BP shares when the disaster in the gulf appeared. While I had fantastic initial gains, I held on too long and now have been saddled with a pretty crappy return…18% in three years. Luckily, I invested a whopping $1,800.
– I bought Carnival when the ship limped in to port and shareholders fled, anticipating a class action lawsuit. The shares, even after lawsuit factored in, became very cheap. Who knew they could have another problem a week later? I sat on a rotten return for some time until shares finally rose this summer with the market.
– When JCPenny fired their CEO, I’d just begun a love affair with the company. I got it. Shares cratered and I swooped in. Oops. Apparently I’m still the only one who loves JCP.
My Choice
That’s why I don’t recommend playing with individual stocks as an investor. It’s risky. However, I have two choices. I can either:
– Go back to 100% passive investing.
– OR learn from my mistakes and create a system. Then I can hone my system as I’m beaten up.
While I advocate option #1 above for most, I’m going to go down the road of option #2. Most investors I know touch the stove and then decide to never buy one again. I’m going to use my money as a learning device. Rather than decide I “won’t cook,” instead, I’ll tweak.
Here are my precepts:
– This isn’t with a major part of my portfolio. I’m using less than 10% of all of my money for the grand total of all of these buys. For most of my investment, I’m using ETFs or funds where ETFs aren’t available (Cheryl’s 401k).
– I’m not advocating this for my readers. However, I thought it’d be fun to follow along as I try this out.
I’m not sure how this is going to turn out. Sometimes I feel like I’m looking for an easy return, and will probably end up like this guy stealing a phone from a woman in Russia.
If I end up like him, hoping to steal something that isn’t really available, you can consider this series a public service announcement. 😉
Go Joe! lol I love experiments and this sounds exciting. I can’t wait to see how it turns out!
I think a big part of investing like this is knowing your exit point, so I’ll be curious to see how you work on that. It’s been the biggest reason we still own shares of BP (Mr PoP bought that after the spill for ~$28, I think. But he doesn’t really have an exit plan, so we still have it (just about $600 worth) and the CAGR was great at first, but is getting worse the longer we hold it without an exit pla.
It will definitely be interesting to follow along. The problem I have with most algorithms is that they look fantastic when they’re back-tested but don’t pan out when they’re actually implemented. It’s pretty easy to find something that would have worked in the past. It’s much harder to find something that will work in the future. But you’re clearly acknowledging all of that and going into it with eyes wide open, so I wish you the best of luck!
Aside from the disclaimers, which I understand why you have them, I think you have a great point Joe. At times, you can really find some solid bargains in the market if you have your head about you and are willing to swim the opposite direction that everyone else seems to be. I’ve done this, to a certain extent, myself and usually have some decent success. Of course, there’s always tend to be the stinkers like JCP but you can usually get some equally good winners.
There’s something to this idea though. Why? Because the stock market oftentimes overreacts and pushes the price unrealistically down. I didn’t invest in it, but here’s another example. The market hated Hewlett Packard about a year ago. The CEO position was in turmoil and the Board unsteady. All the analysts said HP can’t compete and Apple is taking over the world. Yet, HP was still a $125 Billion in rev company. So, the $12 stock price low was absurd. It’s back up to ~$25 now.
I came so, so close to buying HP…..but that one looked too risky to me. Hindsight, huh?
PLEASE keep me posted on this algorithm! I would like to be a part of that!
I almost bought BofA when they almost became unlisted. I did fear that it might get so bad that the value would almost disappear. If I did purchase at the time (they had basically become a penny stock) I think I would have quintupled my value.
I am curious, what perimeters or limits do you set for when to sell these purchases?
That’s going to be the hard part. We’ll have to design and tweak. I have some ideas, but they’re so long and convoluted I’m going to save that discussion for another blog post.
Sweet man, I’ll be on the lookout.
No matter what happens, this like, automatically, makes for a good podcast or three.
I’m interested to see how this works out, and am rooting for you to make some dough!
Thanks. that’s what I thought, too. It’ll be a fun train wreck, at the least.
I’d do this, but I don’t have enough money in my portfolio yet AND I wouldn’t know when to sell. I might try to mess with some individual stocks with a small percentage of my portfolio when I get more seasoned as an investor and have more money at my disposal.
Come on, Lance, bet it all! 😉 Wasn’t there a movie about a guy who was going to take his whole life savings and put it on black at the casino?
Sounds really cool. The world algorithm sounds super fancy so I know I’ll be impressed. 😀
I’ll have to think of more fancy words to keep you coming back, Cat. How about “standard deviation”?
I’m back! It worked! 😉