Today I received a call from a friend who also reads several of my posts. The reason for the call was to congratulate me on my purchase of Alcoa (AA) at $5.55, plus the question of asking me where I am selling and when I would be getting back into the stock. Now several of my former colleagues that are still stockbrokers will not like this answer, but I’m not selling.
The fact is that I feel there is a huge difference between investing and trading. That difference is not subtle, and a huge part of the losses many smaller investors make on a regular basis. I can say from my experience that it is a leading cause of why the average investor loses money on some 70% of their portfolio each year (good or bad markets).
My friend has confused my investment and his trading tendency. The thought in his mind was that because I currently have a 67% gain I must want to get out of the stock and take the profit. Then I can simply wait for a pull-back in the stock and buy back in. This is a terrible technique.
First let’s look at the trading theory. I take the profit now. That’s 67%, minus the 5% it cost to buy the stock. Take out another 5% to sell the stock. Then come taxes, on a short-term (less than 1 year) trade they are about 25%. So I net 32%. This is great, but far less than what I have on paper; and no where near what my target was for the stock.
But the really important thing is the potential for the company. I bought Alcoa because I felt that it was well positioned over the long term. That due to the extreme emotional environment the discount of the company’s book value was ludicrous. I felt the company is worth at least 1.5x book value, which at the time I bought it was roughly 14. Even giving a 40% discount to book it meant that the stock was worth 15 to me. So I believe the stock still has a strong upside from here.
If I were to sell the stock, what guarantee do I have it will drop? Considering the extreme and highly pessimistic outlook at the time I bought the stock, what are the chances for it to go to a similar level in the near-future? If I get out, I must wait 30 day before buying back the same security (otherwise the IRS does not count the sale), so if the stock does tumble right after I sell it I get no gain unless it stays at unreasonably low levels. Or I have to have the vision of Nostradamus to pick the perfect 30 day window on the stock.
If I get the timing wrong, which is likely, the stock may run to my target. It could go beyond it. And then I own nothing. Or worse I might be buying the stock far closer to my target sell price and reduce my overall gain.
Trading stocks, or any investment, is a rush. It feels great to pick up a nice percentage gain and mention it to your friends on the golf course. And that’s about all it is useful for. It is not a means to garner true wealth.
Investing means you do your homework, which I did to find Alcoa and other stocks I believe are worth owning. Investing means you know your goals, which for me are long-term appreciation and in this case the occasional dividend (whatever that may equate to). Investing means that unless there is a change in the company or the markets that is significant and fundamental, you wait.
No bragging, no excuses.
So no, I have not sold my holding in the stock. Nor do I plan to any time soon. I love the fact that the value has increased in the portfolio, but I don’t follow it daily. I actually hadn’t realized it had run up so quickly, because I did not expect that for at least another 6 months or more. Still it is not where I targeted it. And the outlook has not changed. So I have no reason to act.
My friend thinks I am crazy. He believes that I am wrong. So here is the experiment. Just for the sake of mental masturbation, let’s assume I sell the stock today for $9.25, a gain of $1.77 or 32% net. In exactly 30 days we will say I will buy the stock back at the then current price. Let’s see if this makes sense. And then in another say 6 months from the theoretical buyback date we’ll take a look at the value then (if the stock does not hit my actual target). We can then evaluate which plan has created the best gain, net and not percentage.
Perhaps this will help some understand investing and true wealth as opposed to trading and bragging about 401k’s and such. But as always, I advise people to speak with a financial professional. I am a former stockbroker, so I may do ok for myself, but that does not mean what I say is perfect for your financial goals and outlook.