How I Lost 50% in a Week

Was it luck or was it skill?

As investors, it's the eternal question. Put another way, was your investing process sound or did you just get lucky (or unlucky) with the result?

In my continuing effort to become a better investor -- and to share my experiences so you can avoid my mistakes -- I took a look back on my investment decisions and trades for the last year.

What I found was two actions I am proud of and one action I am less sure of -- the one that lost me 50% in a week!

The two good actions
In investing, as when I'm at the poker table, I find that process-driven patience is rewarded. Over the long run, the more rash my actions, the worse my results.

For most of the year, I maintained my discipline.

Action No. 1 that I took was to be rational about my winning stocks. I evaluated their prospects and held or sold accordingly.

Accenture (NYSE: ACN  ) has had strong gains since I bought in a few years ago, but its operational gains have kept up with its stock price and it's a company I believe in for the long term. So I took no action and continue to hold it.

On the other hand, I sold about half my shares of Whole Foods (Nasdaq: WFM  ) and NVIDIA (Nasdaq: NVDA  ) and all my shares of a small bank. Whole Foods shares have increased a good deal since then, while shares of NVIDIA and the bank have fallen quite a bit.

The results have differed, but in each case, I was following my process. For Whole Foods, I was trimming my position in a richly valued stock I had probably bought too much of originally (I had bought a double position, an action I try to reserve for high-conviction, core stocks like Berkshire Hathaway (NYSE: BRK-B  ) when they're especially cheap). But I didn't sell all my shares because I believe in Whole Foods' business prospects. I know my own psyche, and selling half allows me to be disciplined and hold my remaining shares without fretting.

For NVIDIA and the small bank, shares had approximately doubled faster than I could have hoped for and I worried about valuation. I only sold half of my NVIDIA shares because, as with Whole Foods, I believed in the business prospects enough to hold at a premium. However, I sold all the bank shares because the business prospects no longer justified the now-doubled valuation.

Action No. 1 involved stocks I already held. Action No. 2 was about being disciplined in my buying process.

In the late-July to early-September time period, the market was tanking due to the botched U.S. budget talks and the resulting U.S. debt downgrade. During that time, I used my "dry powder" cash to pick up individual stocks I'd been waiting for good prices on, including some I already owned.

For those two actions, I'm happy with the process, regardless of the eventual results. For my third action, I'm still trying to figure out if my process was sound.

The action that cost me 50% in a week
One of the stocks I bought back in the July-September swoon was down extra because of its own problems. The stock was Dendreon (Nasdaq: DNDN  ) .

Unlike with bank stocks, I'm no expert in biotechs. But my summary thesis was that the market punished Dendreon too much for weak early sales of its Provenge prostate cancer treatment. The weakness (and subsequent pulling of sales guidance from management) was due to a Medicare reimbursement issue and the company's poor initial response to it. Long story short, I believed both were fixable and that Dendreon's prospects were robust enough to warrant an investment by me.

I bought in at $12.95, which was a third of where it had sat just a day before.

I did my analysis quickly, but that's not the quick movement I regret. Here's where it gets hairy. Shares continued to fall. On Dec. 30, the last trading day of the year, shares sat at $7.58.

Meanwhile, I was looking for losers to sell for tax reasons, and this was my last day to do so for 2011. You see where this is headed.

With the company's official earnings not due till February, I decided to sell my Dendreon shares to lock in a tax benefit and promised to look back into the stock after a month (and wash sale rules) had passed.

I knew there was the possibility of good news rocketing the stock. Biotechs are nothing if not volatile. But I took the bird in the hand. If you've followed the Dendreon story, the company released news of improved sales. So a week after I sold for tax reasons, shares were up 75% from my sell price. Less my tax savings, that's an opportunity cost loss of 50% in a week.

Was that just bad luck or the symptom of a bad process? Honestly, I'm still wrestling with that. I'm open to your thoughts. What I am promising myself, though, is that I won't anchor on the gain I lost. As I had planned when I sold, I will reevaluate Dendreon and consider buying back after a month has passed. Process!

Dendreon's been a big winner in early 2012. Another recent winner that's looking to revolutionize health care is featured in The Motley Fool's brand-new free report: "Discover the Next Rule-Breaking Multibagger." I invite you to grab a free copy. Just click here.

