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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:
- Rutgers investment risk tolerance quiz
- MSN Money risk tolerance quiz (and an article on the subject)
- Kiplinger: Test your risk tolerance
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!
This article is about Choices, Investing, Psychology, Real-Life Wednesday, 3rd October 2007 (by J.D. Roth)
October 3rd, 2007 at 5:33 am
Hey, I plan on doing the same thing once I’m completely out of debt and putting 15% into my 401(k). I have a Roth IRA with $100 but I will increase it to $1000 and see what I can turn it into.
In the mean time, I’m having fun with the virtual stock exchange on marketwatch. I’m actually pretty glad I started like this because I haven’t done well and I’m learning what I should and shouldn’t do when I’m to the point of using my own real money.
October 3rd, 2007 at 5:38 am
I also don’t find it that much fun to speculate on the stockmarket. I prefer to put my extra money in more boring investments, or buy things that will make my life better - like, say blinds for my bedroom so I can actually get changed in there.
October 3rd, 2007 at 6:19 am
J.D, if you’re going to trade your fun money, you should look into technical analysis also. It will help in your entries and exits.
October 3rd, 2007 at 6:20 am
Humans are not wired to be investors. Since pre-historic times, our brains have sought “patterns” that lead to rewards — much like a rat learning a new “trick” for a chunk of cheese. The only problem with this behavior as it relates to financial markets is that the market “patterns” do not repeat in the same way. As Twain said, “history does not repeat itself, but it does rhyme.” It’s not surprising that much of our investor behavior has been described as “rat brain” behavior.
Fortunately, you “know yourself” well enough to limit the rat brain behavior to a small portion of your portfolio. That way, you can have “fun” while learning valuable lessons at a relatively low cost!
I tell people to “know thy risk…”
http://financialphilosopher.typepad.com/thefinancialphilosopher/2007/08/risk.html
October 3rd, 2007 at 6:37 am
The problem I have with speculating or selling and buying is the transaction fee. I put my money in a stock, and since I’m in it for the long term, I keep it there, but I wouldn’t want to pay 6 bucks every time I bought and sold something. I guess being cheap helps every now and again.
October 3rd, 2007 at 6:42 am
I think having just a little bit of money in some speculation trades is a good idea. The majority being in safer investments is great, but a little bit in speculation and riskier plays is actually quite healthy.
October 3rd, 2007 at 7:43 am
The funny thing about a “fun” trading portfolio is that everything we read tells us not to do it, but you’ll still find many people with a “fun” portfolio where we speculate and simply throw away money at commission fees (or on the other hand, make a killing).
So I never really wrote about my own “fun” portfolio before (probably because it became not-so-fun when the numbers went the other direction). But I basically went around and looked for a few beaten-down stocks, one of which is a medium-size electronics retail chain in the nation. I purchase only about ~$1,000 worth of stocks in said company.
After the stock tanked a bit more, I thought about cutting my loses and just simply sell at a loss of ~$100. In the grand scheme of things, that $100 was spare change and I soon forgot about setting the limit sell order.
Remembering my “fun” portfolio, I checked into the account (different brokerage) months later and found that the stock is now down a whopping 40%, so now I have only ~$600 left of my initial ~$1,000. Ouch.
Long story short, during this entire time where I held the stock, it crawled back up to a 8% lost (thanks to massive layoff), which I could have sold at a lost of only $80. Of course, I again neglected checking into the account, and only remembered I still owned shares in the company when the bankruptcy proceeding papers on claims of ownership from the court. Promptly sold it at a lost of 90+%. Good times.
At the end, other better picked stocks in the fun portfolio broken even the $900+ lost, but when I compare my “actively managed and fun” portfolio to my lumps of index funds, they are both close in performance and the whole thing is simply much easier had I just keep dumping the money into the IRA and etc.
October 3rd, 2007 at 8:00 am
Oh by the way. Having said all that, I still think a “fun” portfolio may be a good idea for some people to experiment in, especially if they’re at a financial position to do so (without jeopardizing their financial well-being). It’ll quickly be an expensive lesson if you don’t do your homework, but you’ll have a better idea of how the market works, and will be more acutely aware of how the noise in the market influence your decisions. You can also gain a respect and understanding for your risk tolerance, and your ability in carefully researching and managing your investments.
After taking more time into researching some value stocks, I firmly believe that you can make money actively trading stocks and options, if you do the homework and go beyond speculating (e.g., actually reading and understanding the income statement, balance sheet and cash flow reports; understanding the industry the company’s in, the sec filings, the % held by insiders and institutions, the short ratio, etc. etc.)
