$10,000 Portfolio Update: On The Merits Of Simulated Trading

by: Rocco Pendola

Fellow Seeking Alpha contributor Cameron Kaine wrote something today that flattered and made me get introspective all at the same time:

It takes quite a bit to make me envious, but after having read Seeking Alpha contributor Rocco Pendola’s portfolio performance, I have to admit both envy and jealousy have crept in and for this I must say that I am ashamed and embarrassed. While he is now on the verge of possibly tripling his portfolio’s value, at just over $5,200, I am still only half-way toward reaching $10K and I have two months to do it.

First off, to do anything but give Cameron credit for posting his results, through thick and thin, borders on missing the point. While it's easy to make anonymous comments taking a writer to task for this or that, it's takes so much more character to put yourself out there. That's what Cameron does. That's what I do. And I operate under no illusions that my performance to date makes me better than anybody else. The tide has a way of turning swiftly in this business.

As I told Cameron in a private message, we often place too much focus on making stock picks and being "right" and less on other things that matter just as much in trading and investing, particularly managing your positions. Before I update my $10,000 portfolio, as of Monday's close, I want to expand on that a bit. I think value exists in considering the circumstances that surround both my and Cameron's public Seeking Alpha portfolios.

Using A Simulated Account

I would be remiss if I did not mention what might be the point that ties everything that follows together - as the disclosures at the bottom of our respective articles show, Cameron actually holds the stocks he includes while I only maintain select positions. That's incredibly important because, while I do have to manage my positions, I do not have to do it with as much of my real money on the line as Cameron does. Do I still feel pressure? I do, but it's a different type of pressure. Consider this analogy.

When I was studying urban planning in college, Barbara Ehrenreich's book Nickel and Dimed was all the rage throughout the social sciences. Ehrenreich deals with her experiment of "(Not) Getting By in America" by working minimum wage jobs. Widely considered an important contribution to several disciplines, I never really took what she did all that seriously.

Sure, Ehrenreich probably experienced episodes of discomfort here and there throughout her adventure, but what she did never amounted to much more than, well, an adventure. She was - and is even more so now-- a successful author who had money in the bank and even a credit card to fall back on when she was "struggling to get by." You simply cannot simulate the experience of being poor when you operate from a position of relative strength and comfort. (For a much better related account, see Philippe Bourgois' In Search of Respect: Selling Crack in El Barrio where he does not try to be something he's not).

So, there's, without a doubt, an element of Ehrenreich in what I have done with my $10,000 portfolio. I don't have the overhang of What if I lose my money? like Cameron does. It's so much easier to let a trade ride or go in with more size or proclaim that I'll hold through earnings, when I have nothing but pride and an ego stroke or two to lose. Heck, I made killings holding Research in Motion (RIMM) and Netflix (NASDAQ:NFLX) through earnings. I cannot honestly say, however, that, outside of a simulated account, I would not have taken some or all of one or more of those positions off of the table amidst pre-earnings jitters.

That said, I strongly believe real worth exists in what I am doing. First, results are results. If picking winners in simulated accounts was easy, everybody would sport great records. Even without actual money on the line in most of the positions, it's still not easy to generate considerable returns, particularly formidable ones in such a short time frame. And judging by the correspondence I receive from readers offering up beers for my RIMM, NFLX and Sirius XM (NASDAQ:SIRI) short calls, I know I've made a relatively broad, granted small in the grand scheme of things impact. The former NFLX longs who thank me for "scaring them out of" their positions only reinforce that, to some extent, I should feel good for being on the ride side of those trades.

If nothing else, I think the experiences that Cameron and I relay through our articles lend support to the notion that most traders and investors, even advanced ones, could benefit from using a simulated trading account. While I cannot speak for him, I would not be surprised if Cameron wishes he had tested a few things out before putting in actual capital. I know that I would have liked a bit more time to learn from my mistakes in a simulated account before I started trading options for real.

Simulated accounts can play several roles for most investors. Back in the day, I was known to ransack a room when things did not go my way. Thankfully, I'm not quite that competitive, emotional (or profoundly stupid) any longer. Then and now, however, taking a walk around the block always helped to calm me and put things in perspective. When you're on bad a stretch and losing money, a simulated account can be a trader's or investor's equivalent of a walk around the block. Instead of "waiting for your luck to change" with real money, why not ride out the storm by taking a few swings in a simulated account?

It might also teach you a thing or two to keep a simulated account alongside your real money accounts all the time. At every entry and exit in a real account, ask yourself what would I do if I did not have my real money on the line here and make that move in your simulated account. As the results roll in, I think you might end up learning quite a bit not only about your trading and investing, but yourself.

Here's how things stand in the $10,000 portfolio, as of the close of Monday's business:

Option Quantity Entry Price Midpoint Price, Monday's Close Profit/Loss
Apple (NASDAQ:AAPL) April 2012 $450 call 1 $19.18 $17.25 - $193
Amazon.com (NASDAQ:AMZN) April 2012 $220 call 1 $30.00 $22.63 - $737
Research in Motion (RIMM) March 2012 $20 put 30 $2.70 $3.80 + $3,300
Sirius XM (SIRI) March 2012 $3 put 25 $1.58 $1.31 - $675
PowerShares QQQ ETF Trust (NASDAQ:QQQ) March 2012 $50 call 1 $6.68 $9.51 + $283
Netflix (NFLX) June 2012 $50 put 8 $4.50 $3.48 - $816
Pandora (NYSE:P) June 2012 $15 call 9 $2.55 $2.70 + $135
TOTAL P/L + $1,297

That brings the portfolio's value to $24,828. For my current thinking behind each position, please see my update from Friday, Is This What A Three-Bagger Portfolio Looks Like?

Disclosure: I am short NFLX.

Additional disclosure: I am long P.