Wednesday, May 2, 2007

CNBC Million Dollar Portfolio Challenge: #41,667

Some days you can console yourself with thoughts of, “Well…it could have been worse…” Yesterday that particular consolation was not a straw available for me to grasp at, as my ‘all in’ bet on i2 Technologies (ITWO) turned out to be on the stock that had the largest percentage decline across the entire universe of NYSE, Amex and Nasdaq stocks. The damage was considerable, dropping me some 40,000+ places from the top 0.1% to the top 3%.

The gory details about ITWO’s earnings boil down to a significant earnings miss; a drop in maintenance revenues (often an indication that customers are unhappy with the software); and news that the 57-year-old CEO is retiring – with comments that the Board of Directors have “started looking for a replacement.”

A couple of interesting things happened along the way to this implosion. The most obvious one is that my earnings spike potential algorithm has to be considered a resounding success, as its last two selections have notched impressive gains and another stock it rated highly, ITWO, showed impressive volatility yesterday, albeit in the wrong direction. Yes, this is a Pyrrhic victory, but it is one that may pay some real money dividends down the road.

The other aspect of this is the emotional one. I have never tried paper trading and do not recommend it for those looking to learn how to trade. ITWO turned out to be the perfect case study. It cost me over a half a million dollars yesterday and my reaction was mainly that of amusement over the magnitude of the loss. Apparently, the entertainment value of CNBC dollars far exceeds the portfolio value.

If these were real world dollars, I would probably have agonized over the gap down in ITWO yesterday, hoped for a bounce (yes, I know you should never let “hope” enter into your trading calculus), then cut my losses as the intra-day pattern of lower highs and lower lows failed to reverse. At least that’s what I like to I think I would have done. In practice, too many investors, particularly inexperienced ones, cling to these horror stories and search frantically for any stray piece of information that can justify their instinctive response to hold on – with this pattern repeated over hours, days, weeks and sometimes months.

Without any dollars at risk or emotions involved in holding ITWO, I dumped it unceremoniously at the end of the trading day (no intra-day trading is allowed in this contest) and looked for another potential high-flier. Today my CNBC dollars are riding on the Amkor Technology (AMKR) bus; while AMKR has been doing wonders for my Portfolio A1 portfolio, today it is up 1%, consistent with the gains in the broader market.

Hey, at least you don’t hear me proclaiming, “Mission Accomplished...”

5 comments:

  1. No worries. As I wrote last night, I had nearly a ten percent gain yesterday, now with 1.897m, and I'm still only ranked 611. I'm going to do my best to make a run for the Top 10, as you said, but with just 7 trading days left, it's going to be difficult. I'm only up 1.8 percent today, so I doubt I'll be leapfrogging anyone. I dare say to you that I'm going all in on ITWO tomorrow.

    Dave

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  2. Can you give us a new pick using your algorithm system where the put call stradle would be a good bet due to the big swing?

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  3. That is the metaphorical ITWO, I assume, anon.

    evans, that is exactly the type of strategy I am researching and testing as a part of this process. If anything comes of it, I will pass along some of the details. In the meantime, I won't be making real-time suggestions for this type of trade.

    FWIW, however, I have been a little more forthcoming about the inputs and outputs of the algorithm at Investor Village.

    With a little legwork, you could probably come up with something similar to what I am doing...

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  4. Bill,

    Apparently, and as I'm sure you figured out as well, the competition is thick in this upper 1/10th of 1. In fact, by the time the market closed yesterday, my gain was 1.37%, raising the total to $1,923,704. I didn't expect a very big rise from 611, because when I was in this range previously, I only went up 40 some spots with a 2.2% gain. However, I actually fell 4 spots to 615. To have any shot at this junture it's going to have to be all earnings plays, and all-in. Seven days to gain another million or so is not happening without a few home runs. Off to my scanner, algos and Ivolatility.com I go. I'm looking forward to sharing with you some of my VIX work.

    Dave

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  5. Dave,

    Is it too late to take steroids before you swing for those fences?

    I figure that to finish in the top 10 it now looks like it is going to take about $3.5M, so as impressive as your numbers are, it looks like you are going to need another 80% boost in the next 7 days. That's seven very fast horses and/or at least one DNDN.

    Keep us posted...

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