Like many of my generational colleagues, the baby boomers, I've found that my best intentions about saving for retirement aren't always meeting the mark. In 2011, I took some old 401(k) accounts and combined them into a self-directed IRA with Scottrade, and established a strategy of using covered calls to stabilize and enhance my returns. Rescue My IRA chronicles the progress of my IRA rescue using this approach.
Wednesday, January 2, 2013
2012 Retrospective #2: Worst Positions of the Year
I’ve already posted about
three positions where I took losses during 2012, but in this retrospective post
I wanted to go back and take another look at them – in the style of yesterday’s
post, I have some lessons learned from each of these that I’ll share. The yarn will unwind chronologically based on
the date I closed the position, the order they are listed in the post’s title.
Adding up the absolute losses on the three
positions, you get a total of $9,086.06.
That is a lot of money, but by the end of the year my account value
showed a gain – so I rest on the strength of the portfolio model. I am going to take some losses from time to
time, and in these cases I believe I understand what went wrong.
They’re mistakes I’ll try not to make again.
Biting the Bullet on Legacy
ACM is the company I used to work for, and one
of the options for the 401(k) plan there was to buy shares at a discount to
market. I was there for nearly four
years, and had accumulated 800 shares by the time I left. The basis of the shares was around $25, so
this position represented about 20 percent of the portfolio I was holding in
the Rescue My IRA account after I transferred it.
Soon after I left the company and completed
the transfer, the stock dropped from $28 or so to $22. I could handle this and had planned to wait
for the comeback. But then, early this
year, it dropped again to $15 or so, as I recall. While I could have taken on some kind of
stock recovery plan, I’d lost my patience and sold the shares (it turned out
that I would have needed to because of some business conflicts at my current
job as well).
I sold the shares and took the loss, rolling
the funds into a position with URS – a similar large architecture and
engineering firm. I still hold that 400
share position, and it appears to be performing up to my standards on the
Here’s a repeat of the position analysis for
November 2012: Transferred 880 shares in
from my 401(k) during the rollover. I sold 80 shares immediately so I
would have 8 round lots. My basis was about $25.00 per share.
5/8/2012 Sold 800 shares at $14,784.66,
average share price $18.49
Total stock LOSS: -$5,233.34
Over the course of this holding, I have had
covered calls with March, June and September expirations at strike prices
between 22.50 and 25.00; total options income: $204.91
ACM is not a dividend payer. It is a
legacy holding that was not selected based on the trading plan, and has always
been a candidate for divestment because of this.
1) Stock loss: -$5,233.34
2) Options income: $201.91
3) Dividend Income: $0
Total Net loss upon
divestment: -$5,233.34 + $201.91 + $0.00 = -$5,028.43
Estimated Absolute Return on Investment: -25.14%
Annualized Return: Not calculated
This is a case where I
probably should have eliminated more of the position when I made the
rollover.ACM didn’t fit in my
portfolio, as defined by my trading plan (it is unrated by S&P and it doesn’t
pay a dividend are two of the reasons).The
concentration in the shares represented about 20% of my portfolio, where I
generally won’t have more than 8% in a position.So, with all of that working against the
position, it’s a wonder I didn’t take a worse hit.
The shares have recovered
somewhat in value, but I judge the position as an underperformer in any
case. I feel quite confident about the
current URS position.
– Just a Bad Pick
This symbol is so similar to ACM – perhaps if
I were more suspicious, I would have anticipated that I was going to run into
some trouble with this one. During a
summer of volatility, the stock reported disappointing earnings and the bottom
dropped out. I took the loss, but was
able to make up for it inside of the month given the ongoing market action –
and I moved the funds into a new CAT position, which I am still holding at the
time of this post.
ADM was rated 3 stars by S&P when I
bought it, so again, this is a case of not following the trading plan. I’ll keep the analysis on this one brief:
300 Shares, basis $30.82, cost $9,246.88
Option Premiums (total): $597.97
Dividends Collected: $52.50
Stock Loss: -$1,724.05
Rushing to Purchase HPQ
HPQ is another stock
where I made a bad pick. There was
dramatic news for the company during 2012, information that I deemed
positive. And since I needed to get my
funds back to work quickly, I simply may have rushed the situation, violating
some of my trading plan rules in the meantime.
As far as the good
news goes, it came early and then everything went pretty bad. I pulled the trigger on 400 shares in August
because there was a new CEO, who had a good reputation. It was a 3 star S&P stock, which led to a
lesson I’ve finally learned: I will only
invest in S&P 4 and 5 star companies now.
Then came some poor earnings
news. I thought I could leverage my
basis down with 100 shares and added them, and then I adjusted my covered call
strategy to maximize cash yields.
Finally, there was the news that the company had made a bad purchase
decision on an acquisition, and I decided that it would just be a lot of work
to fix the position. It was called away
in December on the ex-dividend date.
Now, there were some
promising aspects of this position – counted by themselves, the returns I
earned from call premiums and dividends are almost 9 percent, which annualized
meets my goals on returns. But my loss exceeded that amount. That smarts, but I figure that is something
that will happen from time to time, as it did with ACM and ADM. We have to hope that the portfolio model I
use can absorb this variation, covering it and then some with a few gains and
mostly steady performers.
Here’s the story of
the HPQ position:
8/20/2012 – Bought 400
shares for $7,919.00.
9/25/2012 – Bought 100
shares at $1,697.99.
Share basis of 500
shares is $19.23
Gain/Loss on the position: -$2,779.14