A little over ten years ago a secret was shared with me that might be the single greatest tool that retail investors can use when managing their investment portfolio. The secret is designed to not only ensure that investors maintain a long term investment horizon but can also be used to create opportunity for better mental health and quality of life. This secret has been key to my holding both Inovio Pharmaceuticals (SYMBOL: INO) and Mannkind Corp (SYMBOL: MNKD).
The secret was simple and only five words long, but, putting it into practice has saved me countless hours of potential psychological misery and micromanaging nightmares. This was the secret.... "Quit watching the daily ticker". Sounds simple to some and the concept might be harder to grasp for others, but, I can tell you that after employing this "secret" I certainly did gain a better insight into what investing is all about. Slowly, I left behind the notion that every downtick on a stock was the beginning of the end for my investments.
Years ago, stocks were a bit more difficult to track, but, where there is a will there is certainly a way. My broker offered a service called "telebroker" and as a client I was given real time access to quotes, volume, news and stock market data. It was rudimentary to say the least, having to use two numbers on the keypad to enter each letter of the stock symbol. But, in short time I was able to punch ticker symbols into the keypad without even looking at the keypad. I was good, fast and was in sync to what my stocks were doing on a minute to minute basis. I can tell you that the only time my keypad had a meaningful rest was on the weekends, holidays or after market hours.
I used thousands of these free real time quotes per month, my account being replenished whenever I bought and sold a stock. Yes, back then I was buying and selling on a regular basis based on the real time data I was receiving through my now antiquated flip phone. I wasn't a day trader by any means...I was an owner of a small business and being such allowed me the necessary time to be the micromanaging investor that I was.
But, what I began to notice over time was that as I was watching, stressing, trading and being in sync to daily data for at least 5 hours per day, I saw that other family members were having comparably successful trading results and they looked at their portfolio statement once per month. My brother, for instance, opened his statements monthly,but, if the market was in a downward spiral he simply filed them into his organizer unopened.
It was in 2003 that he first asked me if I followed our grandfathers advice and traded stocks only after careful due diligence and traded out of positions only after a fundamental shift in the strategy or dynamic of the company had materialized. I told him that such a discipline was not my current practice. I then explained my great tool called "telebroker" and the benefits it afforded me. I explained my feed to real time price and trade data which allowed me the opportunity to get out of a stock within minutes of my "instinct" that the stock was going to continually trend lower.
It was only after I boasted of this gift of a tool from my broker did he tell me this. If you truly want to stay successfully invested and focused, do your homework first and "quit watching the daily ticker". He was simply passing along the secret told to him.
After that conversation, I then began to audit my portfolio and count the trades I had made in and out of a particular stock. Many times, I was trading the same stock, scalping ten cents here or twenty cents there. In at least half the cases, I would have seller's remorse and repurchase the stock within minutes of selling it...at higher prices! Then, it occurred to me that this gift from my broker was actually a tool for them to get me to do exactly what I was doing.... watching, trading,watching, stressing,trading...all the while the commissions were being booked at the brokerage house. True, knowledge is king, but, too much knowledge without the discipline of how to use it can often be costly with stock trading.
Shortly after starting my audit I decided to build a small tool of my own. I prepared a simple excel spreadsheet and placed my securities in column A, the price of the security at the beginning of the month in column B, the price of the security at the end of the month in column C and the difference in column D. It was a rudimentary tool, but, it provided me the details for the information that I was seeking.
I was mostly invested in technology stocks at that time, the same high beta, volatile stocks that own a fair part of my current biotech portfolio today. The daily swings were violent and inconsistent, similar to today's market activity in the biotech sector. It would be difficult to try to assemble the daily,weekly and monthly performance of each stock I held from the late 1990's into the early 2000's to prove my point, but, I can tell you this...in over 75% of the cases the individual stocks traded at less than 10% difference from where they had started at the beginning of the month. And, when I looked through the daily activity of the high,low and settlement data I would see those same 5%-15% swings in the price of the stock on a regular basis. When the market was volatile, my technology stocks reacted in high beta fashion, swinging wildly intraday and often settling back to a more normalized level by the end of the trading day.
But, what became most apparent is that by the end of each month, the markets were typically pricing the stock consistently close to its prior month valuation. Typically, the stock was within 10% of its starting price if the stock appreciated and averaged less than 10% on a decline. The only thing that was missing from the data was the "noise" from all the meaningless trade data that was available to me second by second through my cell phone. At the end of the month, my stock was valued at a price fairly consistent with market performance and all of the potential stock dumping and penny scalping trades that I had made were almost meaningless.
Remember, I often bought back shares at higher prices, so, it was pretty much a wash as far as saving money goes. But, what would have been missing was the daily indecision and stress caused by a stock that was moving down or the compulsion to sell a stock because it had moved up a few percentage points. It was a tradeoff that I should have made years prior.
Some will argue that trading patterns of my past might not necessarily equate to similar results in the future. To that I say, wrong. They are following precisely in the same manner as they did in the early 2000's, at least in the biotech sector of my portfolio
Let me provide two examples of stocks that might have caused me some serious stress and major indecision had I been micromanaging them on a daily basis, utilizing an even better trading tool called "streetsmart edge". This tool gives me real time streaming data, split second trading capability, up to the minute news for my stocks and even offers strategies and tools to make sure my "trades" go according to plan. Sure, they made the tool for my benefit, not to increase commissions (sarcasm here). But, before I digress too far away from my thesis, let me first discuss Inovio Pharmaceuticals.