And the more I learn, the more I realize that for me personally, buying lumps of ETFs and/or index funds just simply works better.
Btw JD, I hope you’ve since moved your fun portfolio into other lower cost brokerages (from sharebuilder), so you can limit the cost on commission fees, especially for smaller trades like these. I’ve calculated my fees at Tradeking and it’s a bit ridiculous how much I’ve spent. If the amount in the account wasn’t higher than I started out with, I wouldn’t have noticed the hundreds of dollars I’ve squander away in fees.
Lastly, almost every single stock I own in the “fun portfolio” would have come out significantly better had I held it longer-term. SWHC, LOGI, NVDA, RIMM, you name it, they’re all higher priced today than when I last sold it.
After I finish selling some other stocks, I’m seriously going to just move them all to the retirement accounts and pretend none of this ever happened
October 3rd, 2007 at 8:44 am
You said, “I sold it four months later.”
For tax purposes, that’s a huge mistake.
Also, always consider the cost of each transaction. I pay $7 per transaction at Scottrade, but I can earn free trades by referring others.
I research stocks thoroughly before buying or selling, and I’ve done better in the stock market than I do with my Vanguard Index Fund.
October 3rd, 2007 at 9:02 am
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
Hmmm… I thought this websiste is called getrichslowly.org
October 3rd, 2007 at 9:10 am
Hmmm… I thought this websiste is called getrichslowly.org
I’m human, just like everyone else. The lure of a quick buck is always there. My point is that it’s pursuing these quick bucks that get us into trouble. And in my case, I’m finding that the risks involved in pursuing quick bucks aren’t worth it for me…
October 3rd, 2007 at 9:39 am
Even with “play money” speculating in anything may not be a fun activity for some. After all, it never feels good to lose money. Even if you think it’s ok because it’s your play money and prone to vanishing..wouldn’t you be happier if it just stayed in your rock-solid index fund and gained over time with the rest of your retirement monies?
October 3rd, 2007 at 9:53 am
Contrarian investing is not for the weak at heart, but its often the best way to buy low and sell high.
October 3rd, 2007 at 10:51 am
RE: frequency of checking individual stock holdings, I say spend 2 hours a week per individual stock holding. why? because you need to know what’s going on w/that company, it’s competition, and it’s overall industry.
An investor may miss alot if he/she only check once a month.
October 3rd, 2007 at 10:52 am
oops what i mean by checking is not “what is the price of the stock” it’s the fundamentals of the business; understanding what business that company is in, who their competitors are (and what they are doing in the marketplace), and the overall industry.
October 3rd, 2007 at 11:12 am
Amazingly enough, I jumped on CFC at roughly the same time you did (and at roughly the same price-point). I think you haven’t given CFC enough time. The recent volatility can be directly linked to their (and the general market’s) liquidity problems. While I can’t say for certain that they are out of those woods yet, I like the moves they have been making to make sure they aren’t bitten by a cash crunch again. If they don’t go bankrupt (and I believe there is still a slight chance of that happening), I think they will either be acquired (*cough* BofA *cough*) or solidify their lead in the mortgage market once the housing/mortgage market settles back down over the next couple of years.
An uncertain future does not necessarily equal a risky investment. I, for one, am giving CFC a chance to recover. But my timeframe is more like 2-3 years.
October 3rd, 2007 at 11:28 am
It takes a strong stomach for just about any stock when you watch it daily. Even with an ETF you are at the mercy of the market.
I like the once a month rule for checking your portfolio. However, it’s also good to watch for any major headlines just to make sure you don’t miss a big problem.
October 3rd, 2007 at 11:38 am
I’m with plonkee on this one. I don’t have “fun money” for investing. I’m the world’s most boring investor, but that strategy has treated us very well, thank you. Perhaps I have a different idea of fun.
October 3rd, 2007 at 11:58 am
I’m with plonkee as well, I don’t have the stomach for high-risk investing. Actually, at the moment I don’t have the money to spare either.
October 3rd, 2007 at 11:59 am
I don’t think you’re approaching this speculating the right way. Your only criteria seem to be it has to be a well-known company who has just taken a nose-dive. Speculating becomes more like investing when you start to put more time in to researching the company. You’re not going to have much success doing what you’re doing now, without a large dose of luck, I’m afraid.
I’ve done my best to do as much fundamental research as possible, consult with those who have more experience and really leave no stone unturned. And although I’ve slipped a few times, this year my portfolio is up 42%.
