People usually like to talk about their successes and glories. I guess I am no different in that aspect, but I also believe that it is a good idea to go ahead and reflect once in awhile. As the year's end nears, I have been thinking about the bad trading and investing decisions I made in 2012 and what lessons I learned from them. While 2012 has generally been a good year for me, things could have been a lot better. Of course, the famous saying goes: hindsight is 20/20. I would like to revisit some of my bad decisions in the last year and the lessons I learned from them. Hopefully, readers can find a lot of similarities and reflect on their mistakes to learn some valuable lessons. After all, people spend tens of thousands dollars to go to college so they can learn valuable lessons that will help them earn money later on. Why not look at the trade/investment losses the same way?
Here goes my list:
1. AMD (AMD): This company makes it to the top of my list. I bought it at $8.15 when it was very close to topping back in March. Back then, the sentiment on the stock was very positive and the monthly covered calls were yielding about 3-4%. I thought "what could go wrong here?" and sold some covered calls on my shares. Later on, the price kept dropping and dropping. I kept selling monthly covered calls to bring my breakeven price down, but the share price came down a lot faster than my breakeven price did. At the end, I sold my shares for $2.00 each and my breakeven price was $6.80. Thankfully, I hadn't bought a lot of shares of this company and the damage was not that bad.
Lesson Learned: Don't buy into hype and don't buy a company's shares at prices near its 52-week high. Many times, many stocks will be pumped up to unreasonable prices and many people will buy into these prices. Funny thing, back in June and then later in September, I even wrote articles about AMD thinking that the company was over-punished by investors. I should have paid a better attention to the company's fundamentals (particularly amount of debt and future growth opportunities) before buying it.
2. Bank of America (BAC): Many people will be surprised to see this company on this list, given that this stock has outperformed the market by a large margin in 2012. To be exact, Bank of America is up 101% since the beginning of the year. Then, what's wrong with it? Nothing. More like something is wrong with the way I traded this company. In the beginning of 2012, this stock performed like a monster. It felt like it could go up forever, but the uptrend came to a halt in May and the share price fell from $9.93 to $6.80 by mid-May. Back then, I already had some shares, but I doubled the number of shares I held. Then I made the mistake of selling covered calls with a strike price of $9.00 expiring in January 2013. It was a huge mistake. Now the company trades for $11.15 and if my covered calls get exercised today, I will only get $9.00 for them. Sure, I will still make a good profit on my shares, but I could have done a lot better. I also had a similar experience with Ford (F).
Lesson Learned: If you believe in a company strongly enough to buy its shares, don't sell covered calls that are too conservative and too far away. Monthly covered calls will do the best, as it is very difficult to predict where a company's stock price will be in six to seven months. If you are unsure about a company's future performance in the medium term, the better idea is simply not to buy it rather than buying and selling covered calls.
3. Hewlett Packard (HPQ): This was a typical "catching a falling knife" case for me. I bought the shares at a pretty cheap price and thought the price couldn't go lower. I was wrong -- they went down another 20% after I bought the shares. Thankfully, the share price has been recovering recently, and I have been selling covered calls to recover some of my losses. I will hold onto my shares for awhile unless my calls get exercised. Here is the thing, though. I believe that the company's turnaround will be successful and the stock price will recover eventually. I really believe that investors have beaten this company down far more than necessary. I just don't know when the recovery will take place. It may take as long as three to five years. We will wait and see. By the way, I also made the exact same mistake with Chesapeake (CHK).
Lesson Learned: Just like it is a bad idea to buy a stock into hype, it is also a bad idea to buy a beaten down stock just because it appears cheaper. Many times, things will get a lot worse for turnaround companies before they get better. It is very easy to catch a falling knife in the stock market. I thought Hewlett Packard was an exception because the company still generates positive cash flow while going through the turnaround, but I couldn't calculate the fact that investors had lost trust in the company's management. In this market, sentiment is just as important as fundamentals.
Of course, after reading this list, many readers will think "if you make so many mistakes, why should we bother reading your articles?" This is probably why it's tough for people to write an article talking about their biggest mistakes in a given year. At the end of the day, the stock market is a way of risk taking, and it is nearly impossible to predict the future. Having said that, I also had some successful trades this year. I made pretty good money (at least 25% return on investment) on my trades/investments on Nokia (NOK), Starbucks (SBUX), Bank of America (even though it's on my bad list), Ford (same as Bank of America), U.S. Airways (LCC), Monster Beverages (MNST), Priceline (PCLN), Siri (SIRI) and AuRico Gold (AUQ). Some of these returns are realized and some are unrealized.
A question to readers: what were some of your worst decisions in 2012 in terms of trading/investing?