Od Studios -- Fortitude Page 2
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Fortitude Page 2 -- by sector24, 2008-01-15 |
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2nd Half
Many of the lessons I learned would be put to the test when I decided
to invest in IMAX. On a gut feeling level, Imax is one of those
companies that is destined to succeed. "They have a theater in
every museum and Imax movies are so cool! How could that be a bad
investment?" Looking at the fundamentals, the company was not
that great, but after looking at the chart, I saw that the price was
fairly stagnant around $5. I figured, at the worst I would neither
make nor lose money and I could exit the stock affordably.
Additionally, my uncle was gambling at Foxwoods that spring and he
talked to a guy who said that sometime in 2007 they were going to sign
a major deal with one of the big cinemas to install a bunch of Imax
theaters. The kind of news that would really bump up the stock price.
Normally I wouldn't chase an unsubstantiated rumor like that, but I
felt that the stock was safe enough to invest in even if it wasn't
true. It was not the kind of thing I'd pass along to my friends, but
it was within my own comfort level of risk.
So I made a sizable investment in Imax at $5.10; 6000 shares. One of
the advantages of cheap stocks is that you can buy huge amounts of
volume. For every penny that the stock went up, I would make $60!
But at the same time, when you buy stocks under $20, you get what you
pay for. There is a significant amount of additional risk for low
price stocks.
Of course if the stock went from $5.10 to $99 in 6 weeks this wouldn't
be a very interesting story. Instead, within 5 days of my purchase,
the stock was trading at $4.23. The same volume that would earn me $60 per
penny also put me almost $6000 in the hole. Unless you are a
millionaire, that's a lot of money to lose in 5 days, and was
significantly outside of my comfort zone. I was a nervous wreck,
second guessing myself and thinking that I'd made a huge mistake. I
checked the fundamentals again, this time with fear watching over my
shoulder and pointing out every little negative like a certainty
rather than just a possibility.
I also looked over the chart again and saw something disturbing. A
year ago (August 2006) the stock was trading at $10 and the stock
plummeted due to lower than expected earnings. It got me thinking
that all of those investors who bought the stock at $10 are probably
still holding the stock, waiting to get their money back. Any upward
move in price is going to be heavily offset by selling pressure from
people sick of Imax screwing them for so long. I felt like I was
trapped, and I needed to escape before something even more terrible
happened.
But I had made that mistake before, where fear of losing money made me
sell early, and then the stock ended up doing what I had expected all
along. Only I was no longer there to reap the benefits of my
research. So I decided to face my fear and stick with it. I invested
in Imax for a reason and that reason hadn't changed. Between August
and December of 2007 the stock went virtually nowhere. Several times
it flirted at or above my purchase price of $5.10 and I was given a
chance to break even, but I stuck with it and the price dropped back
down in the $4.25-4.75 range. Finally on December 7th, Imax
publicly announced its 100 theater deal with AMC and the stock shot
up over $7.
Overtime
Another lesson I'd learned previously is how a stock behaves when
there is good or bad news. Stocks tend to drift too far in one
direction before over-correcting and then finally finding firm
footing, much like a car would. In the case where a stock has a bad
news event or lower than expected earnings, it typically takes an
initial steep dive, followed by small increases in price for the
remainder of the day, and possibly another correction the next
business day until a firm number is established. One of the tricks
that day traders use is to find these stocks, and buy them early in
the day when the bad news is released, and then sell them at the end
of the same day for a profit. At 4:01pm it's as if you've created
money out of thin air.
The opposite is also true. When good news is released the stock
skyrockets, but through the day the price declines as sanity kicks in
until at some point firm footing is achieved. So when I saw the news,
I immediately sold at $7.20, knowing that I could buy the stock back
later in the day. Although the stock ended the day at $7.32, I could
have picked it up again as low as $6.05. But I was through with Imax,
my experience in August tempered my zeal for profits and all I could
think about were the people who had gotten in at $10 who were going to
sell when they saw the news. Imax has been in steady decline since
then. I'm actually considering getting back into it...if it drops
down to say $4.25. ;)
Conclusion
Imax is a story of fortitude. I had a plan, I laid out my
expectations for the stock, and I met those expectations despite an
uncomfortable bump early on. If I had given in to my fear and sold
everything, I would have lost 20%, just under $6000. By going the
distance and believing in myself, I ended up with a 40% gain over 5
months, about $12600. However, at the same time if I had just waited
five more days before I purchased the stock, I would have made a 70%
gain. The additional lesson I took from this trade is that you can
pick the right stock, but you also have to pick the right moment to
buy it. This is a mistake I'm not likely to make again.
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