As has been related, on April Fool’s Day 2004 my net worth was at a high and almost twice the level of the previous September. Year to date I was up almost 40%, mostly on an overweight positions in subprime mortgage lenders. It was the perfect environment: low mortgage rates, easy access for lenders to additional capital through securitizations, and low defaults as the economy recovered. For the investor, margin rates of about 5% and double-digit dividend yields made margin look like a sure bet. I was heavily margined, but figured I could slash my exposure with a few mouse clicks. If only its were mentally so easy. I had certain wealth targets and determined I would not sell a jot of NFI until it had appreciated enough that the dividend yield hit 8%, a number I had pulled out of the air.
The market, however, doesn’t always abide by our mental reference points. On April 2nd the employment report came in well above expectation and suddenly everyone was worried about rate hikes and a collapse in the mortgage market. After the big run-up in subprime lenders, this was all that needed to knock them down. Both NFI and IMH fell by about 7%. They took another hit on Monday as NFI fell 13% before stabilizing for the rest of the week.
Despite the drop, the stocks were still above their March 1 levels, and I thought I had weathered the storm yet again. I was wrong. On April 8, the Wall Street Journal published a story on non-compliance of some of NFI’s branches with lending requirements in some states. This had been reported in local newspapers and on the Web, but when it hit the WSJ the stock plummeted 31%! With over half my portfolio in NFI, it was a challenging session. My total portfolio was down 25% for the day.
Suspicion grew on the NFI message boards that the fall was a concerted attempt by short-sellers to push down the stock (allegedly by some of the same Sith lords later referred to Byrne Overstock.com CEO Patrick Byrne). The next day NFI recovered by 10% to the low 40s. Sensing a recover, I bought some June 45 calls. They didn’t pay off. NFI continued down, hitting an intraday low in the high 20s on April 29th. When it fell early the next morning, I couldn’t take it anymore and sold about 20% of the position. These were the shares I had got from exercising options earlier in the year and they were sold for a loss. My wealth was back to the same level it had been the previous September (though I had paid tuition and living expenses since then).
The sudden drop in my wealth was jarring, though was cushioned by the fact that even at these levels, my investment in NFI not counting dividends had about doubled. My gains in IMH were less, but still substantial.
The main lesson I’ve taken away from this episode: don’t fall in love. When things started to go south after such a big run-up, I should have taken some profits. The eery feeling I had that if I didn’t hold NFI I’d never get to certain wealth levels was just silly. There are thousands of opportunities in the market every day. Where to find them? I could have looked in my own portfolio. One position I held, Knightbridge Tankers (VLCCF) doubled in the year from April 1st. Another, Asia-Pacific Fund (APB) went up 50% in the 2 years from the same date. These were positions I wasn’t very excited about at the time. Finding something that did excite me would have helped. Its much easier to escape an infatuation when you have an another apple for your eye (or several as the markets go).
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Don't Fall in Love (my trading history Pt. 7)
As has been related, on April Fool’s Day 2004 my net worth was at a high and almost twice the level of the previous September. Year to date I was up almost 40%, mostly on an overweight positions in subprime mortgage lenders. It was the perfect environment: low mortgage rates, easy access for lenders to additional capital through securitizations, and low defaults as the economy recovered. For the investor, margin rates of about 5% and double-digit dividend yields made margin look like a sure bet. I was heavily margined, but figured I could slash my exposure with a few mouse clicks. If only its were mentally so easy. I had certain wealth targets and determined I would not sell a jot of NFI until it had appreciated enough that the dividend yield hit 8%, a number I had pulled out of the air.
The market, however, doesn’t always abide by our mental reference points. On April 2nd the employment report came in well above expectation and suddenly everyone was worried about rate hikes and a collapse in the mortgage market. After the big run-up in subprime lenders, this was all that needed to knock them down. Both NFI and IMH fell by about 7%. They took another hit on Monday as NFI fell 13% before stabilizing for the rest of the week.
Despite the drop, the stocks were still above their March 1 levels, and I thought I had weathered the storm yet again. I was wrong. On April 8, the Wall Street Journal published a story on non-compliance of some of NFI’s branches with lending requirements in some states. This had been reported in local newspapers and on the Web, but when it hit the WSJ the stock plummeted 31%! With over half my portfolio in NFI, it was a challenging session. My total portfolio was down 25% for the day.
Suspicion grew on the NFI message boards that the fall was a concerted attempt by short-sellers to push down the stock (allegedly by some of the same Sith lords later referred to Byrne Overstock.com CEO Patrick Byrne). The next day NFI recovered by 10% to the low 40s. Sensing a recover, I bought some June 45 calls. They didn’t pay off. NFI continued down, hitting an intraday low in the high 20s on April 29th. When it fell early the next morning, I couldn’t take it anymore and sold about 20% of the position. These were the shares I had got from exercising options earlier in the year and they were sold for a loss. My wealth was back to the same level it had been the previous September (though I had paid tuition and living expenses since then).
The sudden drop in my wealth was jarring, though was cushioned by the fact that even at these levels, my investment in NFI not counting dividends had about doubled. My gains in IMH were less, but still substantial.
The main lesson I’ve taken away from this episode: don’t fall in love. When things started to go south after such a big run-up, I should have taken some profits. The eery feeling I had that if I didn’t hold NFI I’d never get to certain wealth levels was just silly. There are thousands of opportunities in the market every day. Where to find them? I could have looked in my own portfolio. One position I held, Knightbridge Tankers (VLCCF) doubled in the year from April 1st. Another, Asia-Pacific Fund (APB) went up 50% in the 2 years from the same date. These were positions I wasn’t very excited about at the time. Finding something that did excite me would have helped. Its much easier to escape an infatuation when you have an another apple for your eye (or several as the markets go).
Like this: