Saturday, October 10, 2015

When Mr. Market Makes A Fool of You

Welcome everyone!  Today I have another financial literacy tale for you involving the all mighty U.S. stock market.  What I appreciate the most about being a stock market investor is that try as I may to understand the market, it always finds a way to fool me.  I believe the expression, "fool me once...shame on you...fool me twice...shame on me," is never applicable when it comes to investing in U.S. equities simply because nothing is ever predictable, and experience gained investing simply allows you to better understand your mistakes.

Take the case of my most recent trade, selling 50 shares of Actuant (ATU) stock.  I published a post on the 5th of this month: How Best to Minimize Losses on Stock Trades, touting my ability to minimize capital losses on an investment in the red.  Let me put things into perspective once again.  On September 29th, ATU closed for the day at $17.57.  My cost basis for the nearly three hundred shares of the stock I owned was at $22.50.  I was down a little under three points per share on the stock, a good sum.  Jessica, my wife, had asked me to liquidate shares (our emergency fund is fully invested within our Brokerage account) in preparation for our property taxes.  Now, she did not have a gun to my head, and really, I am in complete control of our investing decisions.  So there was no rush to get out.  Property taxes aren't due until December 10th in California.

The setting for the next couple of days in the market was typical, more volatility.  ATU settled at $18.39 on September 30th, and at $18.73 on the first of the month.  O.k., I'm seeing three days of upward stock price action on ATU and I'm liking it.  The overall market is also starting to get the attention of investors and the beginning of a week long rally rears its pretty face.  No one knows at the time where the market will go...remember the previous week (and month) had been a red fest with the volatility index working out like a hot lady at Zumba.

On October the 5th before market opened, I took a look at the Yahoo stock page for ATU and see that the 1-year target estimate is $20.50.  I wished I hadn't done that.  It primed my mind.  What happens to ATU on that day would have made anyone who bought on Friday, 10/2, consider unloading it for a quick, one day, 10% payday.  The stock closed at $20.80!  My premise on that day was that surely, after three days of rallying, investors would begin to take profits, leveling ATU stock.  Believing this was the peak before another lull in the stock, or even a small descent, I decided to sell 50 shares at $20.76 to raise the $1K I needed for property taxes.  I lost $225 on the trade as some of my most expensive shares were first out (FIFO...First In, First Out).  I felt good at the time.

And then...the humbling experience began.  On 10/6, ATU closed at $21.28.  On 10/7, the darn thing closed at $21.69.  I felt like Homer Simpson, hitting myself in the head for the bonehead move of having sold any of my shares of the stock.  I'd lost almost a buck per share for being "tactical."  The stock market is known for adding salt to all wounds, and of course, ATU rallied some more, closing at $23.61 on 10/8!  For you math folks, that represent a 34% rally in the stock on 7 days of trading.  A market rally fueled by the belief that the Fed will not be raising interest rates after a dismal jobs number, and who knows what else, helped to spur an appetite for investing in industrials of all sizes, but especially for shares of ATU, already full of potential after an excellent quarter report.     

What I learned:

From this experience, I learned not to be so hard on myself.  Yes, I lost money, but on the bright side, the remaining stake I own in ATU is finally back in the green!  My process of exiting a position (in installments) saved me from future losses.

I also learned that Mr. Market is crazy!  You can't reason with him.  You can't expect him to do what you think is most logical.  In fact, logic shouldn't even be in the same sentence as Mr. Market.  The best one can do is to work with Mr. Market, whatever his daily whims.

Thanks for reading!  May you be having as much fun in the market as I am.  Until next time.

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