Power of percents

workings of the mind

To seduce and deceive

It was about a year ago that I decided to figure out how to make money trading in the stock market. Most of my earlier stock purchases had been notable for losing money. With so much data and so many tools available online, I would learn. Damnit.

Since bottoming in March the major stock market indexes are up significantly so far this year. At this point, the Dow Jones industrial average is up around 20% for the year, and the Nasdaq composite index is up around 45%.

Nasdaq composite and Dow Jones Industrial Averages for 2003 to date

For the same time period, the value of my own trading portfolio is up 170% — worth 2.7 times what it was on 1 January of this year. That sounds terrific, and I think it is.

But percents are funny numbers, for it all depends on the number you start with. A big percent of a small number is still a small number. Conversely, a small percent of a large number can seem very big. For example: 5% of $1000 is $50, but 1% of $100,000 is $1,000.

Now, to some people $1,000 might not seem like much at all. To Warren Buffet that is probably chump change, but to me that amount is still meaningful.

This all came into focus around the end of September, when the stock market swooned. The Nasdaq dropped from 1913 on 19-Sep to 1783 on 30-Sep, a fall of 7%. That's not too bad as a percentage, but when multiplied against the total value of my portfolio at the time, it was a lot of money. It was more than enough money to make me very nervous. Had my earlier successes made me over-confident and careless? Was I over-extended? Was I really prepared to risk that much money?

I like roller coasters as much as anybody, but I came to appreciate that even small percentage fluctuations in the market were providing exhilarating rises and dizzying plunges in the value of my trading portfolio.

HDTV stock chart for last month

The effect has only intensified during the last couple of weeks. Many of the stocks in my portfolio have made unexpected leaps and plunges for no apparent reason. Then I started to pay attention to the many financial commentators who were pointing out that with the Nasdaq and DJIA already up so much for the year, large institutional investors and funds managers were trying to lock in profits for the year. That, of course, means selling, which drives prices down. That, in turn, makes the stock attractive again, and buying drives prices up.

Vertigo roller-coaster at Paramount Great America

I started to look at the yearly charts for my stocks and saw that some of them were up extraordinary amounts for the year. For example, Corillian Corp (CORI) had risen from $0.61 at the end of February to $7.45, an increase of 1221%. (Of course, I didn't buy it when it was a $0.61!) Who wouldn't be tempted to sell and take profits like that to the bank?

CORI stock chart YTD

Considering the type of stocks I'm investing in ($5-$8), this kind of volatility probably just comes with the territory.

The reassuring thing is that after most of them have sold off, they spurt back up again. I keep telling myself that if I don't lose my courage it will all settle down with the new year after the funds managers have re-adjusted their positions.

It's all enough to give a person vertigo.