Friday, September 21, 2007

Reflections on Investing Ten Years Ago

Yesterday I happened to be rummaging through some old files and came across my 1997 tax return. Fortunately, this had nothing to do with any communications with the IRS, but it got me to thinking about how my investing ‘evolution’ has three distinct long-term phases. Specifically, for the first ten years of my investment life, I dabbled in equities with mixed results at best, in much the same manner as Nicholas Darvas describes his early floundering in How I made $2,000,000 in the Stock Market.

Deciding that the time and effort was not worth the lackluster results, I pushed my savings into mutual funds for the next five years or so, again with fair to middling results. I got a little ornery and started chasing momentum funds like those from PBHG and Van Wagoner, but ultimately concluded that it might be possible for me to try to mimic what they were doing by buying individual stocks on my own.

[As a side note, Gary Pilgrim (PBHG) and Garrett Van Wagoner ended up having more than their share of difficulties, but their approach inspired me to aim higher than beating the S&P 500 by 1.0% point each year.]

To make a long story short(er), the third phase began in 1997 when I decided to go ‘all in’ on a portfolio consisting entirely of internet stocks. While that may not sound all that surprising with the benefit of hindsight, very few investors were buying any internet stocks at the time and frankly there were not that many choices out there. I reasoned (and yes there was some hope involved too) that if most of the technology changes that were being touted at the time came to fruition, it could be a once in a lifetime investment opportunity.

So…I made the type of decision in 1997 that many others would make in 1999 and early 2000. What happened?

In retrospect, I might have done better plowing my money into the Munder NetNet fund (now the Munder Internet fund), but instead, I picked five small and very speculative companies that I thought had a chance to be big home runs if things went my way. The first two companies I started buying up were content plays. If content was going to be king, I wanted to own the king makers. Both of my selections are still alive and kicking: BroadVision (BVSN) had a meteoric rise and then crashed back to earth, Icarus-style; Open Text (OTEX) has led a comparatively uneventful existence, growing slowly and steadily to its current $1.3 billion market cap. My third choice was CyberCash. I expected that someone like PayPal would eventually dominate the electronic payment business with the type of ‘increasing returns to scale’ (described by Brian Arthur, among others) as the industry standard, but alas it was not to be CyberCash, which eventually declared bankruptcy, had its assets sold to VeriSign, with the CyberCash intellectual property eventually ending up at PayPal via an acquisition. In the VoIP communications space, I bought VocalTec, a company that released what I believe was the first internet VoIP program. Now a $16 million also ran (still listed as VOCL, for the record), they even had something called – of all things – the IPhone out back in 1995. Sometimes you can recognize the pioneers by the arrows sticking out of their back... For whatever reason, I felt most confident in the fifth ‘internet stock’ I started buying. Check Point (CHKP) has been a leader in firewall and related security products in the ten years since I first started buying the stock. An Israeli company like VocalTec (for the record, Open Text is Canadian; BVSN was the only Silicon Valley company, as CYCH was headquartered in the Virginia suburbs, just outside of Washington D.C.), Check Point has grown to become a $5.4 billion company, but has always operated in the long shadow of a strong Cisco competitive threat, with this 1998 Check Point press release typical of that battle that has been fought.

So enough of the nostalgia. For those who may be interested, I did hold BVSN all the way to the 2000 top – and then some of the way down. I was out of the other four within a year. In retrospect, CHKP and OTEX turned out to be solid if unspectacular investments; CYCH and VOCL were the two dogs.

I’m not sure exactly what the lesson is here, if any. In 1998 I went on to pick a lot of winners in the internet space – and a lot of dogs. I have always been patient enough to let my winners run, but over the years I have continued to improve my ability to cut my losses quickly and protect my profits for those trades that make a big U-turn. If I had been fortunate enough to have read the likes of When to Sell, written by Justin Mamis in 1977, and It’s When You Sell that Counts, a 1991 classic from Donald Cassidy, I’m sure those early internet years would have been considerably more profitable. In the long run, each individual learning curve has different hurdles and a different timetable. The trick is to get a little smarter every day, even if your portfolio does not always reflect all newly acquired wisdom.


Anonymous said...

I find my difficulty lies in letting profits run.

I've been pretty good in cutting losses as I stuck my finger in that socket one too many times. I still have not figured out how to let my profits run as I am gun shy and want to walk away with a profit vs. watching it go back to a loss.

It sounds like you've been trading for about 25-30 years now. Have you been able to consistenly beat the market by a wide enough margin that it was worth your time investing in individual stocks?

Bill Luby said...

Hi Anon,

I've spent a lot of time thinking about and playing with trailing stops and I think that has been the #1 improvement in my trading over the past 10 or so years.

Up until that time, I was not able to beat the market with any sort of consistency. In the last 10 years, I have been much more consistent and have done well enough to finally decide to invest full-time for a living, focusing almost entirely on individual stocks/options.

Still, I suspect that for most people the best answer is buy and hold with index funds.

Keep trying though; you never know when the next big breakthrough will happen. I've been investing for 25 years and for the first 15 of those I'm sure I did not come close to even matching the performance of the indices.



pik said...

Hi Bill,

I've been trading since '97 while working a full time job. I have no formal experience and I have paid my tution if you know what I mean. It seems like I do real well during times of high volatility but then not so well when the VIX is low. I think I lack trust in the market and have a tough time holding stocks long term.

For example...I was down about 8% before july and now up around 18% which I attribute to volatility.

I remember Darvas saying that he would try not to listen to the noise of the markets and just look at the charts. I think this makes sense, but easier said than done in a time of mega-media.

You said that playing with trailing stops has been one of the greatest improvements to your trading. Have you succeeded with trailing stops in a bear market as well as a bull market?

Bill Luby said...


If you are doing well in times of high volatility, it seems you probably have the contrarian bull approach down pat. Frankly, the more time I spend with the VIX and market sentiment indicators, the more I see opportunity in fear and bearishness.

Of course the extended bear or sideways markets require agility of a different sort.

Regarding trailing stops, they do not seem to work as well for long positions in bear markets (or longs in bear sectors), but if you are trading with the trend (i.e., short in a bear market) and not trying to salmon upstream, they generally serve me well.

Finally, it may just be a coincidence, but I too have been on a tear since the beginning of August.

May there be more months ahead like the last two...



pik said...

Here is an example of not knowing how to handle an entry:

I bought 500 shares of GS the day before the Fed rate cut. My entry was 187.47......I decided that I would let run a bit, and I put a stop in at 186.47, accepting a $500 loss if it were to head lower. The stock went above 188, and I was a bit nervous about the next day's fed announcement. I moved my stop back to my original buy point of 187.47, with though of break even if it could not hold 188. Well my stop hit, and now I'm looking at GS today wanting to slash my wrist (just kidding). How could I have handled this trade better using a trailing stop?

Thanks for any words of advice Bill

Bill Luby said...

Hi Andy,

I find it hard to argue with your general approach (and the reasoning behind it) with the GS trade.

The big issue is the Fed announcement. No matter what they announced, I can almost guarantee that any relatively tight stop in either direction would be taken out. That's just the nature of these announcements. Check out these 5 minute charts to see what has happened on previous Fed Days:

Also, given the magnitude of the surprise and buildup, only a protective put would have done the trick here. Keep in mind that this was something that we can expect to happen no more than 2-3 times per decade.

If you don't use pivot points, perhaps you should look into them. FWIW there is a good free web-based at

Enjoy the weekend,


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