Anand Chokkavelu owns shares of Accenture, Berkshire Hathaway, Whole Foods Market, and NVIDIA. The Motley Fool owns shares of Berkshire Hathaway, Whole Foods Market, and Dendreon. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway, Whole Foods Market, Accenture, and NVIDIA. Motley Fool newsletter services have recommended writing puts in NVIDIA. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.


Read/Post Comments (39) | Recommend This Article (44)

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 January 13, 2012, at 12:23 PM, steven107 wrote:

    An Author from this site, I believe, wrote about the sell half idea in an article that I had read. I have made good use of it ever since. =)

  • Report this Comment On January 13, 2012, at 12:37 PM, 4wheelfool wrote:

    If it won't put me overweight in a stock, and I have the cash available, I'll do that wash sale thing the other way around. If I think the stock is really cheap, I'll just buy more stock. 30 days later I will sell my original shares. It just depends where you want to put the risk; having no shares if the stock climbs, or having more shares if it goes down.

    4wheel.

  • Report this Comment On January 13, 2012, at 1:02 PM, DJDynamicNC wrote:

    Re: process vs luck - tough to say, but I'm inclined towards simple bad luck. Selling off your losers at the end of the year for tax purposes can be a part of a solid strategy. And your analysis may not have borne fruit, but that doesn't mean it was necessarily a bad analysis; you're never going to have perfect access to information.

  • Report this Comment On January 13, 2012, at 1:02 PM, daveandrae wrote:

    Friend-

    if selling were not an option, you would make far better investment decisions.

  • Report this Comment On January 13, 2012, at 1:12 PM, tweenthelines wrote:

    Stay focused on the investment; sometimes you just have to get past the tax thing; take your gains when necessary and hold if you really like it. Just pretend all your investments are in Roth IRA account where you never pay taxes and never have to take money out (and if you do, take it in cash). I have also noticed recent discussions about selling puts for stocks you really want to buy albeit at your price which I will be looking into this coming year.

  • Report this Comment On January 13, 2012, at 1:22 PM, folgore wrote:

    Hmmm....about 10 years ago, I made a similar mistake with MVL. From a source outside TMF, I learned the story of how MVL was going to make money as its characters were used in upcoming motion pictures. Initially, after I made my initial purchase, the stock sank all the way under $2. I still believed in the investing thesis behind MVL, but still chose to sell for tax purposes, intending to buy back in later. Big mistake; I sold when I should've backed up the truck.

    Now I only sell for tax purposes those stocks I want to forget about.

  • Report this Comment On January 13, 2012, at 1:24 PM, DJDynamicNC wrote:

    @4wheelfool - that's a good idea! Thanks for posting that.

  • Report this Comment On January 13, 2012, at 2:26 PM, TNNguyen wrote:

    I bought (400) DNDN for $ 12.60, then I bought another (400) @ $ 9.20. I bought another (1200) @ $ 6.80. I have no idea about BioTech stocks either. I lost probably around $40K in the last 10 years, including 60% loss on TRGT. The reason I stayed with DNDN even now, because their invention was classified as the eigth biggest advancement in Biotech medicine. I made lots of mistakes too, but not DNDN. It is always difficult to separate the noises from the thunder; but we have to try and stay with our conviction.

  • Report this Comment On January 13, 2012, at 4:31 PM, TheDumbMoney wrote:

    Be careful. I think one part of good process is stepping back from one's tendency to leap back into stocks one has owned previously, or that one has a "history" with. (Learned from painful experience.) Good not to buy right back in now, but it still tickles my nosehairs that you are already considering buying back into Dendreon after merely a month passes. You *want* that stock. Best be sure at that time that you are buying for legitimate, forward-looking reasons, rather than to assuage your feelings about the loss you have just taken. I only like to sell for a tax-loss if I truly have lost faith in the company; if you did not sell for that reason, that may be a mistake in process. In any event, there are many potential brides at the ball.

  • Report this Comment On January 13, 2012, at 5:21 PM, TMFBomb wrote:

    @dumberthanafool,

    Thanks for the sage thoughts. Agreeing...I think my mistake in selling (if it was one) was in choosing to sell a stock I still believed in, figuring the potential one-month gain wouldn't (assuming I bought back in in a month) wouldn't exceed the tax benefits. The other stocks I sold at year-end were broken theses.

    Fool on,

    Anand

  • Report this Comment On January 13, 2012, at 6:20 PM, sachamay wrote:

    Your biggest mistake: you sold a stock for which your thesis (main reason for buying) was still in play. The only way to not regret losing opportunities is so avoid doing that at all costs. I talk about this kind of a strategy in my article, here's the link:

    http://www.criticalpoint.co/archives/48

    This process both limits risk and avoids missing out on things you knew you should have been in on. I hope it helps you and others the read it.