Inovio Pharmaceuticals has been a successful trade for my portfolio, but, if I was watching this stock trade on a second by second basis I most likely would have sold the position months ago leaving 100% of my gains in the hands of other investors. I have provided the monthly trade data here and it shows the beginning and ending trade data for each of the prior sixteen months. Notice that of the eighteen months posted, Inovio has closed higher on a month over month basis twelve times. The gain from the total period has been approximately 317%. On a monthly basis, the stock closed at least 5% higher than the prior month nine times, and that is on a compounded basis.
The INTRADAY data is the "noise" that I am now happy to be missing. During that same period, Inovio traded in excess of a 5% daily swing between the high and the low of the day 199 times! That means that Inovio traded in an excess of a 5% daily trading range during 49.75% of the time from January 2013 through July 30, 2014. Easily, this type of activity could have shaken the shares from hands of even the most disciplined of retail traders that watched the trading action on a real time basis. But, even if such were the case and if the retail trader was successful in trading for a financial benefit during 50% of these intraday ranges, the question remains as to whether or not the investor, myself included, would have realized a gain of 317% during that same period if he had simply bought and held the stock.
Realizing the emotional components of buyers and sellers remorse, my guess is that the 317% gain would have been superior to the trader who was micromanaging the minute to minute trading activity of Inovio. In other words, it is my theory that investors that were caught up in five minutes worth of trading momentum, whether it was bullish or bearish, most likely lost some or all of their position in Inovio.
Of course, the question remains as to whether or not Inovio is still a good stock to hold and it is always prudent to do some homework at least once a week to make sure that no fundamental or material changes have been made by the company that would cause me to sell the stock.
In the case of Inovio, recent data has showed success in their phase ll VGX-3100 trial and they have raised the level of their S-3 filing to an available amount of one hundred and ten million dollars. The company has also guided toward additional milestone payments from Roche, a potential partnership for the continuance of the VGX-3100 trial into a phase lll study and has submitted papers from the current phase ll study for peer review and publication. In the case of Inovio, my homework has me committed to holding this stock for the long term, or, until a material change occurs within the company that would cause me to reevaluate the position, which would be part of next weeks five minute homework assignment for my review of Inovio.
Keep in mind, I do not keep a blind eye to Inovio. I do receive email notices and blogger reports that are generated directly to my personal email on a regular basis. What I do not focus on directly is the market noise or short sellers that are far more sophisticated in taking advantage of quiet periods, especially in the biotech sector.
The next stock that I own and wish to highlight is Mannind Corporation. This company has similar trading patterns to Inovio. The company recently announced FDA approval of its drug Afrezza and speculation is buzzing about potential partnerships to bring this drug to market. The potential partnership is speculation.
Let's see how the intraday trading range of this stock has traded to determine if retail traders, including myself, would have possibly been shaken from their shares during intraday volatility, assuming that we were glued to the real time trading data available to most retail traders, whether we trade professionally or not.
For this stock, I used the period from January 2013 to July 30, 2014. During that period, on a month over month basis the stock closed higher eleven of the eighteen months posted. The total gain to an investor who had bought and held Mannkind during this entire period would have been 257%.
During the posted 400 day trading period, Mannkind had daily intraday swings in excess of 5% during 132 of the posted trading days, representing 33% of the daily trading activity having intraday swings in excess of 5%. Would I have had the intestinal fortitude to have held the stock through any of these 132 volatile trading days, influenced by blogs and misinformation? It might have been possible, but, not probable. Watching a stock trade down 5% intraday is a stressful situation.
Human emotion, greed, fear and general speculation would lead any investor to make instantaneous trading decisions when faced with wild intraday price swings. An excess of 5% can be a considerable amount of money in some investments and add that to the fear that the bottom might not have been priced into the stock, trading out of Mannkind at the first sign of excessive decline might have seemed quite logical at the time.
But, because this was an intraday range, many investors, including myself, quite probably would have chased the investment back once the fear subsided and the ticker trended back toward the positive side of 5%.. After all, the investment was made after the proper due diligence was completed and in reality nothing had changed fundamentally during that intraday volatility, assuming no fresh news was released..
Summing It All Up
By buying and holding each of the two stocks covered, I have realized a 317% gain and a 257% gain respectively since January of 2013. This takes into account the erratic and extremely volatile week that each of these two stocks are about to complete, shaving over 10% from each total period gain.
If I was trading in my prior 2000's fashion, chances are that I would have either sold each position or would have chased the stock higher. Why? Well, typically I don't buy stocks when they are going down and most retail traders don't either. We like to buy stocks when they are going up to ensure that we do not miss the rally. Therefore, chances are that the retail class, myself included, would have been chasing each of these stocks higher, potentially minutes after selling them on a volatile day.
By not micromanaging these two positions, I have not only enjoyed a fantastic eighteen month return, I have also maintained my sanity, have a lot less daily stress and am oblivious to the daily rants and raves of the message board and blogging crew. I am by no means disassociated from either of these two stocks and I read my real time alerts from blog and news sources. But, in place of active trading and ticker obsession, I do my homework at the end of the week to maintain my commitment to each position.
What do I do in my free time since turning off the real time tickers? I use that time for the better things in life....family, friends and fishing.
Disclosure: The author is long INO, MNKD. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.