Speculative Investing: Don’t Try This
I recently purchased a speculative position in Stage Stores, (ticker SSI) and I wanted to share it with you.
First off, I want to start by saying that I do not recommend you do follow my example unless you are fully aware of the risks involved with doing so and that you understand the difference between speculation and investing.
As I’ve said before, my wife and I put $125 a month into our brokerage account to invest in the stock market, and then every six months I enlarge or initiate a new stock position. My investing strategy with these funds is to increase our dividend income and to capture capital appreciation through a long-term, buy and hold investment horizon.
I try to purchase companies in which I can have a reasonable confidence over the long term, and like to think of my share purchases as if I have just purchased the whole business.
In the past, investing like this has benefited us quite a lot. I’ve lost money, initially, on several of our positions, but I have never lost money in the long run because I don’t freak out when prices fall. Instead, I wait for our positions to recover and appreciate. So far, doing so has yet to fail me.
The story behind purchasing SSI is a little different.
Every once in a while, I’ll go looking for extremely distressed businesses and try to evaluate them to see if management is attempting a turnaround. If I find them, I then try to determine how likely I think they are to succeed.
As an example, I spent time last January and February looking at AMD, when the stock was trading around $2 a share. Ultimately, I decided not to buy the stock, because I wasn’t confident in management’s ability and I wanted to give it a little more time to see if they would be able to execute. Fast forward to today, and AMD is trading at about $14.50. Given how much I was willing and able to put in as an initial outlay, I missed out on a $4700 return.
That return represents 75% of the total value of our portfolio today.
I hate myself a little bit.
But, it’s important to remember that if I had purchased the stock it would not have been an investment.
It would have been speculation because I was essentially deciding on whether I thought management would be able to execute their turnaround, and they still haven’t. Despite the massive gain on the share price over the last year or so, AMD still operates in a loss environment, as they have been for several years.
So I was able to identify a good bet, nothing more.
That’s not investing, that’s speculation.
Why I Bought SSI
My example with AMD isn’t the first time I’ve done this, and about two weeks ago I went hunting for another one and found SSI.
SSI operates about 800 discount retail outlets in the US, primarily in Texas and the southeast, and their share price has been taking a beating as they face competition from online retailers *cough* Amazon *cough*. It’s gotten so low that I thought it might be worth taking a look into, so I read through their annual report and 10-K.
Unlike Sears or Radioshack, SSI appears to be doing a good job identifying how they can turn things around and executing that strategy. Their online sales are growing, although they only make up approximately 10% of SSI’s revenues. SSI is also closing low-margin and loss-generating stores and remodeling and renovating those stores that are performing well or are salvageable.
Management has indicated that they plan to fix the dividend at 15 cents a share per quarter this year, which I don’t like in this situation, but at least provides me with some cover for my principal.
Given these factors, I decided to give them a shot for the fun of it, fully realizing that if I did so it would be speculation, not investing and that I could lose all my outlay. I bought 20 shares for $2.09 with some birthday money from my mother-in-law and sat back to see what would happen.
How My Stock Purchase Turned Out
Well, it turns out that I had really, really good timing. I’ve owned the shares for 3 days, and they’ve gained 23.1%. Part of that was because SSI announced that they were buying 50 well-performing stores and rights to the Gordman’s name from Gordman’s during its bankruptcy, but either way, I’m glad that, this time, I’m on the other side of the gain instead of looking at another AMD situation.
I was excited about that, obviously, so I told one of my friends about it. He was impressed and told me that if I could pull that off again he’d give me $10,000 to invest for him. After I figured out if he was serious, I ran the math, and if I had done that I would have made him just shy of $2400 in three days.
Knowing that, I can see why people day trade, and I am reminded of just how dangerous this kind of speculation is if you think it’s investing.
The real question isn’t how much SSI is trading for right now, it’s how much its going to be trading for a year from now.
That’s the only answer that really matters.
In summary, I don’t recommend you do what I did unless you put money in that you’re willing to lose and you keep it separate from your true investing activities. But I am curious, have you ever had a similar situation to what I’ve had, either with AMD or with SSI?
Let me know!