  • Report this Comment On January 14, 2012, at 6:46 AM, daveandrae wrote:

    When it comes to investing, I have found that the K.I.S.S. (keep it simple stupid) method works best. Meaning, if you really picked the right woman, you won't want a divorce.

    The same is true for common stocks, in that the ideal holding period should be forever.

    Long after you're gone, your children should be telling your grandchildren things like "your Grandfather held onto to his McDonald's stock until the day he died, turning a 5k investment into millions over 40-50 years. The dividend checks are what I use to pay for your education today"

    In my opinion, If you aren't able to say these type of things before you buy a stock, then you should not be buying it at all.

    My girlfriend's grandfather was one of the original investors in IBM and Exxon Mobil. Held onto them through the darkest days of the great depression all the way up until the late 1990's. Through all the vicissitudes of gyrating market, he never sold out.

    Contrary to popular opinion, you do not have to do extraordinary things in this business to get extraordinary results.

  • Report this Comment On January 14, 2012, at 6:47 AM, cookinnanta wrote:

    Yup, when Zagg started declining I sold all my shares then the next morning it pops 20%.. felt like such an idiot. I betrayed my own beliefs because of a few dollars which ultimately cost me 1000's of dollars in profits. go figure.

  • Report this Comment On January 15, 2012, at 2:13 AM, WiseFolly wrote:

    I did the same thing. December - I told a friend to buy LULU - seeing the shareprice was down (despite still hefty valuations). Stock crushed earnings in Jan and is up 37% ...

    I did not buy because of year end tax reasons - hah quite silly

  • Report this Comment On January 16, 2012, at 7:29 AM, DaveKATL wrote:

    It's both: luck and skill.

    We've all been there. We do our due diligence, read reports until our insomnia is cured, study the economy, study the industry, read analyst's opinions and finally go ahead.

    Then the stock does the complete opposite.

    Something out of the blue happens; like a tsunami.

    Or the business is out of favor because the industry it belongs to is out of favor.

    And there are a few things that one could never anticipate or know.

  • Report this Comment On January 16, 2012, at 8:11 AM, apsodifu wrote:

    you lost nothing ,oh thats the lotto numbers i was going to pick i lost hundred of millions.penny wise pound foolish

  • Report this Comment On January 16, 2012, at 11:08 AM, sheldonross wrote:

    You thought a stock was undervalued and beaten down. The price went down more, and then you sold.

    If you believed in your premise, you should have bought more at the cheaper price point.

  • Report this Comment On January 16, 2012, at 11:51 AM, hasty1982 wrote:

    A big part of the problem is that by your own admission you didn't have a great deal of knowledge about the company, and that resulted in some serious gut-wrenching guilt and fear when you were looking at heavy losses and looking into the details of the company after the purchase of the stock.

    Once you get into a situation like that you will mull the sale of the stock over and over until you decide to cut your losses. I've done it myself on occasion, but so have a lot of other successful investors. I think that's where the adage "Never lose money" comes in.

    That doesn't mean every investment will be a success, but it is extremely difficult to recover from losses that you make on an ill advised stock. It takes 100% gains to make up for a 50% loss. Assuming you made average market returns going forward with the remainder of the investment that reckless decision that took 3 weeks to come to a conclusion could take the bulk of a decade to recover from.

  • Report this Comment On January 16, 2012, at 12:14 PM, rhealth wrote:

    I am also a proponent of not letting tax situations drive my investment decisions.

  • Report this Comment On January 16, 2012, at 1:25 PM, TMFBomb wrote:

    @hasty1982,

    It's a good point. I like to be honest with my investing theses...my "conviction" in the pharma sector is lower than other sectors I've spent more time studying (e.g. banking), but I was fine buying in because I set my expectations that I could lose significant money. When I buy something like an index ETF or Berkshire Hathaway, I have more conviction (and I feel they're farther along on the speculation vs. investing spectrum).

    One thing to note is that a tax sell, if done properly, can create a financial win (your tax rate times the loss) if you can buy back in at similar prices or if you're liquidating a busted thesis.

    Where I'm potentially kicking myself is not in the purchase of Dendreon, but in selling a volatile stock I still have some belief in.

