Perpendiculous Programming, Personal Finance, and Personal musings

2008.09.29

Speculation

Filed under: Personal,Personal Finance — cwright @ 1:20 pm

(Sorry for another finance-related post) For anyone who follows my investing procedures, you’d know that I was a fantastically boring etf-only kind of investor. exposure to individual companies is simply too much risk for too little reward, and requires too much research to do well.

Reality, as it almost always is, isn’t quite that simple though. While the vast majority of my portfolio is in diversified assets (almost properly allocated too now, thank goodness :), I developed a tiny habit late last year of taking leftover residue amounts in my brokerage account, and buying a few shares of companies that had recently been hammered. This amounts to less than 0.5% of my total portfolio, so I don’t feel attached to it really, and it’s too small to really do much with anyway. For example, last year I bought a couple shares of E*Trade right after the citibank guy (or whomever) said they were in dire straights. Over night, their stock dropped from ~$15, to something like $4.50-$5.00. I grabbed a few when it dropped, figuring if they ever get back up to $10/share, I’ll have made 50%, so even if it took 5 years, it’s still 10% a year.

A few weeks ago, another similar event happened, this time to Washington Mutual. Their descent was much more rapid, and their reaction seemed a little more uncomfortable (so-called death-spiral financing and all), so it was much more volatile, moving 30-40% up and down each day. I again had a few dollars left over, so I figured I’d grab some of this too (the added benefit was that they pay quarterly dividends, so the end of september would yield some sort of return, at least). Disappointingly, they folded last week, and Chase bought their accounts (on the plus side, since I’m a WaMu account holder, I now have easier access to my account, since there are local Chase banks where I live).

The ride on the way down was quite interesting though. There were times where I made over 40% in a single day holding those shares.


Then, when it was over, it was all gone. The shareholders receive nothing.


The transition was quite smooth. The FDIC didn’t need to step in, and things like checks, online banking, and transfers all continued to happen without interruption.

The only negative I’ve seen in this (besides losing $30 in speculation investments 😉 is that Chase doesn’t expect to have WaMu’s accounts integrated till mid-2009, so I can’t use local branches till then. Their solution to that was “Just Open a local account!”, which is stupid because of the better rates of the online accounts (until Chase kills that to, which may or may not happen…). It’s a shame that acquiring $120 billion in deposits doesn’t make stuff like this go a bit more quickly.

So, here’s a brief example of why reckless speculation would be a dangerous strategy, and why diversified investments are a pretty good bet when companies are dropping left and right.

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