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This Mistake Cost Me 40%

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Hindsight is 20/20. Unfortunately, I feel my foresight could occasionally benefit from a pair of heavy bifocals.

The mistake
Back in late July 2011, I purchased Akamai Technologies (Nasdaq: AKAM  ) shortly after the company warned that it would not be meeting Wall Street's lofty earnings expectations. To me, and at the time, the earnings miss seemed minor -- but Wall Street wasn't nearly as forgiving. The stock nosedived 19% on Akamai's cautious outlook that day.

My investment thesis going into the trade revolved around Akamai's solid cloud market share. I postulated that 13% long-term growth, while lower than even the company had originally planned for, was still excellent, especially with the company at the time only trading at 13 times forward earnings.

The next few months that followed my purchase were volatile, with the stock trading generally below my purchase price. Then something miraculous happened: Akamai returned to what it did best and crushed Wall Street's earnings expectations in late October. Takeover chatter began swirling again around Akamai, and Wall Street was once again firmly getting behind the company's cloud computing long-term growth story.

The cost
Now what did I do? Like an idiot, I got so excited that my Akamai trade was finally profitable that I sold Akamai just shy of $30 a few weeks later for a net gain, after commission, of 22%. Understandably, no one will ever go broke taking a profit, but I abandoned my long-term perspective on the company for quick gains and it wound up coming back to bite me in the behind.

Last night, Akamai reported fourth-quarter results that once again surpassed even the loftiest expectations. With the stock trading just shy of $39 in the after-hours session, I could have been holding shares that would be up 62% as of tomorrow. Instead, my insistence to try to time the market got the better of me, and it cost me a clean 40%.

The solution
One way I plan to rectify this insatiable urge I have to try to time the market is by purchasing high-yielding, low-beta dividend stocks. With very little in the way of earnings surprises, the mortgage REIT sector could be just what I need to get my trigger-happy finger under control.

This was the year I vowed that I would begin paying myself, and high-yielders Annaly Capital (NYSE: NLY  ) and American Capital Agency (Nasdaq: AGNC  ) perfectly fit that bill. Both invest in agency mortgage-backed securities that have the implicit guarantee of the U.S. government. With the Federal Reserve insisting on keeping lending rates at historically low levels through 2014, these two should find that their dividend yields will stay healthily in the double-digit percent range.

The other factor that will get me to hold longer is simply my hatred of paying taxes. No one really likes paying their taxes, but if someone offered a method by which you could cut your tax liability by potentially more than half, you'd probably jump at it. Such is the case with short-term capital gains versus long-term capital gains tax rates. It depends on the rate at which you're taxed, but short-term capital gains can cost you anywhere from 10% to 35%. For the bottom two income brackets, long-term gains aren't taxed at all, while being taxed at just a 15% clip in all higher tax brackets. I work hard for my money, and there's no sense in giving it right back to the government just because I have ants in my pants.

If you'd like to avoid my investing pitfalls, consider getting a free copy of our latest special report, "3 Stocks That Will Help You Retire Rich," and giving yourself a refresher with our "13 Steps to Investing Foolishly." We're all going to make mistakes, but as long as we learn from them, we can become better investors.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He freely admits his mistakes, but doesn't consider being a die-hard Lions fan one of them. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool owns shares of Annaly Capital. Motley Fool newsletter services have recommended buying shares of Annaly Capital. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that puts its readers first.

Read/Post Comments (5) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 09, 2012, at 10:39 AM, reitnewbie wrote:

    I think this article is mistaken in the last paragraph where it talks about taxes. The yield for REITs are based on dividends that get taxed like ordinary income, not traditional dividends or capital appreciation. Therefore, this tax paragraph does not apply since these REITs will be taxed the same as short term capital gains. I would still rather take a high yield taxed like ordinary income rather than a lower yield taxed like long-term capital gains.

  • Report this Comment On February 09, 2012, at 1:07 PM, vaderblue wrote:

    If you are young you will recover. I don't mind paying the capital gain tax (wish they would eliminate it) if I am making good money.

    I have been there. Not sure when to sell but I usually milk the profit and continue long.

    A good company is worth keeping. I don't usually pay attention to wall street analysts. I like Motley.

    I follow the financials and news. I visit the companies on line. I have made money on stocks most people wouldn't give the time of day.

    Buy low.

    Maintain high yielding dividend stocks like FTR

    NLY, NYMT, NZT, NYB and good old Pitney Bowes ( always dividends)

    I feel your info will be helpful to the young investors.

  • Report this Comment On February 09, 2012, at 2:46 PM, lucasmonger wrote:

    People trying to make quick cash seems to be opposite of what Motley Fools should be doing. We're all in it for the long haul. The time I piled into Akamai was during the dot-bomb era at $0.87 and $1.19. In my mind, the $1 to $20 jump (at at times upwards of $60) was the big money. Taking a 20% gain in the last six months and lamenting that you could have made 40% because of market timing is not how I like to invest.

    It's easy to spot low points (dot bomb in 2001, financial crisis in 2008) because the news will be talking about it daily. Resign yourself to buy strong stocks at that time and don't worry about trying to guess the very bottom. Then hold until the market comes roaring back. On the other end, don't be too greedy either. When stocks surge upwards, be happy with a 20 times profit and don't lament that it could have been more.

  • Report this Comment On February 09, 2012, at 5:29 PM, Hawmps wrote:

    If you're feeling "trigger happy" to sell because the stock popped 22% in just a few months, then sell enough shares to get your principal back and keep the rest. You would look at those shares you keep much differently because at that point you have no skin in the game. If you did this (simple math for illustration) bought 100 shares that gain 22% value, sold 82 shares to break even and are left with 18 "free" shares. Not bad, and just leave those 18 shares on autopilot for awhile and let them contribute to your net worth. You could still eventually double your initial investment with only the shares you keep if the value keeps rising while you are deploying your capital to something else that is also hopefully growing.

  • Report this Comment On February 10, 2012, at 9:33 AM, BURDEN59 wrote:

    This article is indeed wrong when it mentions the tax treatment. The dividends are taxed as if they were ordinary income. And, yes, I too would rather receive a high dividend and pay ordinary income tax. But the best way to avoid the tax altogether would be to put NLY into a Roth IRA, which would bypass all taxes--which is what I am currently doing.

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