My month-long experiment with Countrywide Financial is over.

As I’ve mentioned before, I keep a small portion of my investment portfolio designated for “fun” trading. That is, trading that is more speculation than investment, the sort of thing most people think of when they consider the stock market. About $80,000 of my retirement accounts are invested in index funds, but I have $1,000 set aside to buy whatever I want.

Speculation is NOT investment
In general, “whatever I want” translates into stocks of large companies who have been experiencing bad press. For example:

  • The first stock I bought was General Motors (GM) in January of 2006 at $18.62 per share. I sold it four months later at $23.56 per share.
  • Next I bought Microsoft (MSFT) at $23.18 per share. I sold this in September of 2006 at $27.31.
  • I sat on the proceeds for a while, then bought United Parcel Service (UPS) for $76.16 per share.

The UPS purchase was silly, even for my “fun” money. It didn’t meet the requirements I’d set for myself — the stock hadn’t suffered a nose-dive. I bought it because I had heard Warren Buffett was buying it. Dumb. If I had bought it before Buffett bought it, that would be one thing, but buying it after a major magazine article mentioned his activity was poor judgment. Still, I held onto UPS for nearly a year, finally selling it at $76.41 per share in this past August.

Countrywide is on my side
Why did I sell it? Because, as you may have noticed, one big company has been beaten up in the press and on the stock market lately. Countrywide Financial (CFC) has taken a lot of heat during the sub-prime lending mess; its stock fell from $41.31 per share on May 17th to below $20/share at the end of August. Using my completely non-scientific method, I bought 51 shares at $19.44 on August 28th.

The past few weeks have been a roller-coaster for CFC. The stock has been up and down — mostly down. I’ve violated one of the primary rules of smart investing — I’ve been following the stock’s movement every day. (Smart investors buy and hold, so daily movement doesn’t matter. It’s enough to check your portfolio every month or so.)

When CFC bottomed out at $16.35 on September 12th, I’ll admit I was nervous. But rather than sell the stock, what I wanted to do was buy more. (Actually, the 10th was the day I considered buying more.) I didn’t have the funds to do so, however. (I’m plowing all my money into debt reduction.) After the 12th, Countrywide stock climbed higher until it traded as high as $21.99 on the 19th. That’s right: if I had been able to find an extra $1,000 to invest on the 10th, I might have made $300 in just over a week. If.

Looking for an exit
To be honest, though, the stock’s volatility began to drive me nuts. I wondered if I wouldn’t rather have the money in a nice, safe index fund. “It’s my fun money,” I kept telling myself. “It’s meant to be used for risky speculation.” Except I wasn’t having any fun. And the more I read, the less I wanted to hitch my wagon to Countrywide’s star. I decided that maybe it would be more fun to earn safe returns.

When CFC crept back up around $20 on Monday, I seized the opportunity: I sold it at $19.99/share. In five weeks, I transformed $1000.00 into $1008.22 after expenses. (That’s an 8% annualized return!) Today I moved my “fun” money into an index fund (EFA).

Lessons in risk tolerance
Risk tolerance is a fundamental investing concept. Each person is different. For some, even the slightest possibility that they may lose money induces a stomach ache. Others are willing to risk potential losses of the potential gains are greater.

I used to have a high tolerance for risk — I was willing to gamble my money for the possibility of a quick gain. But I’ve become more cautious over the past few years. It seems to me that fine returns can be obtained with minimum risk, so I no longer see the need to indulge in speculation.

Maybe I’ll set aside another pool of “fun” money when I max out my IRA at the end of the year. But if I do choose to use it for speculation, I’m going to try to find something less risky than Countrywide.

You can learn about your risk tolerance with the following tools:

For the record: GM is now trading at $37.05, MSFT is trading at $29.70, UPS is trading at $75.65, and CFC is trading at $20.29. Maybe I should have left my money in GM!

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