“CNBC could be an incredibly powerful tool of illumination for people that believe that there are two markets. One, that has been sold to us as long term. Put your money in 401(k)s, put your money in pensions, and just leave it there. Don’t worry about it, it’s all doing fine. Then there is this other market – this real market that’s occurring in the back room, where giant piles of money are going in and out, and people are trading them, and it’s transactional and it’s fast. But it’s dangerous, it’s ethically dubious, and it hurts that long-term market. So what it feels like to us – and I’m speaking purely as a layman – it feels like we are capitalizing your adventure by our pension and our hard earned [money] – and that it is a game that you know is going on, but that you go on television as a financial network and pretend isn’t happening.”
—Jon Stewart

And that, my friends, summarizes the motivation for 6 months of active trading in the market.

Before September 19, 2008, I was a buy and hold investor. I picked stocks, held them for too long, reluctantly sold, because in the long run, stocks went up. And I was extra dumb because I bought individual stocks instead of index funds, so the odds were against me since about 2/3rds of stocks (as do 80% of mutual funds) underperform the market.

Then I wanted a MacBook Pro.

Invest in tools. Invest in yourself. That’s what took me into that first short term trade. AAPL was down too much, into the $120s and I knew that it had to pop. So I bought calls, put in a limit order to sell at a profit, and bam, made a cool $1700. I didn’t know anything about position sizes, I didn’t know jack. But it won. Then I won about 14 more, and I thought I had it figured out. When the building is burning and people are running away, run towards it. Buy when the spike down occurred, sell (and sell short) on the spike up.

Sure, I had up months and down months, but in the trading portion of my account, I was generating some serious alpha. And that’s when it started to become clear to me that passive investing is just a way of becoming a sheep to be slaughtered for the active investor. In poker, there’s a saying: if you look around the table and can’t find the fish, the fish is you. I’ve shown that time and time again over the last six months.

My money is split into two pots: my “buy and hold” account which operates under the same premises as it did for the 15 years prior, and my trading account, which I actively enter and exit positions in under timeframes ranging from hours to days.

Since mid-September, my buy and hold account is down about 25%. My trading account is up 220%.

Lesson learned.

But it sucks. I’ve been able to generate these decent return, at the cost of about 10 hours a week at night and on the weekend studying and following up tweets and links and StockTwits threads and participating. The opportunity cost is that “investing in myself” has turned into “managing my money”. I’m not necessarily creating new value, I’m trying to salvage the value I had before, swimming against a current of bad news. I’m learning a lot, no doubt, and due in no small part to the relationships I’ve established through StockTwits. It’s not enough to make a career of it, but it’s also enough to keep me from giving it up and just resorting to mutual funds and CDs.

So I got my MacBook Pro with the proceeds I earned. And it’s paid off several times over. So score one for investing in tools, investing in yourself.

Trades: Out of INTC, AAPL calls

Earlier I had purchased two lots of INTC calls for a cost basis of around 0.36 per contract. The first batch (about 60%) sold at 0.50, the second batch (about half the remaining) sold Tuesday at .55 and the final batch went this week on Thursday at .64. My thesis back in week #7 of the StockTwits experiment was that INTC was a bargain at 12.75 or below. The whole trade ended up being a 51% gain. Not bad for catching part of the turnaround.

The AAPL calls I had purchased at 12.50 went for $17 on a limit order Thursday for a 35% gain. Could have let those run a bit more. I still think there will be several opportunities for AAPL in the 80s, although the low end of the range seems to be creeping up. Previously it was a no-brainer to go long in low-80s and short at 97. That range may have shifted up about 5 bucks.

Puts on the Pop: BBY and SPY

While this may end up being a mistake, I took the opportunity to buy more Best Buy and SPY puts with the proceeds from the closed calls. These are fairly minor positions. I’m just going to continue playing this back and forth of buying on weakness and selling on strength until it starts to fail.

The funny thing is that I missed out on a lot of upside by holding the existing BBY and SPY puts as the market rallied. The BBY is especially interesting because it’s the second time that I wrote a long post being negative on a stock only to have the market prove me totally wrong in short order. The first time was when I panned Mastercard; this time, I was talking down BBY at 24.50 just before it rallied to 28.50. In both cases, I lived up to the idiot retail investor moniker. Treat me as a contrarian signal when I’m talking something other than tech. I’m not sure whether it is just coincidence, or whether some subliminal survival mechanism kicks in that starts a rationalization process, but it’s something I’m going to watch.

Long Term: AMZN

The Amazon I bought last week turned out to be a good buy. I’m staying long AMZN. If you didn’t catch my Kindle 2.0 review, be sure to check it out.

My going in premise on 2009 is that we’ll see a shallow rally of the S&P 500 to about 1000 on low volume, followed by a continued fall throughout the year to around 770 and possibly lower. I’m more inclined to follow through on ideas that I come across which fit that philosophy.

I’ll try to post once a week on the ideas that have caught in my filters, and the trades that resulted. As we stand before the first full trading week of 2009, I’ve inherited a number of StockTwits-inspired trades that I need to close out before I can fully embrace the one-idea-per-week goal for the year.

The current open positions (and the source of inspiration):

Short NDAQ

I entered this in stages. Short NDAQ common at $23 and $24.50 for a cost basis of $23.50. Long June $20 puts with a cost basis of $2.47.

I found this one via @alphatrends’ post. This was probably a bad idea—the theory really makes no sense from a Madoff perspective, but may pay off if my bearish sentiment is realized early in 2009. As with most of my options-related failures, the timing is key. In the fall, timing mattered little when there were DJIA swings of 1000 points in a day; now that swings have slowed down, timing matters more.

