How we’ve managed our 60%+ return (annualized) so far in 2010

By: ispeculatornew
Date posted: 07.19.2010 (4:00 am) | Write a Comment  (5 Comments)

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Again this week we do not have a stock pick to do because our 5 live trades have stayed clear of our stop limits for now. A few of them are now at +10% or better so the odds of closing a trade this week are much better. Fingers crossed!

Since we have already gone by the mid-year (it goes by sooo fast), we decided to take a look into how things have gone so far to see what we did right and what could have gone better. It is always a very useful exercise to learn from mistakes. We had learned a few things last year but this year decided to publish our thoughts on here as we always receive many questions regarding our trades, the reasons behind them, etc.

60% return

WOW! Honestly, our annualized return being over 60% at this point is far beyond expectations. Being long/short means that the general direction of the market has limited impact on our picks as we start trades “dollar neutral” so if stocks all moved down or up, there would be no impact. The return comes from the spread between the return of our long and short picks.

Just a recap to start off. We do not hold more than 5 trades at a time and have stops at +20% and -20% returns (except for very rare exceptions when we pick more volatile trades). Since the trades are only done at the opening, reaching the stops during the day has no impact as long as the trade moves back into that range. We have done 17 trades so far this year and considering the 5 trades at a time, that means our trades have. Last 2 months or so on average which is about what we’d expect for these trades.

The most important metric for us is the number of winning trades compared to losing trades. Since gains and losses are usually close to 20% (except for more violent intra-day trading before we can close out the trade), it is all about getting more trades right than wrong. And we have done that so far. While 4 of the 5 current live trades are winners, I will for now only look at the 12 closed trades:

Winners:

Jan 12 –PCLN/EXPE
Jan 18 –NFLX/NILE
Feb 8 –AAPL/AMZN

Feb 22 –EBAY/KNOT
March 8 –DHX/MWW
April 26 –NFLX/NILE
May 17 –PCLN/TZOO

Losers:

Jan 25 –GOOG/BIDU
March 2 –RIMM/YHOO
March 14 –GOOG/VCLK

March 22 –EBAY/IACI
June 8 –SNDA/KNOT

As you can see 7 winners and 5 losers, nothing incredible but more than enough in this case, especially when we also consider the live trades (11 winners & 6 losers). So we have generally been more right and that is thanks to a few trades that have been easier to trade.

Why are some stocks easier to trade?

I always consider that some stocks are easier because they do not trade at the right ratios. Many factors must be considered but all things being equal, stocks with high revenue and profit growth should trade at high Price/Earnings (P/E) ratios while stocks with little or no growth trade at smaller P/E’s. Some stocks fall outside of these rules for reasons beyond me:

-Priceline (PCLN): Priceline has displayed strong growth for many years now but because it is mature company and an industry leader, the online travel company often trades at what I consider low PE’s. I did two successful trades going long on Priceline this year.

-Blue Nile(NILE): it operates in an industry (online jewelers) with little competition but has struggled to get more consumers to buy their diamonds online. That and a slow economy have made Blue Nile show slow revenue growth in recent years. Yet, the company continues to trade at very high P/E’s.  I’ve also enjoyed two successful trades on Blue Nile this year.

Obviously, stocks like Blue Nile and Priceline are not always good trades as they are fairly volatile but we have generally found good entry points for these stocks.

A big challenge

We have written about how we fell for Google, how it has stronger growth than many think but the stock continues to struggle and we have struggled with it causing us 2 big losses so far this year. At some point we will have to either give up on trading Google or the market will finally see what we see in the search company.

Logic behind our trades

To be honest, we consider many different factors when making our picks. If you want more information about these factors, our opinion about the stocks and which stocks we plan on trading next, your best bet is to join our Premium Newsletter, which is sent out every week! Basically, we consider mostly fundamentals but also look at momentum indicators and also “news momentum”.

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5 Comments

  1. Comment by Zavi — July 20, 2010 @ 8:41 am

    That’s awesome. Way to go!! Wish I could have done this for my portfolio. I urgently need to open a short account!! I’ll definitely go long Google hehehe

  2. Comment by IS — July 20, 2010 @ 5:16 pm

    @Zavi – Thanks so much! I wouldn’t be the one to argue a long GOOG position but just be sure you have your passive retirement portfolio under control before getting too agressive with your money!

  3. Comment by Vitalogy — July 20, 2010 @ 11:24 pm

    So how exactly do you make these trades? Do you purchase an amount of PCLN and then short an equivalent dollar value of Nile??

  4. Comment by IS — July 21, 2010 @ 3:34 am

    @Vitalogy – Yes exactly, dollar neutral means the same amount long as short

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