Thursday, April 24, 2008

A Lesson to Me

I've been beating myself up, lately, thinking that I'd mishandled my GOOG holdings to the tune of a $30K missed opportunity. That's the kind of opportunity you hate to miss.

But then I went over the sequence of events and my actions, and I think a case can be made that I acted rationally, for the most part.

First of all, I considered that I incurred additional risk by putting 20% of my resources into a single stock. But I believed that I understood the premise of the company behind the secular growth story, and I believed that it was worth making a big bet.

I wanted to be a long-term holder of GOOG shares. I thought that was the way to increase my wealth significantly. I still do.

But the size of the bet made me acutely sensitive to the stock's fluctuations. They made my bottom line tremble.

Right after I made the bet, a year ago today, the stock took off and ran to 750. When it started faltering, I was unconcerned. I had my eye on where it would be in 2014.

When it fell through 500, I became concerned. When it hit my cost basis at 489, the talk was that it would end up at 350. I decided, because so much money was involved, I should protect my original investment from a significant drawdown. So I sold the lot.

It started out well at first. I bought it back at 447 and 425, and it moved back up to 450. But the talk was that this was still one sick puppy. Josh Hayes said that he was going to short it.

So, I got scared again. This was when the buzz was that Google had run out of paid clicks and and the recession was going to cause everybody to watch television all the time instead of being on their computers. In his videos, Blodgett chortled.

I feared going into Google's next earnings with the number of shares that I owned. It seemed foolhardy. I reduced my stake. Then I decided that owning any shares at all seemed foolhardy, so I sold my remaining shares. I felt shaken.

But the worst was yet to come. The earnings release was a thunderclap. I know a lot of short money got lost that evening. I didn't actually lose anything. I just failed to gain $30K. I had to buy it all back, up a hunnert.

That was the cost of insurance for my investment, given that it was a time of great turmoil. In retrospect, I should never have sold it the first time, or if I did sell it the first time, I should never have sold it the second time. I should have just held it and let the drawdown draw down.

But, at the time, I believe, my actions were rational. To do anything else would have been to ignore the increased and substantial risk of loss. I preserved my capital, but it cost me.

You don't tug on Superman's cape. If I had, I'd be ahead of where I am right now. I should have no regrets, but it feels like a loss. Where do I put that on my tax return?


balljet said...

I am in the same situation. My idea was to sell calls while GOOG was correcting downwards. I also had a call against my shares during earnings. :(
I had to buy it back... at a considerable loss. Now, I am thinking this sideways action is a good thing for GOOG and I expect a move to around 580 in the next week or so. If not, then some profit taking may ensue.
What do you think looking forward, and ho do you prevent micromanaging a large pos. like this?

Larry Blumen said...

Thanks for the comment, balljet.
It helps to share the pain.

I agree that a little fooling around, right now, will help the stock. I keep waiting for a move back to the 500 area, but it may not happen. That forward PE of 22(if you can believe it (I'm trying)) makes the notion of going back down there seem delusional.

I see GOOG making its way back up, but it's going to take longer and that's good (your first point). It's going to have to prove itself every step of the way.

As for micromanaging a large position, it's hard, but I'm working on it. I read somewhere that the most successful traders were those who were able to tolerate big drawdowns for considerable periods of time.

I wish I could pull a Rip Van Winkle and sleep through the next five years. I believe there's a good chance that I might wake up a wealthy man.

Good luck, pal.