Wednesday, January 19, 2011

What I've Learned from Investing

As earnings season approaches, I'm excited to see three stocks I hold continue an upward march. Google, Home Capital Group, and Schlumberger have all seen 10% increases in the last week and are marching very close to the target prices I set for them almost 2 years ago. At the same time, I chose 3 other companies as well on the basis of a screen I developed after extensive research and after performing a detailed valuation of the companies that resulted from the screen to find the 6 trading farthest below their intrinsic value. This process took a long time but so far has been quite successful, with the exception of one company.

In March 2009 I purchased equally weighted amounts of Home Capital Group, Research in Motion, Intuitive Surgical, Google, Apple, and Schlumberger. It was my first foray into the stock market (aside from mutual funds and index funds) so I wanted to play around with a small figure so just used $500 for the whole kit and caboodle. I trade through Canadian Shareowner Investments, a co-op trading firm that allows investors like me to buy fractional shares in companies. For companies like Google, for example, you'd have to fork out multiple hundreds of dollars for a single share. With CSI I can just choose a dollar figure and I own a fraction of a share in conjunction with other investors. The only disadvantage is the trading fees are a touch higher if trading one security at a time and the if you want to pay the lower fees, the sales only occur on set days. So if your stock is real high and you think it's going to drop real low quick, it's a little nerve wracking to place a sell order and know it won't be final for 20 days!

So here's how I've done so far. My first success story was Intuitive Surgical, a manufacturer of sophisticated surgical equipment like laparoscopic and robotic equipment. I purchased it at $100.46 in August 2009. Exactly 5 months later it hit over my target price (what I calculated to be the intrinsic value of the company) so I sold it at $223.11. Including fees this worked out to a 76% increase. Not too shabby! But, 18 months later I have learned lesson #1. I have been taught from my reading that once a company hits your target price, it should not trigger you to immediately sell. You set a stop loss 10% below your target price and a new alert at 10% above. If it drops 10% you sell it. If it rises 10%, you reset your stop loss targets 10% below the new level and so on, until you see a dip. Had I been patient and not jumped at the excitement of gaining 76% in 5 months I would have sold it at $328.77 almost exactly a year later (based on the price history since I sold it). That would have meant a gain of 172%. So, lesson #1=PATIENCE.

I originally purchased Apple at $115.18, pegging its intrinsic value around $210. This time I was patient and when it hit its target I held on. It eventually rose above $260 before dipping enough to trigger me to sell it at $258.75. With fees included my gain was 56% in 16 months. Again, not too bad for a newbie!

After this I was pretty excited for more success. Unfortunately, since then things have been pretty slow. I also made the potential mistake of plowing my returns to date into the poorest performing stock at the time after revaluating it and finding it was still trading well below valuation (Research in Motion, by the way). It has gone up somewhat since then but it has a LONG way to go to hit my valuation! That was lesson #2. Next time I do this I'm going to take out my winnings, buy a safe ETF with them, and then by a whole new batch when the last one sells.

Right now, 3 of my remaining 4 stocks are doing VERY well. Home Capital and Schlumberger have now past my target and are just being watched closely to see when I should sell. So far they seem to just keep going up. At worst, I'm looking at gaining 110% on Home Capital Group and 85% on Schlumberger. Google is marching steadily onward to my target price and currently sits at a 60% gain. RIM endlessly angers me and is in the doldrums at -20%. Damn.

Oh well, even if I were to sell all of them now (which I won't do: see lesson #1), with all fees included, I would still sit at a 39% gain. Not too bad for someone starting out from square one! If I had put the same asset allocation (%CDN:%US) in TD e-series Index Funds (which I do with my RRSPs) I'd be at roughly the same gain, so I'm happy with that. Most professionals can't even beat the index so I'm happy to be 0.5% below it. Plus, now the fees for CSI are lower and I haven't actually sold all my stocks yet, so I'm hoping I can best the market!

I do it mostly for fun and the challenge. I'm not going to get rich on it. My getting rich scheme is slowly socking away significant savings in an index fund portfolio. Pretty boring, I know!