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Author: rjf53 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 74344  
Subject: Opportunity costs Date: 12/9/2012 12:59 PM
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You hear a lot about “opportunity cost” when investing comes up and personally I’ve always viewed the term as mostly the sharks of wall street encouraging us lesser fish to keep the maximum amount of money exposed so they will have more of it to feast on. My own view on the subject is that only if you seize the opportunity to book profits and then wait patiently for the opportunity to buy equities when they represent an exceptional risk/reward are you likely to be a feeder instead of the food.

The maxims “let your winners grow” or “water your flowers and pull your weeds” fall under a similar category IMO. To be sure there is some wisdom in the concept but given the only way we really can be certain about what constitutes a winner or flower is the price appreciation and given that prices can be fleeting, well, at a minimum I’d say it is easier said than done.

I bring this up because I decided to take a look at the picks from the NPI 2012 contest from a slightly different perspective and instead of looking at just the current results look at it from the opportunities the picks presented the owners as viewed from their high water mark for the year.

I personally view the results as telling and take comfort that my thoughts on the subject, at least for this one year, and with an admittedly small sample, would likely have led to vastly superior results.

What I did and what I found…

The first thing I did was to eliminate the repeat picks from the list, in addition I had to eliminate TomFoolNC’s pick of CCWIF because I couldn’t make sense of any of the quotes I was getting (maybe he can explain why it appears so Farked up) so instead of 45 picks we are left with a sample of 36 companies.

Next I went and looked up the 52 week high for each company and calculated the rate of return had an investor sold at the absolute high for the year. (Maximum opportunity)

What I found is when I averaged the maximum opportunity for all of the NPI picks it came to a 51.4% gain vs. the maximum opportunities from the NASDAQ of 22.7% and S&P of 17.2%.

Looking at it a different way there were 6 picks (PATH, AXPW, GFKSY, CCIH, LWLG, DNDN) that managed increases over 100% and an additional 7 (total of 13) that topped out at over 50%. (LULU, YONG, VHC, CENJF, YMI, AMSC, MAKO)

So how did “letting your winners run” turn out?
None of the 100% plus gainers managed to hold on to even 50% of their max opportunity. PATH was the clear winner by holding onto 63.6% of what at one time was a 177.2% gain. The others …

AXPW now 12.9% down from 137.0%
GFKSY now 4.1% down from 126.4%
CCIH now -4.0% down from 112.0%
LWLG now -29.0% down from 129.7%
DNDN now -35.9% down from 124.2 %
Average decline, 132.5% from max opportunity.

The 50% plus picks…

LULU 73.8% vs. 81.1%
YONG 43.2% vs.67.0%
VHC 34.0% vs. 67.9%
CENJF 25.9 vs. 49.8% Yeah I know I rounded up but it’s my pick and I get to set the rules. :<)
YMI -1.2 vs. 50.0%
AMSC -25.7% vs. 63.9%
MAKO -47.6 vs. 79.0%

After looking at things from this perspective I’d have to conclude that stock picking isn’t a problem with the NPI participants, that is of course, if anyone managed to capitalize (book profits) when the opportunity presented itself.

I’d be curious to hear from others how they did, anyone get off the roller coaster on time and if so why? For me it’s been a bit of a mixed bag. With GUKYF (What I actually own not GFKSY which has no liquidity)) I did a crappy job of de-risking the position given the opportunity I was presented with, but still managed to salvage enough of the gain to at a minimum deliver market beating returns despite my letting greed get in the way.. And although I de-risked CENJF (sold 25% of my shares) in a more disciplined manner unfortunately it was at about the price it is at now as opposed to the 52 week high so for now at least it is a bit of a wash. I did scalp a little from trading some shares during some weakness earlier in the year when it fell to around $13 and considering it was a 30% position to begin the year and up 25.95 currently I’m certainly not complaining. Especially because I am as bullish going into next year as I was to begin the year. (I actually plan on buying back the shares I sold into any further weakness because I believe the fundamental story has improved a lot from when I sold them.)

I’m not familiar enough with most of the other picks to have a strong opinion as to how I might have responded if I owned any of them but a few things do stand out. One is the risk/reward profiles where it appears to me that there is quite a bit of differences in the types of picks where one group is comprised of “moon shot’ type picks (much like my GUKYF) where the reward potentially could be mind boggling and somewhat safer (none of them are safe in reality) companies that might have great market beating return prospects (CENJF was like this for me) but weren’t likely to be 3 or 4 baggers anytime soon even if the stars aligned just right.

Again because I don’t follow the other companies and because this is a rather small sample I may very well be wrong, but absent some pretty fancy explaining by the people who know the stories better, my little postmortem would indicate the picks aren’t the problem but rather a unwillingness to seize a 100% real opportunity vs. some hoped for bigger gain when it was presented.

As I said in a previous post, even if I don’t share the same investment philosophy with my fellow Fools I can still gain a lot from them, but only if they share their experiences.

B
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