The Virtue of Selfish Investing: Trading Lesson

Gil Morales and Chris Kacher
Posted: Mar 23, 2012 12:01 AM

We note that the Dow and S&P Index appear to be acting relatively weaker than the NASDAQ Composite Index as the indexes, overall, do what they likely have needed to do, which is take a break for a couple of days.

What may be significant is that a number of "stuff stocks," ranging from miners (pick one) to oils (again, pick one) to machineries (CAT, CMI) to diversified operations (UTX) are getting smacked around here over the past couple of days, which seems to argue for some rotation. If this in fact pans out as it appears to us currently, it would be positive to see.

Technology companies are probably the best levered to benefit from any inflection point that the market may be perceiving here as the potential for real "change" in November could set in motion a change in tone when it comes to the oppressive economic policies favored by the current Administration and Congress. As well, the internet, now known as the "cloud," and all of its enabling components in the realm of social-networking, mobile-computing, virtual networking, etc., etc., is still alive and well, and as the secular move to virtuality continues to add meaningful value and efficiency for private and public enterprises everywhere there will be companies that remain both strong drivers and beneficiaries of this shift.

A Trading Lesson in LNKD

Speaking of which, today’s action in LNKD deserves comment. As members should know by now, Portfolio Simulator Dude (PSD) is a composite character we've created in our Follow The Stock section based on the numerous emails we receive from you all that reflect any number of trepidations, fears, confused moments, etc. that tend to beset (mostly) less-experienced investors, although they can become an issue for any investor regardless of their skill or experience level. For those of you who might see fit to make fun of PSD, keep in mind that he is a fictional character, so you are in sad shape if you find that you have a deep-rooted need to make fun of the investing foibles and follies of PSD!

In latest PSD portfolio action, was PSD wrong in selling his LNKD out at just above 89 after entering the position somewhere around 91, as he did yesterday on March 20? Not if he felt that with five 20% positions and being fully invested he was too exposed, leading him to feel uncomfortable with a stock that was getting somewhat "wiggly" on him. While this contradicted his original plan to use 82 as his downside stop, that was before he had taken four other 20% positions, thus psychologically he was  in a different "space" so to speak once he had all those other positions added to the initial 20% position in LNKD in his portfolio. Given that he sold out with about a 3-4% loss, his total loss to his portfolio is less than 1%, and given that his other positions in SLXP and INVN are up more than 5% for him, it is in fact a simple matter to come right back in and buy the stock here on this morning's potential buyable gap-up which is also a clean breakout through the 95 price level. Other investors might have handled the stock differently based on their own personal psychology and risk-tolerance. Sometimes PSD sees ghosts, and as a fictional investor this is his greatest weakness, but a common one for investors of all stripes, as the emails we receive bear out.

While we ourselves maintained our own core position in LNKD taken on the basis of the prior gap-up and pocket pivot buy point of last week (we're not as nervous as PSD is but we also will trade additional shares of any stock around a core position), there have been many times when we have sold a stock only to see it launch higher within its base over the next day or few days. The critical factor here is to remember that your objective in buying any stock is to get on board at the start of a potentially strong, sustained, upside trend. Whether one buys LNKD at 87, 90, or 97 is less relevant than whether the stock is a) cleared for take-off and b) has the potential to go to 135 (as Goldman sets their price target for the stock) or even higher (as we tend to think it might be able to). In order to make big money it is not necessary to buy a stock at the lowest price, but the right price at the right time. 97 or so might be the right price at the right time, and members should remain focused on this possibility as we are.

We think LNKD provides a great lesson in what to do if you get shaken out of a position and it then does you the great favor of coming right back the next day and giving you a clean, new buy point that also clears significant resistance at the 95 price level. Thus PSD does not waste his time getting mad but treats LNKD like a brand-new situation, which it objectively is based on today's potential buyable gap-up and base breakout. PSD's plan therefore is to come right back and take another 20% position in LNKD with the idea that this could be the start of a meaningful, coherent uptrend.

Meanwhile PSD notes that the two bucks he lost on his prior 20% LNKD position has been made up (well, at least "buck-wise) with the stock pushing up against the $100 level, so he doesn't feel that much was lost here. Sure, he missed out on the big gap-up move this morning, but the point with any stock we purchase is not worrying about "wiggles" of 5%, maybe even a bit more, but to catch a ride that could develop into a strong, playable, pyramidable (is that a word?) situation with the potential to double, or even more should that be the case. Not that LNKD has to double from here, but it certainly would appear to be "in the clear" here on this breakout through 95 resistance and thus this may be the actual "right time" to buy the stock. Hopefully most VoSI members are smarter than PSD, and held at least a core position going into today's gap-up move.

We dare say that this is perhaps one day where we love Goldman Sachs...but we'll see how things close first. At this hour of the morning at the time of this writing, just after 8:00 a.m. March 21 Pacific Standard Time, this is what we are initially seeing, but again, we will see how things close.