"Eagles don't flock."
- Ross Perot
When you first start out it seems that investing is the most daunting task known to man. You have a million different opinions and charts and the news has such sensationalist tendencies. When I first started my goal was to analyze every line of every single CNBC segment ever (It plays right next to my desk at work). I got hooked onto SeekingAlpha and read everything that came through the home page. While the enthusiasm was there the execution was lacking. I quickly became overwhelmed by the plethora of information out there and was lacking confidence in my fundamental knowledge. After reading an article that made sense to me and seeing the news become somewhat bullish I asked a friend about buying the NASDAQ index (QQQ). He liked the timing so I listened and bought very modestly into QQQ at a price of about $62. I fretted over the stock for the past three weeks and eventually sold last Thursday on fears of the EU having issues. Overall, I'd define the entire experience as uncomfortable and distracting.
After I had bought QQQ I looked around for another investment. I decided to return back to my 'roots' per-se and started looking at the financial statements of companies that I had analyzed for a comparable companies analysis while I interned in investment banking. I utilized what I knew regarding how to value growth and justify P/E ratios for companies and had a full working model of some companies in a week or two. MAKO Surgical (MAKO) had a sharp drop in price and I looked into why. It turned out the 10-K had some valuable information that had forced some investors to sell because unexpected expenses regarding trademark laws are delaying the profitability of the company from coming as soon as expected. I confided in my friend and he said it was a wash to even try to make money off of the company but I disagreed. I allocated the remainder of my portfolio in MAKO Surgical at a price of about $21. I sold this investment as well as I became somewhat bearish pre-EU summit and unsure of what would happen to the sector as the government ruled on healthcare. I didn't want to try to predict what would happen and decided I would play after I saw the market react.
QQQ was sold at $64.58, breaking even when you factor in transaction costs.
MAKO was sold at $26 and change, and with the volume of shares I bought I made quite the killing for a novice trader.
So both of these investments have paid off (ok, kind of). But how did I find both of these? The QQQ trade was a simple bet. I followed the news and listened to people constantly. It was a suggested buy here on Seeking Alpha and I liked the basis of the argument the writer had made. The following decision to buy resulted in me watching with terror as the index has been fluttering around the past few weeks until I sold for my own psychological health.
The MAKO Surgical trade was different. I looked at their balance sheets and understood them. I understood their competitors. I read through previous 10-Ks and applied my existing business knowledge to their business model. My previous experience as an intern in investment banking for bio-tech companies allowed me to have a level of depth in my knowledge of the industry that I used to apply to the market. I competed in a Virtual Stock Exchange and decided to combine the fundamental knowledge I had acquired from investment banking with the technical execution I had honed in the play money competition. I didn't rely on other people's opinions and I bought it on my own analysis. I'm not going to say there was no luck involved what-so-ever, but I am going to say that I applied my own knowledge to the current market, and it certainly reduced my risk and increased my confidence level.
What would I recommend? Well let's start with what I wouldn't. My good investment wasn't due to this nonsensical, crowd following, information sucking mentality that was described when I first entered the market and bought into QQQ. I feel that this may be good for an initial attunement to market sentiment but should never be used as a defining factor to make an investment decision. My MAKO trade was found by abiding to what I felt comfortable with and what I understood. Yes, I experimented with using level II analysis and technical indicators in order to enter into the trade, and I exited due to my fear regarding my lack of understanding of the EU summit this past Thursday, but I was confident in my thorough analysis and prepared for what would happen to a point. I would consider my MAKO trade much more of a success than the QQQ trade when we look beyond the returns of them, and I'm sure that any experienced investor here would agree. I looked at what the market was doing, and as the stock dropped I decided that the market should react in a certain way.
So what would I currently define a successful trade?
1) Attunement - see what's going on with the market. Know the main drivers of the market you're about to invest in so that you don't get unlucky with buying into a company that would normally be a good investment and get pushed out when the market drops regarding negative EU summit news.
2) Focus - choose something that you understand, or have a deep drive to understand, and follow it. If there is an investment idea here on seeking alpha that you want to look into, dive in! Message the author, read a book or two on the subject. Don't worry about what other people are saying yet or about the fact that some stock in the industry just dropped 10% and you want to jump in and get the sharp spike back up because there will be other opportunities. Just start to focus and understand the drivers of the industry you're looking to invest in or trade, or use whatever available information you already know and apply it to your view of the market and your analysis. I don't care if you ran a cotton candy stand at a carnival one summer and that's all your business experience and understanding, just start applying what you know to the market and synthesizing information in your head.
3) Buy when confident - Buy when you're ready. Don't jump in and follow the crowd and say that you'll probably figure things out. You want control of your hard earned money, don't you? Execute when your analysis makes sense to you, not when your friend can tear it apart. Use your own analytical abilities to execute investments in line with your style and personality.
4) Make money!
A couple last comments I have on this topic before I go off to learn more and shut my big mouth:
Firstly, I'm a novice trader. I'm not perfect, but I'm practicing and learning.
And second, I wish I could have written this story and said I lost money on my QQQ trade. It could have made a better point to the novice investor and is what I deserved but as I look back on things I have to say that a little luck is always a factor in investing.
May the luck be with you, and happy hunting!
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.