CASE STUDIES

One of the primary goals at Ascend Financial Education is to help investors safeguard against downside risk. The following are three actual examples where such protection would have prevented significant losses actually suffered by the individual trader.

 

CASE STUDY: WALTER ENERGY (WLT)

Retail Investor X made a lot of money trading coal stocks. One of his favorite coal stocks happened to be Walter Energy (WLT). In fact, he developed an emotional attachment to the stock and even held some of the stock riding it up to $130 per share in July, 2011. A year later (March, 2012), he decided to buy more of the stock at $55. The stock continued to decline and he had opportunities to trim or close his position in the $40-$50 range.

Instead he decided to hold his position (ignore his loss) since prior times his stocks always "came back" given the strong bull market. Unfortunately, even if the stock was one of the strongest in the group... the industry backdrop completely shifted and the stock declined to $1.75 by December, 2014. He should have spent more time researching and understanding company and industry fundamentals and set risk management.

 

CASE STUDY: SOLAR CITY (SCTY)

Hedge fund portfolio manager Y of a newer, small hedge fund conducted extensive proprietary fundamental research on Solar City (SCTY). In September, 2013, after thorough research and analysis of the stock and the industry, the fund decided to short SCTY at $34. The short position was the fund's highest conviction trade ide.

As a result of over looking mechanical factors such as the small float size and high short interest, the fund ended up being forced out of the trade a few months later in November, 2013 as the stock squeezed shorts and moved up to over $60.

By overlooking market mechanics, and not having risk management in place, the fund lost close to 80% in the stock within in a 2 month period. As is the case with many good investors, in the end his idea was right but his timing and risk management was faulty.

 

CASE STUDY: BREIBURN ENERGY PARTNERS (BBEP)

Investor Z bought Breiburn Energy Partners (BBEP) and several other energy MLPs based on the investment's high yield and consistent dividend payouts. In August 2014, BBEP was trading at $24. The investor understood fundamental research and kept BBEP because over 50% of the MLP's oil was hedged (locked in) at much higher prices. Further, management reassured investors that the dividend would remain intact.

Investor Z had a strong conviction that oil's decline would be temporary given worldwide growth and demand. Instead of taking a loss, he kept buying more for the value and yield. Unfortunately, the investor blew up and gave up 10 years of investment gains as MLPs kept declining and BBEP ended up worth only .34 as of April 2016.

Investor Z made the common retail investor mistake of adding to a losing position and "catching a falling knife" on apparent value. He failed to realize that anything is possible with stocks and did not apply the principle that risk management is always paramount.

 

 

 

 

Learn more about our financial courses or one of our upcoming seminar events:

Eventscourses

HAVE ANY QUESTIONS?    Call us at: (973) 906-8784

Go to top