So if you don’t take the time to do the research (and educate yourself on what the research means), then you’re not putting yourself in a good enough position to do anything other than obtain meager gains and get killed on taxes. I think you would be more receptive to individual investments if you did more research.
October 3rd, 2007 at 1:52 pm
JD:
I’ve enjoyed reading your blog.
Consider your CFC experience “tuition”–you’ll make plenty of dumb investing decisions over the course of your life. But you’ll make plenty of good ones too. The key is to learn from your mistakes (in this case a mismatch between an investment you chose and your personal risk tolerance), and to try not to repeat them.
The other thing about stock investing is that the successes or failures seem more stark because there’s a clearly listed stock price awaiting you in the paper or on the Internet every day.
Good luck and keep writing!
DK
October 3rd, 2007 at 2:00 pm
That’s funny. I had been considering using some of my “fun money” to purchase put options or something similar on CFC. I figure there is (still) a decent chance that they will follow the path blazed recently by New Century. Haven’t actually put any money into that position yet, but considering the fact that so far the stock is hanging on around $20, I guess that’s a good thing.
Perfectly timing the market may be impossible, but that doesn’t mean it isn’t fun to try.
October 3rd, 2007 at 2:13 pm
I transformed $1000.00 into $1008.22 after expenses. (That’s an 8% annualized return!)
J.D., To be fair to readers, you really shouldn’t annualize short-term returns up to their annual equivalent. You should only annualize long-term returns back to an annual number for easier comparisons.
If, for example, you had invested your $1000 and made $240 over the course of 3 years, then you could brag about an 8% annualized return ($240/3 years = $80 per year).
$8.22 in 5 weeks is just $8.22 in short term profits. It is really easy to say ‘At that rate, if I had just held onto that stock for 11 more months, I could have ended up with a pleasant 8% return’. That statement would really just be speculation.
Congrats on making a profit in your fun account. Keep up the good work, but it is best to not ‘roll up’ short term returns because the annual equivalent return of a short term profit is pure conjecture.
October 3rd, 2007 at 2:23 pm
Thanks, Neil. Though my comment was meant in complete sarcasm, I wasn’t aware that one oughtn’t project short-term gains into annualized equivalents. Thanks for the clarification!
October 3rd, 2007 at 3:10 pm
I used to smoke, and a few years after I quit I began investing with the bank’s mutual funds. It was frustrating for me, because I was very willing to risk the $50 I had available to invest each month. It would have turned into ashes anyways, right? I know have my investments with another broker who accepts my willingness to risk, but he also has me in some quieter waters as well. I read the reports when they come, and spend my time doing the things that give me the money to invest each month!
October 3rd, 2007 at 3:41 pm
1000 to 1008.22 is .8% not 8 % isn’t it?
and also CFC is a spec stock, very risky, (check out american home mortgage - AHM)
should look into tech and oil (apple, google, bidu, exxom, slb etc)
do your own homework, don’t buy a stock when it’s falling, it’s like trying to catch a falling knife..
except if you like the risks..
October 3rd, 2007 at 4:31 pm
I’ve managed to take $10,000 and turn it into $13,400 in the past year with such stocks as Garmin (GRMN), Norfolk Southern (NSC), Exxon (XOM), and Apple (AAPL), along with Fidelity’s Select Health Care fund. Apple was the winner by far, going up over 70% in the past six months.
I’m obviously very happy with the results, but I’ve just been pretty lucky. There hasn’t been too much analysis on my part other than being familiar with the companies’ products and liking them very much (Apple and Garmin particularly) or realizing they’re in demand (Exxon and Norfolk Southern).
It’s probably just beginner’s luck, but I’m very happy with the results so far!
October 3rd, 2007 at 6:37 pm
“Risk comes from not knowing what you’re doing.”
- Warren Buffett
October 4th, 2007 at 4:15 am
I’ve been playing with that kind of thing on stocksquest.com (site where you can simulate trading, because I don’t have the money or the stomach for real-life trading adventures).
On stocksquest, I just bought some shares of Mattel, because of the lead toy crisis. Now, I didn’t do too much research because it’s play money. But it was based on the same idea. I want to see where the stock goes now.
October 4th, 2007 at 4:50 am
“I wasn’t aware that one oughtn’t project…”
And I wasn’t aware that “oughtn’t” is a word, but I guess the contraction makes perfect sense. I’ve always spelled it out as “ought not.”
October 4th, 2007 at 5:57 am
To follow up with more Buffett, I recommend that anyone wanting to buy stocks with fun money read “The Intelligent Investor”, a book written by Ben Graham, who taught some guy named Warren
October 4th, 2007 at 9:15 am
I like your method JD and I do the same thing with my investing. The majority of my money is in things I know and trust based on a rather conservative strategy. A small portion is for me to have fun with. Sometimes I make money and sometimes I lose money. Usually my returns on this fun money are about the same as my other investments.