    Fool on,

    Anand

  • Report this Comment On January 16, 2012, at 5:00 PM, EarlBerger wrote:

    I held a 'taste' of DNDN and when it collapsed it seemed to me that the basic story had not changed much, so I bought a lot more and am currently in positive territory on an average cost basis.

    Small cap drug stocks have great potential and, we all know, can break your heart.

  • Report this Comment On January 16, 2012, at 5:01 PM, ichabody wrote:

    If I may say so, this is "foolish" reasoning. Claiming you "lost" money, when you did no such thing (you may have missed an opportunity to squeeze out a bit more, but that's not a loss), is one of the many things wrong with the mindset of American investors. The assumption that you're due every penny that every stock you've ever owned ever appreciates is indicative of a wild sense of entitlement, not to mention greed. It's reminiscent of the insatiable need for "growth," as opposed to steady profit. Is your portfolio in the black? Then take yourself out to dinner and celebrate. Stop mourning losses you never actually suffered.

  • Report this Comment On January 16, 2012, at 5:49 PM, meddguy wrote:

    I never sell based only or mostly on tax reasons. I learned that a long time ago. I bought a stock and within 9 months it had nearly doubled. But, I decided to hold for another 3 months to be eligible for tax on long term capital gains. Well, you can guess what happened--after 12 months I was down to a measly 10% gain! Boy, was that a mistake.

    M

  • Report this Comment On January 16, 2012, at 6:33 PM, rel77 wrote:

    I look at investing exactly the same way as casino gambling, except you have better information to work with in the stock market. However, info only gets you so far. You still have to contend with the herd mentality and greed/fear factor that governs stock prices. So for example, I bought Nokia a few months ago at $7. When it went down to $5.50 I sold it, because while it's a good bet I bought it too soon. When it dropped to $4.50 I bought all of it back. Now it's doing fairly well, and I think it will blow up in 2012. Like casino gambling, it's all about setting a win goal and a loss limit.

  • Report this Comment On January 16, 2012, at 7:48 PM, Patrick856 wrote:

    No offense toward due-diligence, but even the poorest excuse for a stock, one with the worst fundamentals, technicals that resemble a flat line, will rocket to the stratosphere for no reason whatsoever. Hold on! Could the reason be manipulation? Yes, every stock, good or bad, is a victim of manipulation. Believe it or not, there are guys out there who make more than a buck or two "investing" other peoples money. We are merely the retailers looking for a gain on a stock we deem worthy to invest our dollars into. Those guys control the game. They know who you are, how you think, and provide you the incentive to buy that stock by controlling the "price action" of said stock. Best bet, IMO, if a trade goes against you, get out! Sure it may come back, or not. Now what did I do with my lucky dice?

  • Report this Comment On January 16, 2012, at 8:20 PM, bambi14 wrote:

    Ok.....I have read all your responses....KISS..Keep It Simple Stupid !!! One account with your high dividend stocks and keepers.......day trade on another account provided you have the funds and remember : !) Be careful of Greed 2) Never turn A profit... down in a day trading account 3) Buddhist trading- stay detached...do not over think ....intuition is huge....also being a hedge fund broker is a win win......haha....keep over thinking and greed will take you down.. bambi14...

  • Report this Comment On January 16, 2012, at 8:40 PM, Patrick856 wrote:

    Bambi, I'm liking you! Do you want to go steady? I do prefer stocks with good fundamentals, and usually wait for a pull-back from a 52 wk high or an advance from the 50 dma. Due to past experiences I'd rather not discuss, I always sell when a stock goes against me....but that's just me.

  • Report this Comment On January 16, 2012, at 9:58 PM, nickjob wrote:

    You must have bought DNDN the same day (8/4/11) i did because we both bought it at the same price, $12.95. First, you must be a sucker for a big drop like me. Iam trying to learn that when there is a big drop, it usually carries over for a while and you can usually buy it cheaper. Maybe averaging down would be a better strategy.Secondly, I waited it out because it is in a pension plan. No need to sell for taxes. On Friday, I sold half my position at $13.81 (thankfully). If it goes down, I can average down (what I should have done in the first place). If it pops from here, at least I have half. Face it, big drops are tough to hold the mouse back. Seldom do I catch the bottom, but the few times I do, it feels soooo good. Aren't we all really fishing for the big one?

  • Report this Comment On January 17, 2012, at 12:26 AM, sjuwana wrote:

    How about using some technical analysis principles. Don't buy stocks in a downtrend. Wait for confirmed reversal. Never picked bottom. It has saved me lots of moolah.

