By Mary Rowland
Investing is one of those activities where you learn by doing. And since I've done some trading in the last few, volatile weeks, I've learned a couple of good lessons. One has to do with selling, the other with buying, and in both cases I was lucky the lessons weren't a lot more painful.
I find I learn most from the things I do wrong, but let me start with something I did right -- albeit, not for the best of reasons. I sold a bunch of stock on March 27.
I don't believe in setting target prices for stocks, because I think I would lose too much on the upside. But in mid-March I decided that, just as it's wise to dollar-cost average into the market, it also makes sense to dollar-cost average out. I'd made a good amount of money in tech stocks over the past year, and they were taking over my portfolio. So I started to sell in order to bring my portfolio back into better balance.
I also considered the emotional cost of doing nothing. If the market tumbled, I knew I would kick myself for hanging on and being greedy. So on March 27, I sold 100 shares of the Nasdaq 100 Trust (QQQ, news, msgs), 200 shares of Cisco Systems (CSCO, news, msgs), 100 shares of Vitesse Semiconductor (VTSS, news, msgs), 100 shares of TranSwitch (TXCC, news, msgs), 200 shares of Qualcomm (QCOM, news, msgs), 100 shares of JDS Uniphase (JDSU, news, msgs), 100 shares of MSN MoneyCentral publisher Microsoft (MSFT, news, msgs) and 100 shares of Intel (INTC, news, msgs).
That was the mostly good part. Good timing, yes, but I also felt good about what I'd done. Even if the stocks continued to go up, I wouldn't have regretted selling because I needed to trim back those positions.
Developing a system
Despite my overall satisfaction with those trades, however, I do think I've found a place where my selling strategy could use some improvement. Although I made the right decision, it was largely based on a gut feeling, rather than a scientific method. I'd like to have something better in place next time. I want to have a system that will signal me when it's time to begin moving gradually out of stocks with big run-ups. Perhaps when a stock doubles, it makes sense to sell off 25%. Or maybe, I will sell 25% when a stock splits. I'll follow up on this issue in a future column.
What I clearly did wrong: I failed to develop a plan or strategy for moving the cash I raised back into the market.
Now for what I clearly did wrong -- even though my mistake may have saved me from losing a lot of money in last week's thumping. I failed to develop a plan or strategy for moving the cash I raised on March 27 back into the market.
When the market dived on Monday, April 3, I didn't pay too much attention. After all, I didn't have so much at stake. I got interested the next morning when the Nasdaq was down another 200 points. But at noon, I went to the gym. When the Nasdaq made a touchdown at just above 3,600, some of our Start Investing Community regulars, like Scott McMillin, were in there snapping up stocks. If I had put together my shopping list, I probably would have been buying, too, rather than climbing to nowhere on the Stairmaster.
Of course, it turned out that April 3 wasn't the low. But I still say "Shame on me!" because every long-term investor should keep a list of investments she'd like to own, as well as a notion of what price she'd be willing to pay. That's what I did last fall when I bought IBM (IBM, news, msgs) ("Why IBM is still a great stock to own"), and again in January when I bought Lucent Technologies (LU, news, msgs) following a dip to $55 on a disappointing earnings report. The only way to take advantage of those dips is to know ahead of time what you want and what you're willing to pay for it. The object here is not to catch the absolute bottom -- an iffy proposition, at best, given the track record of most investors in trying to time the market. It's to add stocks you want to own long term at a reasonable price.
Keep an eye on what you want
One good way to follow investments is to set up a watch portfolio in MoneyCentral's Portfolio Manager. Not only can you see where your favorite stocks are trading each day, but you also are notified of important developments at the company with either a news or an "fyi" alert next to the name of your stock.
One stock I had long wanted to own but hadn't wanted to pay for is Nokia (NOK, news, msgs). Not only is it a class company in a dynamite business -- cell-phone handsets and wireless infrastructure -- but I could argue that it gives me a little international exposure, too, since it's a Finnish company that does business all over the world.
Because I hadn't developed a plan, however, I had no target price for Nokia. It dipped from a split-adjusted $55 or so to $47 during the early-April sell-off. I wound up paying a split-adjusted $51.25. By last Friday, it got lower yet, dropping below $45 a share. Had I been prepared, I think I could have done better.
Buying funds on a dip
It's easier to get in on a dip with stocks than it is with mutual funds, because funds can be purchased just once a day, at the closing net-asset value. But it still pays to watch for a dip in volatile funds as well.
Here I had in mind to buy OpenFund (OPENX, news, msgs). Last month, when I interviewed the fund's manager, Don Luskin, for an article on MoneyCentral, I knew I wanted to buy that fund. I like the fact that Luskin buys New Economy stocks, including the tiny companies that I would never buy on my own, because I lack the research capabilities or confidence to do so. I like the fact that he's got enough confidence to post his portfolio every day online.
I also like that Luskin is a big investor in biotech. Biotech frustrates me. I want to own it, but I'm afraid of it because, as we've seen during the Clinton years, it's so vulnerable to political developments. I looked at Tim Middleton's article on biotech funds, briefly considered the Dresdner RCM Biotechnology Fund (DRBNX), and then decided I wouldn't be comfortable with the volatility. But OpenFund seemed perfect for me because I get a dose of biotech cushioned by some other tech stocks. I think it's a good fit with the Nasdaq 100 Trust shares that I still own, too, because QQQ invests in the 100 largest non-financial stocks on the Nasdaq, whereas OpenFund invests in lots of smaller companies.
When I interviewed Luskin in March, his fund had seen an even stronger run-up than the Nasdaq, and I was concerned that a market correction would pull it down. It did. On March 6, the net asset value (NAV) of OpenFund was $37.11. On April 4, it was $25.84, or 30% lower. And by the end of last week, it was down to just over $20. Put another way, if I had put $10,000 into the fund on March 6, I would have gotten just over 269 shares; on April 6, when I actually bought it at $27.41, the same $10,000 bought nearly 365 shares. If I had waited until this week, I could have gotten nearly 500 shares. Again, I clearly missed the bottom, but that's not so important as long as I'm still convinced of the longer-term value of the investment.
Cash equals opportunity
As it turned out, last week's free fall gave me a chance to test my mettle. I quickly put together a list of stocks and funds I wanted to own as the prices were dropping. And on Friday, April 14, I did some buying. I added another $5,000 worth of OpenFund at $20.35, bought $10,000 worth of Vanguard Health Care Fund (VGHCX) at $101.94, bought 100 shares of Applied Materials (AMAT, news, msgs) at $84, and bought back at $62 each those 100 shares of TranSwitch I had sold on March 27 for $121.
I'm still feeling skittish about this market, though. As Jim Jubak noted in his column yesterday, there are still a lot of risks in it. That's why I think long-term investors like me are best off in times like this if they dollar-cost average their way back into some of the indexes and stocks that have been ravaged over the past few weeks. I'll be writing more about ways to do that in my next column.
And under no circumstances will I jump 100% back into equities. I don't use bonds, but unlike my colleague, Tim Middleton, I don't think cash is trash. The last few weeks have been a reminder how important it is to always keep some of my portfolio in cash, which gives me the opportunity to buy when the time is right.
That's assuming I've made out my shopping list beforehand, of course.
See Mary's Start Investing Portfolio.
At the time of publication, Mary Rowland owned or controlled shares in the following equities and mutual funds mentioned in this column: Applied Materials, Intel, JDS Uniphase, Nasdaq 100 Trust, Nokia, OpenFund, Qualcomm, TranSwitch and Vanguard Health Care Fund.
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