On November 5th I started building a position in Valeant (VRX). I had a strong hypothesis that the negative news against the company was severely overdone and there was an opportunity to profit.
From November 5th to my final purchase on November 28th, I bought Valeant shares a total of 28 times and accumulated 440 shares long (approx $34,000). For those that follow my yearly results, I only allocate around $60,000 to personal trading, so this was over half my portfolio.
With a costs basis of $77.77, I ended up selling out of my long this past Wednesday morning after Valeant broke through $100. My net profit after commissions was +$10,010.55 which was my largest profit in some years.
Until I do my annual top 10 trades video look back (watch 2014’s) later this month, here are my top five reflections from this trade:
- Billionaire activists and hedge fund managers can really stir drama – This trade would not have been possible without Bill Ackman, Mr. Left from Citron, mainstream media, and Twitter. In today’s world, a single tweet can result in multi-billion dollar market cap swings. In many cases, the reaction is over done and opens unique opportunities to achieve the ever elusive alpha.
- Speculation is risky business – My core trading philosophy revolves around risk management. I cut my losers short. Real short. When I get a winner, I let it run. This trade was the direct opposite. I took significant risk to scale into a position that yielded a large winner, however not on a risk adjusted basis. To make the $10,000 profit, I had risked over $12,000. This is a terrible, and arguably unsustainable, R-multiple equation long term. However, the trade called for this. There was little I could do. So am I a genius or a lucky gambler? It’s up for debate.
- One trade can make or break your year – Up until this trade my 2015 return was in the red. This profit shot it far into the black. Had I lost, my poor yet risk adverse and disciplined year would have become a disaster. Since it was a winner, my emotional human roots want to celebrate success. Avoiding emotions on both side is tough but the right thing to do.
- Not paying commissions was a key asset that allowed me to slowly scale in over time – Thanks to Merrill Edge and the Preferred Rewards program, I have 100 commission free trades to use each month (I move my personal portfolio around once or twice per year to support my ongoing research for StockBrokers.com). Merrill Edge was my primary broker for 2015, and having $0 trades really helped. Instead of buying say 100 shares per, I was able to buy 10 – 20 shares at a time on average and not stress about racking up commissions. This helped significantly to remove the emotions of watching the stock rise or fall immediately after each purchase.
- You don’t have to be glued to a screen to invest intelligently – The first three weeks in November are the busiest of the year for me, with daily meetings and weekly travel. A very healthy portion of my buys were made in airports, in a rental car , hotel, or immediately after lengthy meetings. While I certainly missed out on compelling opportunities to buy, using the CNBC iOS app and several different broker apps, I was able to invest, on the whole, with confidence. Mobile trading has come a long way.
Even though I was conscious of many of the above principles during the trade, it’s always important to reflect back on every trade, winner or loser. Taking a holistic viewpoint often yields important lessons and reminders.