  • Report this Comment On January 17, 2012, at 6:58 AM, PeterBNYC wrote:

    I've tried all that trading methodology you just described. Basically, you're one of the FastMoney style guys trying to beat the market by taking action. It becomes like a video game ... you're looking at the screen and the chart ...the adrenalin is pumping ... and you take shots at what you see thinking you can hit a moving target. Nothing wrong with trying. It's educational (you learn it doesn't work!). I still try to often.

  • Report this Comment On January 17, 2012, at 10:57 AM, gideon1999 wrote:

    You could have bought call options in Jan and taken the wash hit or in Feb to hedge for the potential explosive upside, that way you have a locked in strategy. If the premiums are high you could have done a spread. That is the beauty of options, you can counter the effects of time and the unknown..

  • Report this Comment On January 17, 2012, at 1:44 PM, nuijel wrote:

    It reminds me of something that happened to me a few years ago. I wanted to buy some AMZN, which was at $12 at the time. But for tax reasons (I am not from the USA), I bought another local stock, which lost 30% over the 5 following years.

    So, to come back to your story, I promised myself not to let again tax reasons determine which stock to buy. If you are a long-term investor, company quality is what matters. Now, on your specific case, on the one side, I believe it makes sense to get the tax credit, but on the other, with picking a speculative and volatile stock to do that, one month is a lot in that case.

  • Report this Comment On January 17, 2012, at 4:07 PM, dowboy5 wrote:

    Anybody else think it's odd that the author doesn't mention the name of his small bank stock?

  • Report this Comment On January 17, 2012, at 4:14 PM, portefeuille wrote:

    How I Made 50% in 4 Weeks.

    see comment #33 here -> http://caps.fool.com/Blogs/fund-trades/690693

    It is around +50% now from the December performance low ...

  • Report this Comment On January 17, 2012, at 4:15 PM, portefeuille wrote:

    DNDN shares were of some help.

  • Report this Comment On January 17, 2012, at 4:21 PM, portefeuille wrote:

    In Germany there is a tax of a little over 25% (depends on where you live and on whether you pay taxes to a church) on "net gains" from transactions in stocks, options, futures, funds, ... and on dividends and interest payments for private investors, no matter how long the positions are held.

    http://de.wikipedia.org/wiki/Abgeltungsteuer

  • Report this Comment On January 18, 2012, at 10:55 AM, TMFEldrehad wrote:

    There are an awful lot of comments here (and I did not read them all) so my apologies if this has already been posted. As to your process:

    Selling for tax purposes is legitimate - and it's a cost/benefit, risk/reward propostion of which I am sure you are aware.

    The question I would ask you, is did you examine the cost/benefit analysis as thoroughly as you could and make an informed decision? If so, I'd say your process is sound.

    If you sell for tax purposes, you are doing so for a quantifiable amount of tax benefit. If you wait 30 days, for example, and the stock has not moved, you rebuy -- however, you would be rebuying at a lower tax basis than your original purchase, so when you eventually resell those shares, there will be a equally quantifiable increase in your tax liability.

    While it depends on whether the gains/losses are short or long-term, in effect, all you are really doing is saving an amount of taxes now, only to have to pay that amount of tax later. It's a deferrment, in essence. The question is, is the time value of money of that deferrment worth, to you, the risk inherent in having a stock you still believe in run away from you in the intervening period?

    The numbers, the tax implications, working both ways, whether short or long-term, are readily quantifiable. If you analyzed those and said, "Yes it's worth it" then again, I think your process is spot on. If you didn't quantify the tax implications both ways (looking at the tax implications as a deferrment, not a near-term windfall) then I'd suggest adding that step to your process next time.

  • Report this Comment On January 20, 2012, at 11:38 AM, istockyou wrote:

    Two things I learned in a similar situation with PTN.

    1) If you believe in what they are doing it doesn't change, regardless of the stock wave cycle.

    2) Use the people selling on a tax loss basis to grab cheaper shares.

    Thus - I am in a nice and tidy spot with averaged down shares I can "deal with".

    Long live PTN and PL-3994!

  • Report this Comment On January 25, 2012, at 5:20 PM, dropo wrote:

    Somtime ago based on my son's recommendation I bought a substantail number of shares of a company who invented a wristwatch diabetic blood sugar measuring device. It sent a very small pulse of RF into the blood strae and was able to measure glucose levels. Great ida, 2 problems: cost 350 dollars, medicare would not pay for it. Company folded.

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