September 25, 2008

Making (pretend) money on troubled banks on UpDown

Disclaimer: Short term trading of stocks is very risky and you could lose all your money. Short term trading of banks and financial institutions right now with real money is virtually insane. I would not do this with real money and I'm only doing it on UpDown for entertainment sake. DO NOT TRY THIS AT HOME.

In my last update on my UpDown investing I mentioned that I'd bought some Fannie May (FNM), Washington Mutual (WM) and Lehman Bros (LEH). I put $30k into the 3 stocks. I was basically just gambling with these trades. I figured that the stocks were trading very low and that at least one of them would recover or get bought out and then go up enough to make the purchases pay off.

My original purchase on Sept 9th was:
1000 shares of LEH @ $4 = $4100
20,000 shares of FNM @ $1.03 = $20700
2000 shares of WM @ $3.25 = $6600
Total investment of $31,400

Initially the bet didn't pay off. Lehman went under and the stock dropped down to next to nothing and was delisted by UpDown. Fannie May dropped to less than 50¢ last week. I was down about $14,000 or about 45% loss in about a week. At that point I figured I'd made a very bad bet. I wasn't sure if Fannie May would recover at all and it was possible WaMu could go under as well.

But this week after the government announced the proposed $700B buyout Fannie May has recovered significantly. Last Friday FNM was trading around $0.75 level. But by Tuesday it has passed $1 and Wednesday it hit over $1.9 at one point. Then on Thursday it had hit well over $2.50 I had a limit order in place to sell 10,000 shares of FNM once it hit $1.40 which executed at $1.83. And once I saw that FNM had gone up so much I decided to cash in some more and set a couple more orders and ended up selling it all as it continued to go up.

My sales have been:

LEH 1000 @ 0.13 = $130
9/23 FNM 10,000 @ $1.83 = $18200
9/24 FNM 5000 @ 1.91 = $9450
9/24 FNM 2500 @ $1.89 = $4625
9/24 FNM 1250 @ 1.79 = $2137
9/24 WM 1000 @ 2.54 = $2440
9/25 FNM 1250 @ 2.08 = $2500

Total sales $39,482

Plus I'm also holding :
WM 1000 @ $2.02 = $2020

So right now I'm ahead $8,082 in cash from my initial $31,400 and I've got another $2,020 in Wamu stock. The stock I'm holding may very well lose most or all of its value so I'm not counting on that gain. But from this little experience I've all ready cashed in a +25% gain on my investment in a 2 week period. But remember that at one point I was down about -45%.

While this kind of thing is entertaining to do with play money this is not something you should do as an investment strategy. If you want to put money into the stock market you should only do so if you plan on keeping the money there for the long term. Very short term trading like I've done here is essentially just a form of gambling.

There are some legitimate bargains in the stock markets right now. If you want to invest in a good stock look for something with strong financials that is undervalued or put your money into an index fund.

(images from Yahoo finance)

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