Thursday, December 07, 2006

Trade Review: LXK

Inspired by Bill, Trader X, Tapeworm, Ugly, I have decided to discuss trades I have made. These early trades were made as an educational endeavor to understand buying and selling of stocks using minimal amounts of capital. For the most part I bought and sold these shares as I developed my investing and trading process.


LXK was one of the first stocks I bought. The main reason for purchase was just to get my feet wet. I did do some research (among other things, a good fundamental look at LXK at the time of purchase can be found at Geoff Gannon's Gannon On Investing blog) and felt it to be suitable for purchase. So I bought. And then I sold.


On February 16, 2006, I bought Lexmark (LXK) at $47.80. I cannot say that there was any particular signal that stood out, so again I would describe it as a random entry as discussed in Trade Your Way to Financial Freedom. With the benefit of hindsight, and with what I have learned this past year at Bill Cara's blog, I can say that my buying was partially supported by the fact that the daily, weekly, and monthly RSI were at or near an oversold level.

On April 24, 2006, I sold LXK at $46.91. I had a loss of -$0.89 cents a share or just about 1.9% in 67 days. Measured as R, my loss of $0.89 was -0.28 R.

Why did I sell so soon? I cannot say I had any real reason to sell. Mainly just a FNG getting nervous. Again looking back with what I know now, the Average True Range (thanks Bill) was $1.07 and therefore my R was $3.22 (understanding why R is important comes from Trader Mike). Based on that, my stop should have been $44.58.

Looking back at the one year chart (and using the closing price), it is clear that the closest the stop came to getting triggered was the close of $45.01 on May 12, 2006. A stop as described above would not have been hit. The question then is, if I had known to use stops I would have been better off?

Umm, does a bear crap in the woods?

Following the one year chart it is clear that LXK bounced off that low close of $45.01. On May 31, 2006, LXK closed at $57.25 and then closed at $53.80 on June 9. Using a stop may have got me out at around $53.80, for a $6.00 (11.2%) gain or 1.86 R in about 4 months.

Bottom Line

Using a stop would have turned my small loss into a decent gain. So far using a random entry with an ATR stop would have done much to improve my results. Clearly stops are helpful in removing some of the emotion a new trader may have.


NO DooDahs said...

Thanks for the love! FYI I am debating whether a close-to-close 3*ATR or a high to low 4*ATR is better; nothing conclusive and it appears to be immaterial, but an actual trailing stop order can be left with the 4*ATR as opposed to checking on the stock every day. Maybe useful knowledge for a vacation.

Steven said...

Sounds interesting. I am using the close on these early trades just as a quick and rough way to look how I may have done with a stop.

Geoff Gannon said...


Glad to see you writing about your trades. By the way, Lexmark (LXK) last closed at $72.81.

I've been doing some calculations. Here's what I have: You sold at $46.91; I wrote about LXK at $46.79 – so I guess my argument was only worth twelve cents. I'll try to come up with a more valuable insight next time.

By the way, I'm really writing just to let everyone know that Berkshire has since sold all of its shares of Lexmark (in my post, I mentioned Berkshire had recently tripled its stake). Interestingly, you sold at $46.91 and Berkshire sold most of its shares at an average price of $46.90. Clearly, great minds think alike.

Anyway, Lexmark is now very close to what I'd consider fair value. I don't see any margin of safety here, and I certainly wouldn't be buying it. It's up 55.61% since I wrote that post, so the stock looks very different today than it did then. But, thanks for mentioning my post. I should probably revisit LXK on my blog, just to let people know the higher share price has now moved it out of the bargain bin.

Steven said...

Hey Geoff,

You know it wasv not your analysis. I was just 3 months new at the time and scared I was about to lose all my

You know it is funny that you and Bill both commented here, because as I have said before you and Bill have had the most impact on my development of an investing process.

You two should write a book and I will then review it. LOl

Take care.

Anonymous said...

You talk about this kind of analysis, and this fear selling creates huge opportunity. I've made tons of money going in where others are running scared, but not only for the sake that people are running scared, I check out the reasons they are running scared and evaluate if I think they are reasonable.

For example, I came across Pegasis, it was diving and often there is money to be made there. Well, in three minute I could see a director had lined his pocket in the neighbourhood of $300 million, very bad sign. Where's that one now... 1% of where it got to?

Whereas many of the Canadian dividend trusts got oversold in the fear selling. I unfortunately got into on for the first time 2 days before the announcement, and I loaded up with more when it plummeted, sold out when it recovered up some, loaded some more going down again, and sold my position and basically turned a high percentage loss into a low percentage loss, and I maybe even recovered all my loss, I didn't actually add up all the numbers. But I am bold where others run scared when I believe in the math, and the math told me people had run too scared.

I certainly like that short term perspect. Right now I've upped my investment in another stock that everytime I look at it I find it grossly undervalued, even in a declining commodities market, and I see the fear selling over the decline market grossly exceeding the valuation of the stock, so I'm in deeper, although this one will be a longer play.

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Excellent post on trading.