It was luck more than timing for me in October. I needed to sell something because I had decided to buy some stock in Netflix (NFLX). I looked over my portfolio and decided that my 100 shares of 3D Systems (DDD) stock had already made me a tidy profit. I had purchased my shares at $16 and they had gone up to $19. Mind you, I think 3D Systems will go to $25 someday, based on past performance, but past performance is no guarantee of future performance and all that jazz. More importantly I needed some cash if I wanted to buy Netflix.
Also, even if 3D Systems did go to $25 then that was an additional profit of 32% or so. However Netflix in late October was priced around $75, and I thought it could go to $180. That would be a profit of 140%, and a potential profit of 140% beats a potential profit of 32% all to pieces.
I decided to take the win. I sold my 3D Systems stock at $19 per share on the 26th of October. I bought 24 shares of Netflix at $80.14. I wanted to buy 25 shares at $75, but it was already on its way back up, so I decided to do 24 shares at the higher price, instead.
It turns out I could have waited. We'll get to that in a second. First let me tell what happened to 3D Systems' stock. It fell. On the 28th of October, just a couple days after I sold, it suddenly fell, closing at $16.20. Over time it fell even more for a while. I had gotten out just in time. I can't tell you why it fell. Press releases, internet chatter, and company reports look just as good before the fall as after. It may have simply been the market being weird. I don't know. Sometimes good timing is just luck.
Good timing is also paying attention, though. I kept watching the 3D Systems stock. I watched it fall and eventually I bought again. I still believe in 3D Systems, and I know a bargain when I see one. I bought 100 shares again, this time at $15.50. As of this writing it is flirting with a price of $19 again, so I'm likely to profit from that trade a second time. That said, I have no plans to sell it just now, unless I see something else I really want to buy, at a price I want to pay for it.
My point is this: Timing is everything, even if it's just lucky timing.
My timing was adequately lucky with Netflix. As stated above, I purchased 24 shares at $80.14. Immediately afterward the stock continued its climb, and I felt ever-so clever. It got up into the $92 range within a week of my purchase. Had I sold at $92 then that would have been a nice 15% profit for a week's worth of investment.
I didn't sell, though. My theory on Netflix was that it would climb to $180 or so. So I held on to it.
And then it began to fall again. And fall. And fall. Four weeks after my purchase it closed under $64. Had I waited, I could have bought 30 shares at $64 each.
Here's the thing, though: When a stock is falling, you have no idea where it's going to hit bottom. With the benefit of hindsight I can now say that I should have waited and bought 30 shares at $64, or even that I should have sold at $92 and then turned around and bought more than 30 shares at $64, but that's looking back from now. From then, as it fell and fell and fell down past $64, I was mostly just kicking myself for being in such a hurry to buy at $80. I didn't once think about commiting more money and buying more shares at $64. I didn't know when it was going to hit bottom. It was entirely possible that it would keep going below $64 just like it had passed $80, and $75, and $70 on its way down. No sir, there was no way I was buying until it was on its way back up.
Hindsight is a wonderful thing, but unless you've got a time machine it's pretty much useless.
Well, Netflix is on its way back up. In fact, Netflix has been hanging out above that $92 mark again. Maybe now I should sell. Or maybe now I should hold on to it. I do think it will go up, maybe even to $180, still. That said, I don't think I want to buy more right now. If it goes below $75 again then maybe I'll sell my 3D Systems stock in order to buy some more Netflix. Maybe not. It all depends on what is at what price when.
My point, still, is that it's all about timing. It's all about buying low and selling high. Nowhere in this column have I discussed Netflix's fundamentals, or what caused all of its massive fluctuations. The fact is the market is going to fluctuate, and individual stocks are what make it fluctuate. The best we can do, as individual investors, is try to figure out the range in which a stock will fluctuate, and then take advantage of its movements within that range. Maybe I'm wrong about the upper end of Netflix's new range, and it will fluctuate between $64 and $100 for a while. If so, I can still make some money off of that. The only thing I don't know for sure is when it will be up and when it will be down.
This brings me back around to a stock I mentioned at the end of my previous column: MIND CTI Ltd (MNDO). This stock pays a nice dividend, and pays it annually. This last fact - the annual payment of dividend - lets us know that investors will be buying the stock (driving the price up in the process) as that annual dividend date approaches. We know, that is, when it will be up. Or, at least, when it will probably be up.
This is a good time to introduce my loyal reader(s?) to Dividend.com. Dividend.com is a website that tracks dividend-paying stocks and gives investors like us a few vital pieces of information. For MIND CTI, for instance, Dividend.com shows us that the dividend last year was $0.32 per share, that the dividend was declared on 2/16/2011, that the ex-dividend date was 2/24/2011, that the record date was 2/28/2011, and that the pay date was 3/21/2011.
