Online trading error based on greed

December 22, 2009

At the close of the market on Monday, April 12,1999, the Dow finished up 166 points for the day, reaching a record high of 10,339. On the same day, Pfizer Pharmaceutical hit 150.

I had picked up 200 shares in mid-January and added another 200 in early February. In less than three months, taking a ride on the Viagra express, I had made a decent return of over 25 percent. While it wasn’t exactly the kind of astounding return some of the Internet stocks were providing, the actual dollar amount earned was plump, and I was feeling pretty good about it. Pfizer was looking as stable as the Rock of Gibraltar.

When I put my ear to the ground, I should have picked up the distant vibration of galloping hoofs headed toward me. I should have realized the run-up was a little too frothy not to be more cautious.

Now, when it hit 150,1 remember thinking, “It’s come up pretty fast. You’ve got a nice return over a fairly short period. The last time a stock profit reached this point, you sold and were satisfied. Earnings are coming up. Why not take your profit now? You can always buy it back later.”

But I didn’t act on what I was thinking. I didn’t put in a stop-limit order to sell, locking in my profit. Nor did I set a mental stop. Had I followed my thinking, I would have sold at the exact top. But no, I was going to squeeze just a little more juice out of it. Greed reared its head, opened its ugly mouth, exposed its sharp teeth, and bit me hard.

The next day the stock went down about a point. No big deal. The following day it dropped another 4 3/4. These were the “smart money” early birds not taking any chances on the upcoming earnings report. I should have been one of them: $2000 of my profit gone in one day. But it was what happened the next day that threw me for a loop.

“PIGS GET SLAUGHTERED”
A favorite little broker cliche about getting greedy goes like this: “Bulls make money and bears make money but pigs get slaughtered.”

The earnings report for Pfizer came out the next morning. Everyone was expecting a good quarter based on the previous quarter’s Viagra profits. Many investors were wishfully thinking that the drug would take off beyond its intended clinical use and become a recreational drug for all men to improve sexual endurance. It was an elegant if overly simplistic notion: As the number of men benefiting from Viagra went up, so would the value of the stock. At the least, they were expecting an improvement in earnings over the previous quarter.

No such luck. The earnings came in less than the previous quarter, sending institutional and individual investors rushing for the exit gate. The stock was, as they say, taken out to the woodshed and thrashed mercilessly, sliding 141/2 points. It was the single largest one-day drop in Pfizer’s history. The following day, Friday, it dropped another three points. By this time, my profit was oozing out of every pore.

At no point during this miserable free fall did I sell, thinking the stock would recover after the earnings disappointment wore off. Here I am, still kneeling with my ear to the ground, listening for the coming Indians, while their arrows are already being zinged fiercely into my back!

Because the stock had been on such a steady upward climb for months, I couldn’t (wouldn’t) change my thinking fast enough to accommodate what was happening.

Monday of the following week brought more emotional uproar. After soaring 250 points at one point, the Dow finished down 56 points. Not to be outdone, the NASDAQ had its second worst day ever, closing down 138. To add insult to injury, Pfizer finished off its punishing meltdown by dropping another nine points to put me back where I started.

I had managed to lose all my profit in one miserable week as a result of a disappointing earnings report and a general market meltdown. Unable to erect itself again following the strong rise it got from Viagra, Pfizer has not recovered its luster since this episode.

My greed to increase my profit to 30 percent had been my downfall. That, and not being mentally nimble enough to respond immediately to what was clearly a change in the short-term stock story and the general market psychology.

I should have known better. I had committed one of the mortal sins of investing: I had allowed my profit to be wiped out. I have vowed never again to build up that kind of profit without having a stop-loss in place to protect me from down-side risk. While the merits and disadvantages of using stop-loss orders can be debated, in this case it would have saved me a healthy profit.

As well, I will be more careful about letting all profit ride. This is not the craps table in Las Vegas, where you can talk yourself into believing you’re playing with the house’s money. The object of the game is to make money, not take undue risks just because you’re ahead.

Next time, I will sell at least a portion of my position to lock in part of my gain. There are times when the dictum of “let your profits run” needs to be tempered to a more conservative position like: “Take some profit off the table and let part of your profit run.”

In this case, taking even part of my profit would have meant letting the Viagra Express zip us back to Lake Como in Italy. Since I continue to think about this loss of profit with Pfizer many months later, it appears that I may have learned an important lesson from this error based on greed.