“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.

I bought a Kindle 2.0 because I wanted to buy a Kindle in October 2008, but decided that there were enough limitations (e.g., no fixed-width fonts, a killer for someone who codes, and form-factor issues) that I’d wait. But I was already sold. When the 2.0 pre-orders came out, I was all over it late that first day, and received mine at the end of February.

The first night, I downloaded a ton of free content. If you’re interested, there’s a whole slew of public domain books available that range from classics from Tolstoy, Dostoyevsky and Joseph Conrad, to the first book I read, “The Art of Money-Getting” by P.T. Barnum.

The Kindle changed the way I read.

Here are the surprises, the things that I didn’t really understand about the Kindle but that pleased me.

One-Click Buying

Amazon is reviled for its patent on one-click ordering, but the Kindle shows this power. I sat at my computer in the most frictionless environment possible, viewing free public domain books, and going through about 1000 in 30 minutes, picking around 20 which, with a single click each, I could have wirelessly delivered to my Kindle. Abstractly, I understood this. But I didn’t really get it until I suddenly had a huge amount of content freely available downloaded to the Kindle within seconds of being purchased on the computer.

I’ve long said that the genius of Amazon as a company is the mastery of distribution. If you don’t understand this, you don’t understand Amazon. It is the primary reason for the insane multiple. They will be bigger than Wal-Mart, and they will get a target on their back the size of Texas. They’re like Microsoft in 1994—set to explode, but with many formative decisions still in front of them. I only wish I could get Amazon Affiliate bucks on readers buying the stock, because that’s the real story here. But I tell you what: take the spare cash you have, that money you’ve been waiting to invest, and split it into two piles. One pile is a small one. $369 for the Kindle. The other pile is whatever your average position size is. Two-percent, five-percent, whatever. Split that in half, and put half in AMZN stock, and put the other half in about 6 months from now or if it dips into the 40s on market weakness (unlikely, given its recent strength). You’ll pay for this Kindle and the next version and the version after that and all the content you’ll buy for the next 5 years many times over.

One-Click Reading

Okay, but what about the device itself? The first Kindle had the aesthetics of a Russian space capsule console. Thick, non-Apple-like, bulky. The Kindle 2.0 is sleek. The buttons are clicky, solid-yet-tinny, but get the job done. You can read a freaking book with your thumb! I can’t overstate this power. Sure, no good for the bathtub, but who was time to read in the tub anymore? This is reading for the laziest of the lazy. You could be one of those 1017-pound dudes on the Discovery Channel who has to be chain-sawed out of his house and this could still change your life.

I’m a chronic no-bookmarker. The saving of context saves me the hassle of finding my place, or dog-earing, or sticking whatever scrap of paper that’s available in a book and having one of my kids yank it out anyway.

It’s Not All Good

Okay, now for the downsides.

Rendering of content that was designed for a fixed-width font or had long lines is problematic. If you’re a coder, this is an issue. But I’m a glass half-full kind of guy when it comes to Amazon, so I foresee a killer “programmer’s Kindle” eventually emerging on which you can have all essential programming documentation at your fingertips and easily accessible. It seems like such a natural evolution that I think the wise move is just to get the Kindle now, buy some stock, and use the winning proceeds in a couple of years to pay for the upgraded device. Reorientation of the display to landscape might help, but then the buttons would be in the wrong place.

The jog-stick sort of sucks. This could be smoother and faster, but it’s not critical. It’s your thumb that gets the workout. This is by and large a passive device, so optimizing for the core function—reading—is the right design decision now.

But It Still Kicks Butt

Joshua Schacter says that focused narrow experiences—basically, doing one thing and doing it well—is the hallmark of Web 2.0. Kindle is the first Web 2.0 device. It nails the e-reading niche and experience. It’s disrupting the publishing industry already.

The Future: Long AMZN

When I hand the Kindle to curious by-standers, the first thing that all of them do is try to navigate by touching the screen. So you see where this is going. A lot of people look at the release of an iPhone/iPod Touch Kindle reader as a repudiation of the device itself, but remember…if Apple comes out with a tablet, the thing’s going to not have the same dynamics as the Kindle. Why? First, the screen technology will be different. The e-ink of the Kindle allows for a lower-power smaller profile. Second, the Kindle OS must be incredibly simple; even the Mac OS draws a lot, and Microsoft? Please. But I get the sense that adding touch to the Kindle is several orders of magnitude easier to accomplish than it would be to slim down any of the tablet operating system candidates out there today (much less create one from scratch.) This combination of first-mover advantage, plus association with a distribution channel, plus being on the right side of the technology stack. Amazon just wins, plain and simple.