What's with all the dates? I really should have gone over all this in my post on the subject of dividends last week. Oh well, we're here now. Let's break it down.
The declare date is pretty straightforward. On February 16th the company announced all the rest of the information. They declared what the dividend per share would be, when it would be paid, and to who.
Obviously the pay date is when the dividend is paid. The other dates are what determines who gets paid.
The ex-dividend date is the last date an investor can buy the stock and get paid the dividend.
The record date is the date an investor has to be holding the stock in order to get paid the dividend.
So. In order to collect last year's dividend, an investor in MIND CTI needed to buy the stock no later than 2/24/2011 and hold onto the stock through 2/28/2011. If an investor sold the stock on March 1st then they'd still get paid the dividend, but if an investor sold the stock on Friday the 25th of February, 2011 then that investor would get no dividend.
This last I don't completely understand. For instance, if someone sold the stock on Friday the 25th then who does get the dividend? Does anyone? Whoever owned the stock when the markets closed on 2/24 gets the dividend, unless he sells the stock on the 25th, in which case that seller doesn't get it, but neither does the buyer, because the buyer didn't own the stock on the 24th. So does the company just keep the money? I have no idea.
The only reason I bring up all these confusing dates is this: It might be interesting to see what happened to MIND CTI stock between and around all of these dates. Let's have a look at the Google Finance graph for MIND CTI for the last year and a half or so.
It looks kind of like a bell curve. In late 2010 the price was very low - under $2.00 - but then at the end of October 2010 it suddenly shoots up to almost $2.50, and then generally trends upward until the mid-February. Between February 11th and 18th it has another very steep spike upward, closing over $3.40 on the 18th, just after the declare date, but before the ex-dividend date.
That's all pretty straightforward. It makes sense that investors would let the stock languish for most of the year, then start buying as the dividend gets closer and closer. It also makes sense that the stock would fall after the record date. During March the stock dipped below $3.00, briefly.
What's kind of weird is the way the stock leaps back up after the dividend is paid. You'd think it would fall immediately, but instead it rises for a while before it begins its yearly fall. I think this second rise is explained by dividend reinvestment.
I own MIND CTI now, but it's the second time I've owned it. I originally bought 300 shares in October 2010 for $1.86 each, for a total investment of $558.00. I held onto my shares through the declare date, the ex-dividend date, and even the pay date of 3/21/2011. Then, on 3/22/2011 there was an automatic flurry of activity in my TDAmeritrade account.
First, I received my dividend of $0.32 per share, which came out to $96.00.
MIND CTI is a foreign stock, though. It's an Israeli software company, and the Israeli government took a hefty 20% chunk of my dividend away. Fine. That also happened automatically, leaving me with a net dividend of $76.80. Still not bad at all.
But wait! There's more! I have dividend reinvestment in place on my TDAmeritrade accounts. This caused my net dividend of $76.80 to be spent on 24.774 shares of MIND CTI at that day's price of $3.10, with no additional fee. The upshot is that my investment of $558.00 back in October of 2010 left me (after all things dividend) with roughly 325 shares of MIND CTI. I then sold all of those shares in early April of 2011 at $3.36 per share for a total of $1,081.20. After I subtract my initial investment and my TDAmeritrade fees for my initial purchase and my final sale then I ended up with a net profit of $503.22, which is a 90% profit.
Sweet!
If my timing had been slightly better then I could have sold those 325 shares for $3.49 each, or maybe even $3.55 each. Still, my timing was pretty good. I'm not going to complain.
In fact, I'm so happy with how that all turned out that I'm trying to do it again, but bigger. In September of 2011 I bought 1,600 shares of MIND CTI at $1.85 each. I hope to sell these shares, plus any others I get from dividend reinvestment, for at least $3.50 each sometime in the next 3 months, if my timing is right. It's all about timing, and luck, and dividends in this case.
The fact is, this could also go horribly wrong. MIND CTI could announce that they're not paying a dividend this year, or that they're paying a much smaller dividend than last year. If that happens then the stock price, which has climbed up to $2.20, could nosedive to $1.75 or below.
If it does, maybe I'll buy more of it. That's a good price, assuming it pays a good dividend someday. We'll see.
Anyway, this same phenomenon - price fluctuation around dividend dates - can be applied to any dividend-paying stock, however it seems to work most profitably in a case like this one where the dividend is paid annually. Stocks that pay their dividends quarterly don't seem to fluctuate nearly as much. My best guess is that the window between a quarterly pay date and the next declare date is just too narrow to allow a stock to cut its price and half and then come back.
There are also many, many stocks that pay no dividend. They're still going to fluctuate a bit around annual reports and quarterly reports and opinions and news items. Needless to say, none of these things has quite the anchoring effect that a regular dividend does.
That said, next week I'll try to identify a fluctuation range for a stock that pays no dividend and, so far, doesn't seem to have a ceiling price: Amazon (AMZN).
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