Regardless of the fact that a lot of studies have been done to prove that passive investing is superior to active investing, I believe that due to the time constraint, a passively managed portfolio would see very little to no change. Since the purpose of the exercise was to acquire some insight as to what it was like to invest, I decided that an actively managed portfolio would be best for me. As a result of my decision, I went on to aggressively trade stocks quite frequently. The only two stocks which were kept for an extended period of time incurred losses. The transactions made were based on several factors including historical analysis of the stock, comparison of quarterly reports between competitors and products in development and being released in the near future.
TRADE IDEOLOGY
Now several transactions that were made will be brought under scrutinization and the rationale for the trades will be discussed. The first trade which will be discussed is a transaction which incurred loss. This transactions single handedly provided more insight into the market than most other trades made.
The market was fairly volatile during the course of the exercise and that lead to a lot of price changes, however, based on the historical performance of the Pepsi Co. I decided that holding on to this stock to bring a little stability to the portfolio would be a good idea. Additionally, on the Pepsi Co. investor website, there is information regarding their acquisition of the Pepsi Bottling Company, I was hoping this would transcend to an increase on stock prices. The end result was a loss of $2,250.76, a small loss but a loss nonetheless. An examination of the charts in Appendix B reveals that the opportunity to turn a profit from this transaction was there but my unwillingness to part with the stock resulted in a loss. This experience taught me that I should not be afraid to sell the stock when it is high, regardless of how long the stock has been a part of the portfolio. I credit this transaction with the earnings I made through the length of the exercise, because I would go on to hold stock for as little as few hours after this experience.
The single transaction that had the highest return on investment was my trading for Whirlpool (WHR) on May 24th and selling on the 30th. I chose to buy WHR (Appendix C) stock for several reasons. First of all their earnings per share (EPS) were up a good deal from last quarter to this quarter, this was probably a result of the increased volume of sale WHR experienced abroad. The increased sales volume also greatly influenced my decision to purchase WHR stock. Aside from financial indicators all looking positive, I also came across an article in Business Week stating that the planned takeover over of Maytag was underway, suggesting more growth is to come from WHR. After this stock had initially been sold, an opportunity to repurchase nearly double the quantity as the first time was taken advantage of. Later that day WHR stock prices would increase nearly $5, I sold them at that point and the result was my most profitable transaction, grossing $47,983.12 after holding the stock for just hours.
The purchase of Activision Blizzard (ATVI) stock was my most speculative transaction of the exercise. While financial indicators are favorable for the most part, I chose to purchase this stock purely on the speculation that upcoming games would spur their stock prices a bit. I was fortunate that a couple of days after the purchase, the company released a teaser trailer of an upcoming expansion to an already popular game and stocks rose to the levels at which I sold. Had I held on to this stock for a few more days I could have sold for $0.25 per share. I suspect that with the looming release of Star Craft 2, the closer release date gets, the higher the stock price should go. This release is one of the more anticipated games in the computer gaming world, and Activision Blizzard (Appendix D) is expecting huge sales as a result. While I stated that this trade was highly speculative, there were tell tale signs of a healthy company lurking within their financial statements. Revenue from product sales is up a staggering 43% from the last quarter of 2009. Besides the increase in revenue from products, net income is up nearly double from last years last quarter.
Google (GOOG) is a monster of a company, and they are certainly not in any sort of financial straights, however, based on the release of their quarterly reports for the first quarter of 2010, the company appears to be strengthening their position as one of the world super company. While doing some research on the history of their stock by analyzing charts like the one found at Appendix E, I saw that as recently as April 14 Google was trading at nearly $600 a share. After checking and tracking their prices for a few days I saw an opportunity to buy when they were near their lowest trade price of the year at $475.47. At that time I allocated 96.2% of my funds into purchasing stock for Google. After holding it for a day I sold it at $490.46 per share, making nearly $15 per share. After spending a short while over the $500 I saw an opportunity to purchase their stock at $493.37 so much like before I allocated 99.7% of my funds into my purchase of Google stock. The next day the stock went up in price to $505.60, an increase of $12.13 per share, resulting in a gain of $27,489.44.
