Sometimes too much of something isn't a good thing. In fact, too much of anything can kill you, or your portfolio. While we like to talk about our conquests and trades that minted a profit, we can learn the most from trades that don't go our way. Investing and trading are as much about risk management as anything else. Whether managing profits and losses, managing time or managing emotions, it will always be about managing the risk associated with each.
A few days ago I looked at two of Doug Kass' trades, specifically Ocwen Financial (OCN) and Home Depot (HD). I have to admit I was a bit hesitant, but I think the lessons outlined were worth it. Let's face it, Doug's not alone. But I hold fast to my thesis: We can learn more from the actions of Real Money contributors than the actual results.
So my goal for the next few months is to periodically take trades or trade theses from other contributors and break them down from a psychological and sociological point of view on what went wrong and why. From these, we should be able to reflect upon similar instances when we've done the same in the past or may be doing right now. I promise no one is safe from criticism, including myself, but constructive criticism is something every trader can benefit from.
Today, I'm going to look at International Game Technology (IGT), a name that several contributors have either commented on or taken a position in. The information on IGT is plentiful:
- Eric Jackson's April 4 concerns about management
- Bob Lang in Columnist Conversations
- David Katz mentioned it as a buyout candidate
- John Reese took a shot at it on April 19
- Tim Melvin's mention of it as a long-shot play a few days ago
- Bret Jensen looking long on May 9
As I did with Doug, I am going to break down another timeline and do my best Carnac the Magnificent impersonation. Paul Price has probably offered the most in-depth analysis of IGT, and much of it is quite good. First, though, let's do a quick timeline, then I'll break it down like a color commentator.
Dec. 5: Long entry into the shares plus a sale of covered calls, along with short puts both set to expire in July based on a value analysis.
Dec. 18: An additional buy of shares on "weakness" as shares were off about 2% from initial entry.
March 24: Additional buy of shares and sales of covered calls based on price weakness and valuation. The stock price still had not recovered after being hit hard in January on a disappointing earnings report.
March 27: Additional shares purchased to lower the average price per share significantly, along with the sale of covered calls set to expire in October and more puts sold that expire in January 2015 and 2016 as a trade repair to salvage an older position without giving up on it. The company issued an earnings warning only two months after a disappointing January report. A purchase of approximately 1.67x the current share holdings needed to bring average cost in line, assuming the average cost basis does not include net premium from covered call sales or puts sold, as it should not.
April 25: Another purchase as the company warned on full-year earnings yet again. Again, a buy based on valuation and weakness creating a good entry point based on past moves.
May 7: Additional purchase of stock, as well as additional put sales in January 2016 of the $15 and $13 strikes as IGT has become a "buy-and-hold investor's nightmare but a trader's dream."
Where to begin? There's a lot going on between share purchases, shorting calls and shorting puts on six different occasions over five months. Averaging down on losers is a very dangerous game. While it can work for some, for new or emotional traders it can be a crutch that falters when most needed
So what are the risks and how does one fall into them? Stay tuned -- we'll dive into that tomorrow.