Stock Lesson IV

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I started this “stock lesson” series because I want to write down some of the mistakes I made on the stock market in the past few years. I hope I can avoid making the same mistakes in the future; I also hope others can learn from my mistakes.  

OK, back to the subject. I have talked about enough about “Grass is not always green on the other side”, find your own rythm (stocks and trade pattern), the investment goal and plan, all these good stuffs. Now comes the practical question: when to buy? when to sell?

This seems like an easy question. I think we all want to buy low and sell high, so that we can make money. But how do we know whether a stock will go down or up when we buy it? Remember our good friend Warren Buffett once said “buy when others are scared; sell when others are greedy”. Fair enough. But there are some caveats on this one. I have done this: in Spring 2004 I bought some Nokia (NOK) stocks at $17.xx  when it released earning below expectation. And I bought more at $14.xx a week later when it said it would miss the next quarter earning estimates too. The main reason is Nokia is a bit slow releasing those Flip phones which are more popular in the US market. They lost market share to competititors. So here is the mini lesson one: don’t try to catch a falling knife. When the earning is bad, and everyone is selling, why would I fight against the market? So what was my results? The stock went down as low as $11 before it recovered to $17 in one year. By that time I already lost patience and sold it at a loss.

Another thing to we need to pay attention is distinguish between a temparory problem from a foundamental change (for worse) in the company earnings. This is not an easy task. But in principle, if a company lost its competitive edge, lost its main customer, lost its main business, we should stay away from it no matter how cheap a stock is. Still use Nokia as an example, since the customers likes the flip phones better while it will take some time for Nokia to come up their flip phones, it will take a while for the Nokia stock to recover (if they launch the flip phones customers like). Because Nokia is a solid company it did recovered from its mistakes. Unfortunately many companies could not. I had one of those companies (Nine Town Digital, ticker symbol NINE). In July 2005 it says its main customer the China inspection Bureau decided to get a free version of customs inspection software, thus essentially making Nine’s products free (software license). The NINE says it will switch the business model: from software license based revenue to service based revenue. I sold the stock at that day (at $6). More than a year later, its stock price still has not recovered.

Talking about the NINE, it’s also the worst performing IPO stock I bought. Generally speaking, IPO stocks is not for beginners like me. But at that time I bought two IPO stocks (Shopping.com, and 51job), had time to make good money, but I missed the opportunities. I tried to catch the missed boat. And I bought the NINE at the beginning of its debut. I never had any chance to make money on this one: because it never went back to the price I bought. So here is mini lesson two: approach the IPO stocks with caution. My friend bought Baidu at the first day and made handsome money. Many people bought the VOIP provider Vornage (VG) IPO this year and lost money. 

OK, enough about my mistakes. I think Warren’s principle is still valid as long as we know these caveats. Wait for a week to a month in the case of “earning miss” so that we will have time to figure out if it’s just a temparory problem or a foundamental problem. Use limited orders instead of marker orders. It’s not just for the sake of saving the small money (the difference of limited price and stock market price); the main thing is it will make us think serious more about the buy order (more disciplined).     

OK, I won’t try to correlate this with things in our personal life this time. Use your own imagination 🙂

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