Ups and downs of trading stocks

graph_up2I recently finished up executing the last shares of my big stock option. It is nice to wrap it up and be done with it. It represents a very nice part of my compensation package, and yet the whole experience was somewhat distressing!

I want to chronicle what it has been like to give you a taste of the emotional roller coaster that comes with trading stocks and options.

In the beginning

I was hired in 2010. My stock option grant was designed to be paid out on the following four years, with the first 25% vesting on the first anniversary of my hire date. My grant had two parts. One part would pay out the rest in 25% chunks annually. The other half would start vesting the rest in monthly periods. February 2014 is when I receive my last full vesting.

My company’s market price was about $44/share when I was hired in 2010. I didn’t pay a whole lot of attention to the price until 2011 started to approach. On my first anniversary, the price had risen to $97/share. Essentially, my stock option had doubled in value and I was super excited.

I got a big chunk of money when I cashed out the bits that I could. At a similar time, my wife had overheard someone else mention about trying to sell their town home in Orlando. When I heard the price, we started shopping online. After several months, we had figured out that with the stock option money so far, we could easily put down enough to buy one. Mortgage rates were around 4.5%. I had also worked out that my bonus check could fund the monthly payments, mortgage, utilities, and all. We signed the papers in November of 2011.

The Wealth Building Society is born

booksIt was March of 2012 that I started writing this blog. I had learned something new in the world of building wealth a year earlier, and it took me almost a year to shake loose the old ways and embrace this new concept. I reached a point where I couldn’t keep it to myself. Thankfully, this happened before I got my first chunk of stock option money. I had originally intended to use it to nuke my home mortgage. That was off the table and other things were being considered. Rental property, dividend paying stocks, and an EIUL were in the pipeline.

In the middle of 2012, the stock price had risen to over $113/share. I figured things were just going up and up and up. The sad part was, I had already exercise 2012’s quarterly grant. It was really hard being forced to sit on my hands and wait for another vesting of stock options.

Some varying news shocks were felt and the price dipped briefly down to the mid-80s. That hurt. I was worried. But it quickly rose back to $100/share. Frankly, $100 feeling like a mystical edge that was hard to cross. It seemed that running up to $100 was a struggle, but once crossed, it felt magnificent. And I hoped it would stay there.

Danger Will Robinson! Danger!

panic_buttonIn the first quarter earnings report of 2013, my company missed their earnings estimate. It wasn’t a huge miss. But in less than a month, the price fell from $99 to $72.38. It recovered the following month into the mid-80s. And then dropped even further in July to $66.51. While a 33% drop is pretty bad, this stock option had a strike price of $44. The value is in the difference. It went from a delta of $60/share to $20/share. That is a 66% drop in exercisable value. I knew what those people felt that had scraped together 401K funds with mutual funds totaling $1 million and watching the market take away $300,000+. It would drive me to get out too to avoid a total collapse.

But I was in a different situation now. I had already acquired cash flowing rental properties in the fall of 2012. I had started funding my EIUL and had seen it grow steadily for over a year. And in March of 2013, I took the cash proceeds from the sale of my previous home and used it to buy a big position in VNR. Cash was flowing in on a monthly basis that was close to the amount of money I earned at my day time job.

This provided me quite a bit of emotional relief. It also helped me collect my thoughts. The stock option has an expiration date after which its worthless, but that wouldn’t happen for a few more years. I told my wife that we would have to wait on getting that new car, and she was okay with it.

The best things come to those who wait

rodin_thinkeFrom there on, I decided to bite the bullet and wait it out. In my mind, I had set the day of the last vesting of stock option as my target date to shoot for. Before then, I would simply ride things out (unless the stock did something like jump to $200/share). My company beat its earnings estimate in the last quarter of 2013 and began to steadily recover its price. It climbed into the $80s followed by a slight dip into the upper-70s. I was waiting for each earnings report with glistening eyes. I had already seen what it meant to miss one. Now I awaited them to beat their estimate. In mid-January 2014, I watched the price rise back to $98. The tension was unbearable. If they didn’t make it this time around and the price tumbled, I would have missed a keen opportunity due to the timing of my vestige. On the big day, my company beat the earnings estimate again.

