How to Make 88% in a Year the Clueless Way

January 31, 2018

Never attribute to malice that which is adequately explained by stupidity.         -Hanlon’s razor

 

I love Hanlon’s razor. It brings me peace when violent thoughts wash over me while sitting behind someone texting at a green light.

But there’s also a corollary: Never attribute to skill that which is adequately explained by a trader’s cluelessness.

As is the case for a lot of traders, I started with stocks. For my education, first I read Buffett, then Darvas, then Peter Lynch and William O’Neil.

Not surprisingly, I went from wanting to buy-and-hold forever to wanting to get 10-baggers.

This journey eventually led me to the Motley Fool guys which eventually led me to become a subscriber of their Rule Breakers newsletter.

While reading about some Rule Breakers, I came across a little company called Ceradyne (CRDN). This was 2005.

At the time, the U.S. was knee deep in a little skirmish in the Middle East and the need for body armor was high (and getting higher). As it turned out, the company that made the best body armor was Ceradyne.

In short, Ceradyne was a leader in an industry that was going to explode and stay exploded. Or so the thinking went.

My thinking went the same way.

Looking at the chart, I saw that CRDN was way down. Apparently the stock had fallen on hard times because no one was sure who would get the body armor contracts and, if CRDN didn’t get it, the little company would be in big trouble.

But the Motley Fool Rule Breakers had faith in CRDN, so I did, too. All I needed was a big day up with a lot of volume to start the upward climb (or so I was told).

On June 28, 2005, it happened.

While watching an adult tennis team match, I got a text alert that CRDN was moving up fast and volume was bigger than normal. So I left the match (sorry, ladies) and quickly raced home to buy $1,000 worth of CRDN. TD Ameritrade confirmed I was in, so I raced back to the match.

No one even knew that I had just become a stock trading superstar.

Here’s a picture of that first entry:

https://www.screencast.com/t/GFWhbk5tNQ

In the first rectangle on the left, you can see my first trade (blue arrow) and see that volume surged above normal.

The first trade immediately rose up (confirming my greatness), so I immediately panicked. Why didn’t I buy more??? So on June 30th, I bought $3,300 more.

CRDN shot up once again, so I panicked once again. I need even more! On July 7, after it had stalled, I bought another $1,700 worth.

Why was I buying in such inconsistent, illogical amounts? Your guess is as good as mine. (My guess is that I was an emotional, irrational novice.)

As the stock went sideways, I had yet another nervous moment. The next earnings announcement was coming up on July 28th. All the message boards I was obsessively reading were saying that CRDN would have a good report. They were the leaders in body armor. They were a good company. Demand was up.

I had to have more CRDN!

So I bought another $1,000 chunk on July 12th.

Now I had 4 different purchases for $7,000 worth of stock at an average price of $24.41. The stock was trading for about $26 at the time–with the next earnings call coming very soon.

I’ve never watched anything as closely as I watched CRDN on July 28, 2005. It was worth the watch.

The announcement was good and the stock shot up once more. I am the greatest!

From there, everything was pretty easy. The stock eventually went sideways again and then starting rising once more. In fact, it started rising quite a bit right before the next earnings announcement on October 27th. Time for another good report!

Nope.

Well, the report was “good” but the stock was not. It went down, and it went down hard.

I remember it clearly because Jill and I were walking the streets of downtown Chicago. CRDN was still very profitable overall for us but it was tanking. I had no idea what to do. Why do stocks go down when the report isn’t bad??

So we went into a Barnes & Noble and I read investing books to try to find some answers (no lie). One book I found said that dips on solid companies are what every investor should hope for. These are buying opportunities.

Well, a random quote in random book in a Chicago bookstore was good enough for me, so I plunged right in and bought $3,000 more.

That total stab in the dark couldn’t have turned out more perfectly.

CRDN went straight up after that bad day and my trading account got bigger and bigger. Holding on at this point was easy, and I did just that for the next few months.

The next earnings call was the following year on March 6, 2006. Once again the stock started rising right before that day. More profits loomed just around the corner.

Except when they don’t.

Once again, the report seemed positive and once again the stock dropped, though not as badly as last time.

The bad day was the day after. Take a look again at the chart (earnings days are noted with a gray vertical line):

https://www.screencast.com/t/CbakZkcyqF

On the right side, you can see the down day on the announcement and the much bigger down day right after.

The big down day right after made me need a new pair of pants.

Nothing could save me. The message board bulls didn’t have much positive to say and the naysayers were saying that CRDN is toast. I was terror-stricken.

When the next trading day also was deeply red, I couldn’t take it anymore. I sold everything as fast as I could and felt exhausted and empty. It was over.

The good news is that I sold at $51.75 for an 88% gain. My $10,000 had turned into about $19,000. I’d won.

I guess.

The big problem in my mind is that I knew how ridiculous the whole thing was. My original premise for buying was vaguely acceptable. My trade management decisions had been highly emotional, suspect, and lucky.

Yes, I made a nice profit. But could I ever repeat that profit? I had my doubts.

My doubts were correct.

I couldn’t find any other prospects. No more Ceradynes out there to make me rich. I felt like a one-trick pony, and rightly so. I knew what I had done was not something I could ever do again.

Knowing that, I tried to go back into CRDN and trade that some more. It wasn’t the same.

I made a few quick in-and-outs that went nowhere, and then I was able to make one last good trade late in ’06 for a 25% gain.

After that, I was done. I never traded CRDN again (and moved into Forex in 2009).

That’s the problem with gut-feel trading and fundamental analysis. It can work, but can it be repeated?

Was it the high-flying stock that made me look good or did I play it exactly right? It’s hard to know for sure when trading this way–and we, as traders, need to know.

Because if we’re going to trade-for-a-living, we need something that’s repeatable, something we can count on to make money this year and next year, too.

In tomorrow’s YouTube video, we’ll look at how an unemotional, automated system would have handled CRDN.

We’ll find out if an unemotional system would have been the better way to go.