Statistically speaking, the trade of Sprint (S) (Appendix F) stock was one of the more successful investments made through the course of this exercise. The ROI for this particular investment was 7.07%. Sprint's financial situation is less than favorable and has a fairly high rate of churn, although, when compared to last year, their quarterly earnings are rising. I would have to say however, that my reasoning for purchasing the stock had more to do with what has been happening in the cellular industry as of late. First of all, Sprint is offering the nations first and only fourth generation network, which should attract more members. Additionally their rate plans are more affordable for data centric customers which with the advent of smart phones, is a good chunk of the cellular market. Besides the previously stated, the exclusivity that AT&T had with Apple for the iPhone has expired, and the iPhone has been shopped around, with the possibility of a CDMA version of it being released and compatible with the Sprint network. Lastly and possibly most importantly, Sprints anticipated release at the time, of the super powered smart phone, the Evo, was being preordered by the truckloads. The new device from Sprint should help bolster its numbers for the second quarter and build upon the increases it had already experienced from the last quarter of 2009 to the first quarter of 2010.
RESULTS
The results were shocking to me, as I expected I would be more severely punished by mistakes I made when trading. At the end of the exercise I my portfolio and cash on hand was valued at $1,101,794.53, an increase of 101,794.53. That is an ROI of 10.18% thorough the life of the exercise. My most profitable transaction based on ROI was WHR the first time around and the transaction I made that resulted in the largest loss was my purchase of JP Morgan Chase on the 30th of May. I believe I held this stock too long and missed my opportunity to make a very small profit.
CONCLUSION
In conclusion, I focused exclusively on actively managing my portfolio. Every morning I would look through the closing prices of the previous night and opening prices of the current day. Based on news articles, or reports which I may have heard I would verify as much information as positive and then I would check market indicators to see if I thought there would be an opportunity to turn a profit on a transaction. My inexperience caused me to hold on to a few stocks for a little bit too long for my particular strategy and those blunders resulted in a loss just about each time. Those mistakes were not repeated and I was much quicker to let go of stock when I saw that the price had risen. This exercise has provided me with a much better insight as to what goes into making stock purchases and sales, the experience was well worth it.
In hindsight, what I should have done was be more aggressive and more active. I missed out on some opportunities to make a profit because I was hopeful that the stock would appreciate more value. I think that when you are actively looking for securities, you are most likely buying a stock that is already under priced and by waiting you could miss out on a temporary price hike.
APPENDIX A
This is the downloaded file from WSJ, I edited it a bit, first of all to show just 20 of my transactions. Secondly, I made a separate column for the return on sale and subtracted the used amount from the total I got in return for the sale of the security. The Last two columns were also added by me. They show whether or not the transaction produced a gain or a loss and what the return on the investment was a percentage.
APPENDIX B
Pepsi's stock prices and volume traded over the last 6 month period
APPENDIX C
Whirlpool's stock performance and volume traded over the 6 months
APPENDIX D
Activision Blizzard's stock performance and volume traded over the last 6 months
APPENDIX E
Google's stock performance and volume traded over the last 6 months
APPENDIX F
Sprint's stock performance and volume traded over the last 6 months
SOURCES
http://www.marketwatch.com/story/sprint-4g-helps-chicago-food-bank-feed-more-2010-05-17?reflink=MW_news_stmp
http://investors.sprint.com/phoenix.zhtml?c=127149&p=irol-reportsannual
http://investors.sprint.com/phoenix.zhtml?c=127149&p=irol-quarterlyearnings
http://www.glgroup.com/News/Sprint-at-2-Churn-Rate-for-the-Past-Three-Years-34513.html
http://www.phonearena.com/htmls/HTC-EVO-4G-phone-p_4382.html
http://activisionblizzard.com/corp/index.html
http://www.pepsico.com/Investors.html
http://www.businessweek.com/news/2010-05-27/whirlpool-chief-repairs-maytag-spurs-takeover-talk-update2-.html
http://phx.corporate-ir.net/phoenix.zhtml?c=97140&p=irol-overview
http://investor.google.com/financial/tables.html
http://www.wsj.com
http://finance.yahoo.com/