I cheered. And then something awkward happened. In after-hours trading, I watch the price fall five points. Huh? I was chatting with a colleague over Skype and he asked me what that meant. I couldn’t answer. To tell you the truth, Warren Buffett couldn’t answer. He avoids this type of daily chatter and points out how important it is to invest in strong businesses with long time frames.

Someone posted a similar question on Seeking Alpha regarding the drop in price. For the next 2-3 days, the price wobbled around $90/share. Then I heard a news report indicating that the DOW had dropped 300 points. Professional analysts referred to this as “consolidation”. I think they were spinning the news to make it sound less harmful. Several of the stocks I monitor had all slumped 3-5% in price. This had something to do with emerging markets, a facet of investing I’m not really familiar with (yet). Dr. Dave posted an article a potential market correction coming in the next 1-2 years.

Let’s wrap this thing up and put a bow on it

habit-saving-moneyI was getting a first hand taste of how tough it can be to depend solely on appreciation of the stock price. My option didn’t have any dividends to hedge the risk of price fluctuations. But then after this correction passed, things began to inch back up. I noticed for three days in a row, the price climbed 1.3-1.6 points each day. I quickly calculated in the head that ten more days, and the price would hit a golden price to sell and which I would be quite happy: $110/share. I told myself that if I could sell what would effectively be half of my entire option a hair away from the peak price of the last four years, I would be quite happy with the outcome.

Then the growth rate began to slow. I watched one day where it went up 0.6, only to see it fall the same amount the next day. I pondered selling immediately. Or putting a limit order to sell if it hit $100. Or a limit order if it hit $110. Or. Or. Or. It drove me crazy!

Finally one night when the price had closed just below $97/share, I put in a 60-day limit order of $110. If it was going to jump to that price, why not line things up to make it happen automatically. I knew it would be good.

At the end of February, I watched it go up almost 2.5 points. The next day it fell 1.7 points. This is really tough to sit by. It always feels like the next day will mimic the current one but you just don’t know what will happen.

On the first Monday of March, I see it drop 1.4 points and then start to recover. By the end of the day, it has dropped around 0.4 points.

On Tuesday, the price jumps 3.5 points in first ten minutes of trading. I’m shocked. What is different between today and yesterday and last Friday? Throughout the day, stock keeps going up. Right now, it’s up 5.6 points around $101.30/share. This is friendly territory. It isn’t the golden price of $110, but a price I would be very comfortable selling.

While running an errand after lunch, I hear a news report that says Wall Street is rallying due to news of an eminent easing of tensions regarding Russia’s invasion of Ukraine. I immediately recognize that this type of news has almost nothing to do with the company and it’s stock.

Since this could crash the next day, I decide to move. One block executes at $101.13, the other at $101.03. Whew! I’m out. No more panic. I got a good deal. I see the price rise maybe 1 point over the next couple days, and then drop again. I made the right decision.

Lessons learned

talkingI was never, ever, EVER happy with the price when I exercised some shares. If I made a move and then saw it rise after that, I felt like I had missed an opportunity. Sometimes the price fell after a trade, but I would ponder what if I held it until later. I had to condition myself to accept the trade and instead focus on where to move my freshly acquired cash. I can replenish my rental property cash reserves. I also plan to open a custodial account for my 2-month-old son. And I can finally snatch up some new positions from my short list of stocks. Stay tuned for more on that.

It was often a joke reading the opinion pieces and the buy/sell/hold recommendations were frankly worthless. It almost feels like everyone is trying to coach everyone else.

Forming macro opinions or listening to the macro or market predictions of others is a waste of time and even dangerous, because it may blur your vision of the facts that are truly important. –Warren Buffett

I have been able to reflect on many aspects of my wealth building plan, and there is no denying that my stock option has empowered me in many ways. I also can’t wait until I get my next chunk of ESPP payoff in five months. I also have one last small stock option so I might yet be able to exercise some shares at $110 if not higher.

What’s fun about this? My division was spun out into a separate private company. We were issued another stock option grant several months ago. At some point in the future, I get to go through this entire “exercise” again. It’s VERY nice to get an equity position. But it isn’t stress free.

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