So I’ve either convinced you to buy a Kindle, or to invest in Amazon. Not sure which. But if you’re here because you’re more interested in the stock than in the device, let me offer some caveats. First, Amazon has been incredibly strong during the recent downturn in the market. While the overall market has been down 20% in 20 days or so, AMZN has been up. You could have bought it for as low as $48 during the last 90 days, and as low as $34 in the last four months. If, as I believe, all good companies must be made to suffer, particularly retail stocks, before this depression can end, you may have several opportunities to average down. I got in at $60, but that might end up being a trade rather than a 2-5 year investment. I would be backing up the truck if Amazon starts painting numbers in the 40s or 30s again, even if their revenue starts getting hurt. They will crush brick and mortar because they are not about selling things, they are about DISTRIBUTING things. That’s their DNA. If you don’t understand that, you don’t get them.

So that’s my rant. Buy a Kindle 2.0 for the Amazon love. And buy the stock. Your kids will thank you.

I’m dumping Google for Amazon in a couple of ways, and here’s why:

For the past year or so, I’ve had a Google AdSense block over there to the right. Not because I had illusions of making any money, but to get a sense for how it worked, and what typical click-through rates are on a personal blog. As the focus on my posts moved away from the Code and Literature of the blog’s tag line, and more to Money, the ads settled in on a bunch of penny stock pushers. No one clicked on anything anyway, and in the course of the experiment, I netted little more than a postage stamp’s worth of value.

Consequently, I’ve dumped the AdSense in the sidebar and limited my commercialization to book recommendations. For my kind of site, I think this works a lot better. And my decision to do so tells you something about the two companies.

Fat Head Aggregators vs the Filtered Long Tail

Currently I’m reading Howard Lindzon’s new book, The Wallstrip Edge (full review later, when I finish). I’m about 1/3rd of the way through the book, just past the part where he describes experiences in finding trends. And the trend I see here is not only relevant to monetization of blogs, but to the underlying stocks as well.

Google is great for monetizing commercial eyeballs. AdSense works not for the long tail, but for the “fat head” aggregators and ad farmers who can pull in 1M page views per month, or really narrow their focus to attracting search traffic on a topic rather than building an audience. Facebook’s click through rates, which are reported to be notoriously low (in the 0.04% range), in fact may be more typical than anyone wants to admit. Like so many of the faith-based schemes that have been exposed in the last year, AdSense profitability and conversion ratios seem to be overstated. Not good for the GOOG. A thesis I’m working on for a later post is that you can find things that are “too good to be true” and profit by avoiding them. As the web matures, I suspect that the AdSense ecosystem, which for much of the decade was too good to be true, will grow far less attractive monetization option.

Amazon, on the other hand, caters better to the long tail, to those finding trusted voices, and to those building audiences.

The trend I see (confirmed by observing the many-to-many relationships on Twitter, and by the dynamics of StockTwits as it relates to trend following is that repeated interactions lead to trust, and so much commerce—finding things, finding what you should be interested in, learning what’s best—are enabled and made more effective by the social filter. The actions taken due to these recommendations results in real commerce taking place; a “real” transaction occurs as opposed to a trivial payment for shifting attention.

Trust the Filter; Monetize the Trust

It’s no wonder that a trend rider like Howard is investing in StockTwits and Amazon; it’s a coherent theory that makes sense. Trust the filter; monetize the trust.

So I’m avoiding Google and looking to buy Amazon. Put another way (inspired by a line in Howard’s book), I’m more confident that Amazon is the next Amazon than I am that Google is the next Google.

Several times over the last seven years, I’ve purchased an AAPL product instead of buying the stock. Without fail, I would have been better off financially buying the stock rather than the device.

Tonight, I pre-ordered a Kindle 2.0 and the same effect may be at play, despite Amazon’s big run up since its lows.

The new Kindles aren’t available until the 24th, so that gives me a few more days to try to get back into my AMZN position that was called away at 50. The more I study Amazon, the more amazed I am at their strategy and coherency of vision.