[Note: This is an article idea that I had outlined for a week and a half now. I’m going to continue with it, because:
- I think it’s interesting
- it can show one (in this case myself) can be reactionary to a short term.
Something that can seem like a great idea might not be.]
A little more than a couple of months ago, I wrote about the Facebook IPO giving my thoughts and predictions. I had thought that 38 was too high and predicted that it fall to around $30 a share. Surprisingly, I was actually pretty close to right. This is where I executed the strategy that you read in the title. Since institutional investors had paid a lot more for Facebook, I figured I was getting a better deal than those smart guys. Better yet, they’d probably do whatever they can to try to push the stock up so that they can break even. With this in mind, I ended up buying some FB at around 30.50 and as it continued to drop some more at around 26.50. Facebook stock recovered to around $33 and I implemented a strategy a friend at college had mentioned… selling most of the stock and playing with much of the “house’s” money.
I sold off 75% of the Facebook stock and kept 25%. My friend in college suggested that it might be wise to do this to leave behind a trail of your investments. It’s not like Facebook is going to be worth 36 trillion dollars any time soon, but it could certainly be worth something significant in 10, 20 or even 40 years from now.
I executed a similar strategy with Groupon recently. I saw that they hit an all-time low at around $7.30 and picked up 100 shares. My theory was that once again, there are a lot of people who paid more than $15 and even $20 for the stock, so it could go up there. Admittedly, this ignores a lot of important analyis such as why the stock went down. With Facebook, there were no earnings misses or anything that I saw as a significant change in their business from the $38 price. With Groupon, there is significant worry about their exposure to Europe’s financial problems. However, I stil saw it as worth taking a shot at something at such a discount. Within hours of buying it, it jumped up to $7.90 and I had once again showed the stock market who was boss. The funny thing is that when you only buy 100 shares and things move up 60 cents, you only made $60… and trading commissions takes away some of that. This time I didn’t sell… I didn’t have much of the house’s money to play with like I did with Facebook.
If you’ve looked at the stock market today, you’ll have noticed that Groupon has gone down and created some new lows. As I write this, Groupon is down to $6.70 and I’m on the wrong side of losing an entire $60. (I’m emphasizing how insignificant this is for a reason.) I clearly have not solved the stock market riddle (and we know that it isn’t possible to solve). I’m reminded of the time a dozen years ago where I bought Worldcom on a similar thought process. That didn’t work out either. At least I’m now a little wiser and looking at the growth, potential earnings, and other metrics. I’m still feeling comfortable with Groupon.
The third stock that I had been looking at with Groupon was Zynga. When they went public at a valuation of nearly 10 billion dollars I laughed. I’m sorry, but people throwing digital cows at me or whatever Farmville is can’t be a 10 billion business. It simply can’t compare to Netflix which put most of the video rental stores out of business was worth around 4 billion. However, as Zynga fell and fell, my through process of “someone else paid a lot more for this” started to take over. However, it still seemed very expensive compared to other businesses, so I didn’t pull the trigger. If you’ve seen the news today you know that it was a wise decision as Zynga got slaughtered on its earnings miss losing 40% of it’s value over night. Now at $3.10 it might be worth considering a few shares, but I don’t see anything significant moving the stock until the next earnings.
That Zynga miss affected Facebook, because a good chunk (I think 10%) comes from Zynga. So to bring this all back around to Facebook, it is trading at 27.50 and announcing earnings in a few hours. Almost everyone is expecting it to be bad. I am expecting Facebook stock to go even lower. Over the next 6 months or so, employees of Facebook will be able to sell significant chunks of their stock options as the lock-up period expires in a few stages. I expect this to drive the stock further. I’ll be keeping an eye on Facebook to buy in cheaper. It’s amazing to me that Facebook started out with about twice the market capitalization of Ebay and is now neck and neck with Ebay posed to pass it. Even though their businesses are separate with nothing other the Internet in common, I am keeping my eye on them because they are similar priced right now.
Have any thoughts on this, or am I just nuts trying to trade these tech stocks like it was 1999? Hit me up in the comments as usual.
Final Note: Something that I should have mentioned earlier is that I am doing these trades with a very small amount of my IRA account (Some 90% of it of is well-diversified in index funds and cash waiting for a buying opportunity). I’m not trading anything that should have any great impact on my financial future (unless these small moves really add up over time as I hope). Trading stock like this bears some risk, so I make sure that I have a good amount of money in buy and hold, diversified areas.