Lesson Learned
Originally published at Daveism. Please leave any comments there.
First off, Happy New Year! I know it has been almost a month since I've made a post. I'm optimistically aiming for at least one a week.
Now, to get to the meat of the post: OW. In the past couple of weeks I've gotten a little greedy. I thought I could make a little extra money in the market on top of my long-term investment portfolio.
I upgraded my brokerage account with E*Trade to a margin account, and converted all my securities to marginable securities. For those who are unfamiliar with the term, margin means to borrow against you existing securities as collateral to buy new ones while paying interest on the loan, in E*Trade's case less than 8%. Dividends can help offset this cost, but you still have to hope you are making a better return than the cost of your margin debt in the long term, or else use it to fund short-term trading. Which is the mistake that I made.
I had a small holding in Intel that I've held for several months. I know a great deal about the company and its industry. I felt the earnings projections made by the stock analysts were far too conservative and the stock was underpriced, so I decided to make a big bet that the stock would appreciate significantly upon the earnings announcement yesterday. I bought a lot of Intel shares on margin.
It turns out I hit the nail on the head with the earnings; Intel beat estimates of 30 cents a share by 10 cents, grew their profit margin, their top line revenue, everything above estimates. It was a home run.
Unfortunately I had no idea that the market would react negatively to this news. Intel closed down almost 3%. It is true that the market is in a broad-based selloff today, based partly on 'so-so' earnings from JPMorgan, and who knows what else. There were options expiring today, puts and calls, futures trading...
My point is, I should not have gone against my long-term strategy. While I was right when I called the earnings, on a short-term basis the market is just too complex to predict. There are simply too many moving parts. Even now, when reading and watching interviews about Intel and the market's action today, the analysts just gloss over it. They don't have a clue either.
Now, don't worry, I am not wiped out. I am actually about even on the Intel trade, having bought the margin shares well over a week ago. What bothers me is how I was so totally and utterly wrong, thinking I could make a bunch of money on an earnings trade. It was reckless and stupid; can you imagine what would have happened if Intel had missed expectations?
I'll stick to long-term investing. Lesson learned.