Stock Market Nooblar

January 24th, 2008 by Potato

Never try to catch a falling knife.
Never shoot a running horse.

These are two simple sayings that investors use to remind them of how to manage getting into and out of a stock. They essentially boil down to one word: patience. Fortunately dear readers, you have me here to act as a giant stock market nooblar to reinforce the point for you. I’ve made two recent mis-steps in this volatile market.

Never try to catch a falling knife.

My falling knife was Russel Metals (TSE:RUS). As I mentioned earlier, I had accumulated a bit of cash over the last two years or so and didn’t put it to very good work. It was at least in a high interest savings account, but I felt that a good portion of that money could serve me better in the stock market. So I spent a weekend with my dad looking for stocks to buy (and then discovered the magic of low-MER index funds). There were a few that I liked, but except for TD (which I’ll get to), I thought they were all a little too expensive for me. Russel metals in particular was one that both my dad and I liked. It’s a steel company, and they make a variety of steel parts, particularly tubular steel for oil sands projects. Their expertise in rolled steel and proximity to the oil sands lead me to think that they would have a pretty steady business as long as the oil sands kept pumping. They also paid a decent dividend. However, I just didn’t like them at the price they were at (around $26 at the time), and figured (via a valuation calculation that, given my inexperience, might as well have been composed of a dart and price target) that under $24 seemed right to me, so I put in an order at $23.75 and just kept renewing it every few weeks.

I got it at that price not too long ago, in the middle of a steep fall to it’s current price around $20. If I had waited for it to settle in to its current price, I probably would have been a lot happier. Of course, I can’t be too upset: as long as they keep up their dividend, I should make 7% on that money. And I think it’s a good long-term hold, and the day before I got it, it looked like it would take quite a downward spike to hit my bid. Though there are all kinds of ways to feel stupid when a stock you just bought falls over 16% in just a few days. If I had more money to invest, I probably would have bought it in a few separate lots as it was falling.

Never shoot a running horse

TD Bank is perhaps my favourite bank stock. They may not have as much of a dividend as some of the others, but they have such a great retail bank business that always seems to get at least decent word of mouth, combined with the longer hours inherited from Canada Trust. They have a great discount brokerage service, and have been prudent with their US acquisitions; overall it’s a company I feel proud to own a part of (new call centre excepted). Moreover, they managed to sidestep most of the subprime fiasco (I say most because while they may have avoided investing in ABCP, the reasoning goes that there’s a good chance a mortgage given by TD to a perfectly low-risk client could be under a sub-prime second mortgage, and if that client goes into arrears, it’ll hurt TD just as much as if TD made the sub-prime loan in the first place). That, in my mind, makes them a shining beacon of conservative, intelligent management in this sea of financial sector disaster. At $65/share back in November, I thought they were a good bargain and bought some up. It shot up to $75 within two weeks. However, I was in it for the long term, and didn’t end up taking any profit there. I got to watch that high slowly erode as TD was dragged down with the rest of the financial sector, all the way back down to where I bought it. It’s been unusually volatile these last few weeks, and to be honest, I got spooked, particularly when it fell below my supposed more-than-fair buy price. My dad phoned me up and told me to sell it and cut my losses — while TD may be a great bank, possibly the very greatest these days, the market sentiment (or the “macro picture”) just wasn’t behind banks, and TD was going to get killed with the rest.

So I put in a sell order with an ask price of $67/share two days ago, hoping to catch another inexplicable spike back up, and get out with a modest profit to watch from the sidelines. That happened today. I can’t really complain: I made 2% after commissions in just over two months. However, if I had the time to watch it today, I might not have sold so soon into its huge rally at the end of the day — it closed up over $68. By selling while it was in the midst of its upswing (shooting the running horse), I gave up a fairly decent amount of potential profits. Who knows what tomorrow might bring?

Again, it was a bit of a noobish thing to do, but I’m trying not to beat myself up over it too much. While I still like TD for the long-haul, this volatility makes me think I can get it for a better price than I had. So, I take a bit of a profit today, and sit back with my cash and wait for a better buying opportunity.

Speaking of buying opportunities, I bought some more Priszm income fund (TSE:QSR.UN) today. Priszm is an income trust that manages several fast food restaurants, mostly KFC and Pizza Hut locations. They’ve had some financial troubles of late (and I can understand why — when I drive by KFC it’s always empty!), and had to cut their distribution for a few months while they got the company back in order. They had been paying out at about 6% during this time. Now they’ve just announced that the distribution is going back up to $1.20/year. At the current share price of $6, that’s a 20% return! There are some concerns: the TD analyst who did the report felt that $1.20/year might be unsustainable for Priszm, and I can totally see where they’re coming from. However, the distribution the analyst suggests, and that my dad also thinks they’ll settle to in a few more months would still represent about a 15% return. It might be a bit of a troubled company, but I’ll take a gamble on getting 20% on my money, with a decent shot at 15%, and what looks to be a fairly solid floor of 6%. Of course, since it does appear to be higher-risk, I only put about half the money I got back from my TD sale into Priszm. The rest will wait for this volatile market to bring me another buying opportunity.

I don’t know why I’d need a disclaimer about not following my advice in the very post where I talk about the nooblar mistakes I made, but just in case it’s needed: I am not a financial advisor. This is not financial advice. Don’t buy or sell based on my recommendation, and if you do, don’t come whining to me afterward.

One Response to “Stock Market Nooblar”

  1. Ben Says:

    You should have bought stocks in Taser :oP