Navigating Thru a Trading Fiasco

By: Michael Dawson
Submitted: 2007-01-17 16:17:39
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Two weeks ago the Canadian government announced that it was imposing a new tax on income trusts. This announcement shocked the market and sent the Toronto Stock Exchange S&P/TSX composite index spiraling down 2.4% for the day. To put that in US terms that was the equivalent to a 300 point drop in the DOW. Billions of dollars were lost by this announcement.

Unfortunately I had recently taken a position in Enerplus Resources (ERF) the granddaddy of income trusts. It was the first Canadian oil and gas trust formed in 1986. Over the past five years, while the DOW was returning peanuts, its return was over 200%. It has a 9% yield and pays a monthly dividend like clock work. The plan was for it to become the anchor stock in an income oriented portfolio that I am building. As I have mentioned numerous times, to be successful in this market you need to be either a trader or a dollar-cost averager. Most will be far more successful as a dollar-cost averager. I have written many articles on the topic on this site. I make use both styles, but primarily I am a trader.

On the day of the announcement, ERF dropped 14%. That might have been the largest one day drop that I have experienced in a stock. If it is not the largest - it is definitely in the top two or three. Here are the comments from one mutual fund manager, “There is a knee-jerk reaction out there. You got a lot of mutual funds that might be experiencing cash-ins because the media headlines make the masses want to liquidate at whatever the cost.” Based on his comments, I would presume that he was advising his clients not to sell. I have been caught in downdrafts such as this before. So, I was a seller.

Seven days afer the infamous announcement, the calm mutual fund manager’s clients are down an additional 10.5%. As a trader, I don’t rationalize over this or that - I react. Perseverance of capital is my number one priority. Although my intent was to become a long term investor growing old collecting dividends, STUFF happened and my plans were changed. Many will say, that if it is such a great stock it will come back. My answer is maybe. Not everyone sold seven days ago and have since suffered an additional 10.5% loss. So, now every time ERF advances a few points it will be faced with enormous selling pressure. Those trapped will want out. ERF could be dead money for awhile. Additionally, there is an opportunity cost of being stuck in a stock after such a calamity. Your money could be put to use in another stock as opposed to languishing in ERF waiting for it to come back. So, the next day I put some of the money to use into another to stock Hud Bay Minerals (HBM).

Refer to HBM.TO's chart of my site.

Over the past seven days HBM has gone up 1.9% versus -10.5% for ERF. Making this a double win. I have recovered some of the loss and avoided an additional loss. Many would have listened to the broker and held on. Although my original intent was to be a long term investor in ERF, I realize that preservation of capital trumps intent. This was not my first rodeo, so I sold and moved on.

Refer to ERF'sChart on my site

About the Author

Michael Dawson recently said goodbye to a 20 year career in Engineering, Marketing and Sales to focus on living his dream of financial independence. He has since founded The Time and Money Group as vehicle to encourage others to do the same. The company's mantra is "Why trade time for money ... when you can have both." Sign up for their free weekly newsletter, where he and others discuss the different paths to financial freedom and offer insights for your successful navigation.

http://www.thetimeandmoneygroup.com

Make sure to read one of Dawson's most popular articles: "Saying Good-Bye to the Time for Money Swap"

Article source: Expert Articles

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