Righteous remorse

remorse

Reflections on trading in the stock market

It's the "earnings season" on Wall Street, a time almost guaranteed to raise blood pressure and increase demand for anti-anxiety medications. One minute the market is up on news that <any company name> earned a penny more than expected. The next moment it's down on news that <any other company name> gave cautious guidance. Throw in SARS and Alan Greenspan's prostate, and you have a recipe for high drama and disorder.

Trading in the stock market is an unnatural activity. My parents, having witnessed the stock market crash of 1929 and the subsequent Great Depression, considered stocks and the market as speculation. And rightly so. A share of stock, after all, has no intrinsic value — its value derives from the possibility and probability of being able to sell it to someone else for more than you paid. As all of us who bought Enron stock can testify, that's never a sure thing.

Evolution. My first experience with owning stock of an individual company came with the HP Stock Purchase Plan, designed to encourage a "buy and hold" attitude. I bought and held.

With the advent of online brokerages, I decided to try my hand at owning other stock. Although the dollars that went into it were real enough, I thought of my brokerage account essentially as more for entertainment than for serious money-making. Like Monopoly. As it happens, that was a very appropriate attitude, since money-making was hardly the outcome.

On the face of it, the stock market looks random. In fact, if you make a chart of how much the market goes up or down from one day to the next, you get a nice bell curve. Sometimes you land on an unowned Park Place; sometimes you go to jail. However, mine is the type of mind that wants to make sense of things, and I determined to get more understanding of the market. I would learn how to do this — damn it!

Subtly, but irresistibly, my brokerage account morphed in my mind from entertainment to challenge. My strategy shifted from "buy and hold" to "churn and earn." I'd go for the short pass, not the long bomb.

But once you start to care about the outcome, that's where remorse comes in. And it's all fueled by greed.

Remorse

A person gets involved with the stock market looking for rewards, but as often as not finds remorse, different kinds of remorse.

Seller's remorse. Seller's remorse is what you get when you're successful, but sell too soon. Watching the price of a stock rise is almost as nerve-wracking as watching it fall. You see the potential profits in the higher prices, but you know the real possibility that the price could plummet and turn gain to loss. So the pressure to take the "bird in the hand" grows.

Once you've sold, the initial satisfaction of taking the profits can be replaced by remorse if the price of the stock continues to rise. It's even worse if there's a sudden upward leap as a result of some surprise, as happened this week with Citrix (CTXS) earnings.

CTXS stock chart

I had held onto my CTXS shares for quite a while, through ups and downs, but I was impatient that it just hadn't gone up as much as I'd hoped, so I sold. What makes me annoyed with myself is that I ignored very positive signs that the upward trend would continue. Had I waited 3 days, I could have made 40% profit, instead of only 16% profit. If only...

PKTR stock chart

I am having this exact debate over my shares of Packeteer (PKTR). I've had a nice run-up of over 30% since buying the stock. The technical indicators show that the uptrend still has a lot of strength, but yet— the past two days of declines have me nervous. Common sense says, "Those are good profits, take them." Greed says, "But you might make more!"

We should be so lucky to have this kind of remorse with all our trades!

Buyer's remorse. Buyer's remorse is what you get when you bet wrong. You identify a stock that's going up and decide to catch a ride, but no sooner do you get your ticket punched than the train reverses direction.

Hurricane Hydrocarbons (HHL) was moving sharply up. There's always a need for more oil, right? Within days, HHL shares started to fall. "It's just a "correction," I said to myself. "It's the war in Iraq," I explained to myself. To make a long, sad story short, I clung to hope way too long and ultimately bailed after losing 20% of my investment.

HHL stock chart

Although I had set a loss limit, at which point I would sell and cut my losses, I didn't follow through on my decision, to considerable remorse.

"At least," I said, "I didn't make the Enron mistake again."

Compound remorse. Compound remorse results when a case of buyer's remorse is followed by seller's remorse. You see you're losing money and decide to cut your losses (buyer's remorse), but as soon as you do, the stock starts back up again (seller's remorse). As it goes back up again, one keeps thinking, "If I'd just kept it, I wouldn't have lost as much." Of course, one could jump back in again, hoping to make up the loss, but that runs the risk of "sending good money after bad." In my own experience, HHL definitely produced compound remorse. If I had not sold, I would only be down 8% at this point, rather than having lost 20%. If only...

Non-buyer's remorse. Non-buyer's remorse is what you get when you identify a stock that's likely to start trending up, and it does, but you failed to act. It also results from the common experience of finding a stock hitched to a rocket, only after it is in full flight. This happens a lot!

STAA stock chart

Results?

Bottom line: I'm up for the year so far by a few thousand dollars (about 15%). This is clearly better than being down by a few thousand dollars.

I'm beginning to feel like I'm catching on. There are some indicators that I think I understand and know how to interpret. I'm getting a whole lot better at finding stocks about to move, rather than discovering them after they've completed a good part of their climb. And I'm becoming more comfortable with the idea that volatility can be your friend, because from it comes opportunity.

There are some things I'm still working on:

  • I'm not yet ruthless enough about using my stop-loss limits. I succumb to hope that a reversal is just temporary.
  • I'm not yet confident enough to ride a trend all the way. I succumb to "bird in the hand" thinking.