Gal
October 4th, 2007 at 10:12 am
I, too, have an IRA with $1,000 that I use for speculation. I just started it last April and so far I’ve managed to lose $22.
I don’t mind speculation, but I’m 31 years old and I realize that we lose money every single day we have debt.
A lot of people worry about losing their money in the stock market. I had a 22-year-old city employee tell me he would never put his investments into anything risky; he chose the city’s money market fund for his 457. It gave a 3% annual return. I couldn’t believe it. I wanted to say: YOU’RE 22 YEARS OLD. TAKE A RISK.
I think of it this way; I have been unable to pay my credit card at the end of the month, oh, about a million times, and every single time I lose money to the tune of 12-16%. I have only lost 2% of my investment on the stock market. I take a HUGE risk every time I buy something on my credit card. I think about this if I am tempted to use it. It makes me think twice then; also, it makes an investment loss easier to bear, because, after all, I’ve lost lots of money by being stupid, so what if I lose a little by taking a risk that is a smart one?
That being said, it sounds like you are nearly off of the debt bandwagon and your money is more precious to you right now. That’s totally ok too — I mean, after all, by getting rid of your credit cards, you’re gaining 12-16% a month, PLUS the 5% or so you might get from a stable investment. Right now, at 31, I’m up for a little risk, but if I were completely debt-free…I might want to rest on my laurels. For a little while, anyway.
October 4th, 2007 at 11:02 am
I found a funny distinction in myself regarding risk. I’ve had years where my whole portfolio dropped by 20% and I didn’t blink an eye. I am very risk tolerant of my portfolio (although it is pretty conservatively invested for a person my age).
But a year ago I took $1000 and plonked it down on two individual stocks that I had researched carefully. I found that I was very risk averse with that money, because every time the value went down I felt stupid. I learned to some extent to ignore it, and after 6 months I was up about 20% (after trading fees).
It turned out that I wanted that money more for another investment. So I sold my two stocks for the short term capital gain and used that money elsewhere.
I’m glad I did it, and I learned a lot. I could afford to do it again, but I just didn’t find it that much fun so I probably won’t.
October 4th, 2007 at 11:19 am
“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.”
that reminds me of a “rule” on what not to do when playing poker based on risk/reward- betting/calling $1000 to win a $300 pot when you have horrible odds . . .
October 5th, 2007 at 3:19 am
Star Money Articles for the Week of October 1…
Here are some recent interesting posts from the MoneyBlogNetwork and beyond: AllFinancialMatters has fun with math. MightyBargainHunter Five Cent Nickel says Zecco has modified its commission structure. Blueprint for Financial Prosperity discusses the …
October 6th, 2007 at 6:13 am
I would have held onto Countrywide. What’s the point in making $8? Countrywide is suffering now but taking steps to rebound. I think in a few months you could have sold it at $30+. At least, with $1000 invested, you could have held on to find out. But, ah well, you did what you did.
October 6th, 2007 at 6:42 am
[...] Countrywide and Me: A Real-Life Look at Risk Tolerance. J.D. from Get Rich Slowly has been dabbling with the stock market with fun money. It turns out he’s not as comfortable with the short-time fluctuations as he thought he would be. It’s one thing to fill out risk tolerance surveys saying you can weather the ups and downs; it’s another thing to actually experience losing your money on paper. [...]
October 6th, 2007 at 10:18 am
[...] ended his foray into “fun money” investing by pulling out of Countrywide and back into index funds. It’s a powerful article because he [...]
October 7th, 2007 at 1:20 pm
LOL. I’m with Jericho Hill (comment #31), read more Graham and Dodd. I have The Intelligent Investor. I’m still making my way through it, but what you should know is that you did the COMPLETE opposite of what Warren Buffett would have done. He would have asked himself after a week if it was still a good stock to hold. And at each selling opportunity, asked himself that question again.
FWIW, Plonkee and Nickel can have their fun as they like. Graham himself says it’s ok to use 10% of your investment portfolio for individual stock-pick speculation. Just do your speculation with some solid investing principles in mind.
heh. Perhaps you should have bought BAC instead? They put a lot of money into CFC because they think it’s a long term winner and so far the subprime mortgage market isn’t killing them.
October 13th, 2007 at 8:55 am
Check out my site for the dirt on Countrywide.
CountrywideDirt.com