Sticking To the Plan

So I recently committed a cardinal sin. I shot myself in the foot and am now going to pay stupid tax. Anyone have a dunce cap I can wear?

Dunce-Cap

A while back, I wrote my Investment Plan to help set a guideline for all my investment vehicle purchases, length of holdings and portfolio composition. I was, and still am, proud of how it turned out. You can take a look at it here. It has already served as a good cornerstone of my investment strategy and, up until recently, deterred me from making some stupid buys.

I fell into the trap of buying a stock because someone said it’d be a good buy. I was talking to a friend from work who has recently been on an earnings-play kick. Now, it’s important to note that playing the earnings is NOT part of my strategy but I got sucked into  a “sure thing”.

We were talking about buying BioTelemetry Inc. as they were slated to release their earnings last night (Feb 19) and had beat their earnings that last 3 quarters, so of course… it had to be a sure thing.

To make matters worse, I figured I’d throw some of my Christmas bonus at the stock since “it was money I’d never planned on having in the first place”. After very limited research, I called up my broker first thing in the morning and told her I wanted to buy. She was hesitant but after my reassurance decided she’d try and buy below $11. I snagged the stock at $10.82, ecstatic since Zacks’ analysts were calling for a target price of $15 after the earnings were released.

To my dismay, BEAT did beat their revenue but didn’t make their EPS, thus the price has dropped just over 10% leaving me to pay stupid tax if I sell or try and ride this thing to break-even. What I’ll likely do is hang onto this and see what the next quarter brings since I do feel bullish about the stock and am optimistic about what the firm is doing with their products and services.

The point however, is that I loosened my self-control, got hooked into a “sure thing” and deviated from my strategy. Letting your emotions dictate what stocks you’re going to buy typically lends itself to heartache, as I don’t believe a single investor will ever beat the market over the long-term.

I’m somewhat disappointed in myself, take full responsibility for my actions and am going to use this as a learning experience. I’m still hopeful to make a return on this but now I’ve got to hang onto this stock for a longer period of time than I’d anticipated and broke a promise to myself NOT to deviate from my strategy.

LESSON LEARNED

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2 thoughts on “Sticking To the Plan

  1. tradingsystemlife February 22, 2015 / 12:26 am

    What does your investment plan say about holding onto stocks that you got into by mistake (I.e. By not following your plan)?

    I think there is a fair psychological danger here. If a trader or investor breaks their rules to get into a position, and then for some lucky reason they end up making money, then their subconscious learns that when they break their rules they make money. This may be true on that occasion, but next time they may lose even more money.

    Of course by holding onto the stock hoping to get back to break even the trader may end up paying even more stupid tax!

    My preference is that once a mistake has been recognized that I fix the mistake (get out of the mistake position in this case) immediately. This minimizes any psychological damage and trains you to face mistakes and correct them immediately rather than hope for a good outcome after making a mistake.

    I have a section written in my trading plan that says if for whatever reason I make a mistake then I correct it as soon as possible to avoid a mistake turning into an even bigger mistake.

    Liked by 2 people

  2. cappeldt February 22, 2015 / 9:27 am

    @Tradingsystemlife , I’ve got to agree with you regarding the psychological danger associated with these types of “hold decisions”. Truth is, there isn’t anything in my plan regarding what to do when I don’t stick to the plan. That’s exactly what will be introduced to the plan on the next strategy review date.

    As this was bonus money, I feel more “OK” with staying in to try and break even, having said that, the post was also a form of forcing myself to recognize and remember my mistake.

    I’ll be updating my plan accordingly, thanks so much for your comment!

    Like

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