Don't Fall in Love

 | Aug 23, 2011 | 10:30 AM EDT  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

idcc

,

goog

,

aapl

,

msft

,

qcom

Do you remember the '70s song "Copacabana"? In the disco hit, singer Barry Manilow warns, "Don't fall in love" with a pretty showgirl at "the hottest spot north of Havana." (Of course, Copacabana Beach itself is in Rio de Janeiro, far south of Havana, but the song refers to a famous nightclub located in New York City. It's one of those catchy old songs that you just can't get out of your head, whether you care for it or not.)

Sometimes investments are the same way; how many of us have "fallen in love" and held on to a stock for too long, because we believed we knew something that was important? Yet even if our information is correct, it doesn't always matter in the end. The possibility of some unknown event is always lurking in the distance.

I remember falling in love with some early Internet stocks in the mid-'90s, names like Spyglass and UUNet. I fell in love with the story about how the Internet would take over the world, and the story was true -- it just didn't matter if you were holding those particular stocks. And hold them I did, until they were well below my purchase price, because I was such a firm believer in the story behind the stocks.

This was a hard lesson for a guy who was just starting out -- to learn that what thought you knew didn't really matter, that there was always something else happening in the background and you'd never know for sure if you had all the facts. Spyglass in particular left a mark on both my psyche and my portfolio, but it also taught me a valuable lesson: not to be too firm of a believer in anything in this game. Not to fall in love with any position, be it long or short.

Yesterday I took a little shrapnel for my decision to buy puts on InterDigital (IDCC), the stock that has drawn so much attention as a patent play. IDCC's patents might be of great interest to the likes of Google (GOOG), Apple (AAPL) and Microsoft (MSFT), and now Qualcomm (QCOM) is rumored to be in the mix.

I'm new here at Real Money and I want you to know that I encourage your comments, and I appreciate the comments that I received yesterday. They were directed at me by someone who clearly knows more about patent technology than I do, and I respect that.

But it doesn't always matter how much you know, because there is always something lurking out there that we don't know -- that's why we look at the charts, because those who do know what we don't are probably acting on that knowledge, and the chart will show this in the forms of patterns and volume. I see a bearish double-top pattern on IDCC, but even technical analysis is just a guideline, not a guarantee that something will or won't happen.

 

IDCC -- Daily
Source: TradeStation

 

This morning, the S&P 500 is moving higher once again. Once again, I'm hoping for a pop on InterDigital. If it pops enough, I'll sell some puts. But I'm not so in love with my idea that I'll short it outright. There may be something brewing that I don't know about, so by purchasing puts I'll have a small, clearly defined risk on this speculative position.

I have my opinion, but at the same time I know that I don't know for certain what will come next. I know I might be wrong. I figure it's OK to be wrong, because that's part of the business. It's just not OK to let being wrong kill you.

It's easy to become emotionally attached to a stock or the story behind the stock. But trading should be a dispassionate exercise, not one where our emotions run high. Don't fall in love with a stock, and don't fall in love with what you think you know about a stock. In the nimble world of trading and investments, we always have to maintain the ability to let go.

In the meantime, please keep your comments coming. A difference of opinion is what makes a market, and I invite you to share your opinions with me.

Columnist Conversations

1100 Handle May be Around the Corner
The action in the DOW today was the reverse of what we saw yesterday in the index. The rally off the lows in t...
The visualization of data is provided by Capital Market Laboratories (CML). Z is trading $115.95, down 2.8% w...
We are still seeing WYNN hold up above key WEEKLY support here, but I do want to show you what is in the way o...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.