about vinod kurup

It’s time for my quarterly investment update. Every 3 months, I look at my portfolio and sell stocks that I don’t like and then buy ones that I do. This quarter, I’m doing nothing.

This is one of the hardest things for me to do. I like to trade. Sell a stock here, buy a new one here. It’s exciting. Especially when you sell a stock that’s been down for a while because then you no longer have to look at that red smirch on your portfolio every day. But while activity is a good thing in almost every other aspect of life, it can hurt you in investing. The undisputable fact is that the more you trade, the more you’ll lose on commissions and spreads. What’s more disputable, but true in my mind is that investing overactivity makes me do dumb things.

A couple of the stocks that I had sold over the past year have made strong runs since I sold them. AMN has gained 47% and DUCK has gained 20%. I probably shouldn’t have sold either of them, if I had followed my strict evaluation process. But I wanted to sell them. Each company had its problems, so I found good reasons to sell and justifed them to myself. The problem was that I didn’t follow the sell criteria that I had set up before I bought the stocks. I made up new ones just so I could sell the stock. If I had stuck with my initial criteria, I’d still be holding on to those two and enjoying my gains.

I guess my lesson is that you should decide under what conditions you would sell any stock before you buy it. Until those conditions appear, hold tight. This is especially true for small undervalued stocks because it can take a long time for the market to come around and properly value them. James Cloonan, over at The American Association of Individual Investors runs a Shadow Stock Portfolio on which my portfolio is loosely based. He recommends giving small-cap value stocks at least 2 years to be recognized by the market.

Patience, young grasshopper!

DUCK lost money both in its most recent quarter and over the past 12 months, so I sold it. I wish I’d been smarter about the way I sold it. I hadn’t decided which new stocks to buy yet, so instead of just selling DUCK and sitting in cash, I thought I’d using a trailing-stop order. With a regular stop, you tell your broker to sell the stock once the price drops below a certain point. If the current price is $23.50 and you set a stop at $23.00, then when the price drops below $23, the broker sends the order to the market and fills it. It’s a way to automatically limit your losses (or protect a certain amount of gains) in a stock. A trailing stop works the same way, except that the stop-price moves up whenever the current-price moves up. You set a trailing-stop at 50 cents below market. If the current price is $23.50, your stop is at $23.00. If the current price goes to $24, then your stop moves up with it to $23.50. I figured this would be perfect for my situation. I knew I wanted to sell DUCK. I didn’t know what I wanted to buy next. If DUCK went up in this period of time, I’d benefit. If DUCK went down, I’d lose very little.

Or so I thought. The stocks that I own are thinly traded - they’re small and unknown. You always want to use limit orders for these type of stocks. But all stop-loss orders are really market orders. The broker holds onto them until the price hits the stop and then sends the order to the market as a market-order. So, in my case, DUCK closed at 23.49 on the day before my order. I placed a trailing-stop at 50 cents. DUCK opened at 21.50. The trailing-stop triggered and my order filled at 21.60. The stock price then jumped back to 23.50 and remained there. I got screwed! The real problem is that I got greedy. Instead of hoping for a few extra pennies per share, I should have just set a limit order at $23.00 and forgotten about it. Live and learn. Either I want a stock in my portfolio or I don’t. Squeezing extra pennies out of it is not the way to get rich.

Here’s how the rest of my portfolio is doing as of 11/30/05