Selling SRS January premium

I’m trying to sell some premium here on my open $SRS position at a basis of $86. Selling a January $70 call tomorrow on any early pop.

$COST Puts

Found this one in two places. While I don’t believe that the payment form limitations cited by @BuyOnTheDip will prevent people from shopping there, I do buy the EarningsBreakout channel check that people are going to focus on staples rather than on premium electronics. Therefore, I’m going short with the puts. Long the July $40 puts with a cost basis of $2.10.

Short BBY

Went in to buy an iPhone this weekend. They were out of what we wanted, so we left. I can’t decide if that’s a good channel check or a bad one, but it signals to me that they are retrenching. Short the common with a basis of $26.45, and also sitting with June $20 puts at $3. Not looking so good with $BBY up to $30 today.

Long $AAPL April $100 Puts

Cost basis $16.86. I still hold that $AAPL is range bound between $80 and $100, so this is sort of neutral. I was simultaneously long and short last week, but closed out my open call positions. I have a tight leash on this into a rally. I may have to hold this until the post-show return to earth.

So far, only the $COST move is in the money. As I close out one of these others, I’m scanning for other opportunities. And trying to stay too small to fail.

It’s the time of year for reflection and resolutions. After putting about a month of thought into the exercise, I’ve landed on a few themes revolving around preparedness, agility and serendipity.

Here’s my 2009 game plan.

Invest in Skills

In early 2006, Mark Cuban gave his investment advice for the upcoming year. The moneyshot:

Invest in yourself. Do the things that can get you closer to your goals and dreams. It wont come from a brokerage commercial. It will come from preparing yourself , working hard and standing apart from your competition. You Inc is the best stock you can ever buy…if you are willing to do the work. —Mark Cuban

Lazerow hits the same theme again at 2008 year’s end:

So the question you need to ask is simple: is your annual take home pay, after taxes, really enough for you to justify the status, albeit it potentially fleeting, quo? I’d argue for many of you that the answer is NO by a long shot. And you taking your paycheck and deluding yourself to think that this too will pass is dangerous and short-sighted.

In 2008, I split my investment between infrastructure, upgrading some equipment and skills (learning a little about the markets.) In 2009, the investments move more towards the skill side of things, as the scarcity of time and attention, and the value that can be created through focus and deliberate practice (pdf) point towards a greater ROI for your attention than for your capital, especially as we look to enter a long economic recovery.

Along these lines, my 2009 skill investments are:

• Learn Objective-C and Cocoa development for the iPhone.
• Create one screencast per quarter.

The learning has already started, thanks to the great Stanford Cocoa Programming course targeting iPhone development. I’ve tried in the past to get started with Objective-C and didn’t have much luck finding an easy path through the weeds; so far, this class looks to be a great guided tour balancing instruction with personal achievement. And it found me through Twitter.

As for screencasts, I learned in 2008 the power of a multimedia presentation style from Giles Bowkett. You may not like Ruby or programming, but his presentation at a Ruby conference is worth watching simply to understand how to win a crowd at the rate of around a slide every six seconds. Short screencasts, backed by transcripts and supporting materials, are to long term social influence for change as Twitter messages are to ephemeral, in-the-moment connection.

Building a decent screencast involves developing at least three new skills I don’t have. But thanks to the Creative Commons, it’s possible to start this learning from a much better vantage point than ever before.

Invest in Social Capital

Gary Vaynerchuk struck a chord with me with the insight that “social equity trumps private equity”. “I’d rather have a million friends than $10 million in capital,” @garyvee says. Seeing this with Twitter-era eyes, I don’t necessarily need them to be friends as much as I need them feeding the intake valves of my social filters so that the great ideas find me. Go long serendipity.

The 2009 plan to start down this road is simply:

• Contribute one thoughtful comment per day.
• Construct one reasoned blog post per week.
• Make one insightful tweet per day.
• Write one review (book, movie, tech) per month.

Invest in “Too Small to Fail”

Howard Lindzon said it best: I am TOO small to FAIL!

Being too small to fail means staying lean, not overcommitting, focusing on skills, finding efficiency of purpose, and looking for the highest return with what you have on hand and can build with your own hands. And in 2009, it also means survival, developing options and thinking about alternate income streams.

This is an ongoing process, and to be agile will require adjusting what it means to be too small to fail throughout the year. But for starters:

• Get something in the iPhone App Store.
• Follow through on a couple of StockTwits oriented projects I have in mind.

In terms of writing an iPhone app, I have no idea yet how much of a commitment it will take to complete even a simple one. If it’s on the order of a few hundred hours of spare time, I could pull it off. More than that, then it shifts more towards personal needs.

The StockTwits idea is simple (if not dull): make one trade a week based on ideas gleaned from StockTwits, and transparently document and blog the results. StockTwits seems to be proving its value to daytraders and swingtraders; this project would seek to answer the question of whether it can be used for gain by someone who can’t sit in front of a trading app during market hours. I have a chunk of my too small to fail portfolio to use for this purpose—with the extreme volatility of the last three months, I’ve managed to increase this small amount significantly, with some small props to StockTwits for help and ideas.

At scale, prognostication is a con game, and while we kid ourselves that the social filter makes finding gurus easier, simple probability says that in a million-voice field of 50/50 pickers, there’ll be one voice that through nothing more than luck hits 20 in a row, and there’ll be thirty who are sitting on 15-trade winning streaks on luck alone. What does that leave us with? The lesson is not to look at trades, but to look for ideas, the serendipitous connection that pushes you closer to your goals, whatever they are.

So in 2009, I’m going long serendipity, building social capital, developing skills and staying too small to fail.

(photos used via CC:SA licensing from William Hook and Lisa Brewster)