Monday, July 17, 2006

playing with fun money, my pains with Shanda Interactive SNDA and my exit strategy

I recently read a posting at my money blog regarding a fun money accont.
Specifically, he mentions, an account with some money set aside for active trading.
MyMoney also asks about limits to the fun money account, mentioning $50 per month or 5% of net worth.

These are my thoughts:

Principles: more and more I am uncomfortable with direct equity investing and am moving toward index investing, especially for large cap. I am increasingly curious about small cap value opportunities domestically and internationally.

Despite my intellectual developments, I have still felt the need to play with a small amount of equity investing, mostly overseas.

In terms of how much to invest in a play money account. My thoughts are to keep it fairly small. I consider it more of an educational investment, rather than a significant part of my retirement. To this end, I don't think it should even be 5% of networth - imagine how many people have seen their networth increase due to their homes appreciating (homes they own). I would limit fun money to 5% of their liquid investible assets.

I would not use retirement fund money. Several commentors did mention they are using it. And if you will sell frequently, it certainly has the advantage of differing capital gains, however, I'm somewhat conservative and would like to see my retirement money protected from experiments and learnings. If I'm going to put money at risk (compared to placing it in broad indexes or in a life cycle fund -- I put mine in Schwab's 2040 lifecycle fund SWERX and recently in another lifecycle fund offered in a company 401k), I think it should be money that I can afford to lose. I don't want to lose the tax deferred advantage of a retirement account. If that money is lost, I can't put new money into it (above and beyond my planned annual contribution).

Preferential tax treatment for retirement is more important than saving capital gains on a small percentage of my investment assets.

To that effect, I invest my fun money in an after tax account.

My first investment was in Shanda Interactive. SNDA. What a disaster! In my analysis I had looked at the immense popularity of on-line gaming in the states and read about it in China. I was also aware of the incredible profits they were making and commanding presence in there local market. Finally I was looking for an opportunity to benefit from the eventual increase in Chinese currency (in response to American and other foreign political pressures).

What a mistake!
  • The Chinese government did not strenghten their currency in a substantial manner and has only committed to very modest increases.
  • Shanda's initial investors unloaded at the mid to high 30s massive volumes of stock driving the price radically lower (now between 12 and 14 for their ADRs)
  • In the face of exceedingly strong competition (the World of Warcraft took off in China and has helped pressure Shanda in the market, especially in light of their aging product offerings) Shanda radically changed their revenue model, offering their games for free making money from the sale of in-game upgrades
  • Shanda's forays into home internet gaming appliances and pc media integration are exciting, but do not seem to have impacted their financials

My $11k investment has shrunk to almost $4300. A true disaster. Most of the decline occurred when the initial investors flooded the market with their holdings - what an interesting lesson to learn.

My take aways:

  1. Even for fun money, try to play broad indexes or mutual funds to minimize the risk or bad luck that comes from the vagaries of fortune with individual stocks
  2. For recent IPOs, see if it's possible to learn when investors with liquidity restrictions are permitted to sell their stocks
  3. Even if you're going to invest money, don't concentrate too much into a single stock, diversify into at least four or five.

Action plan:

  1. I'll probably sell a portion of my Shanda investment, about $2100 - $2200 (what was originally about $5k). I'll be able to use the capital loss to offset other investment capital gains this year and I think I can convert $3k of the capital loss against my actual income (returning about $42% of it).
  2. My second position in Shanda, I'll hold for another 9 to 12 months and see if the stock improves - they do have a good story. If not, I'll sell it next year and take the $3k capital loss against capital gains or income as in #1.
  3. I'm interested in buying into overseas investments, perhaps in India (IIF, IFN), Russia / Eastern Europe (RNE, TRF). Recent political instability has really hit many of the emerging market equities very hard. I'm not sure yet about investing in China. I'd like to be there, but am put off heavily by the immense corruption built into so many of the state businesses and former state businesses - especially in light of the bad loans so many of their large banks made. I'm also curious about the new Deutsche Bank ETF based on fundamental valuation FDV. It uses the Deutsche Bank Croci US+ Index, which is an enhanced index based on fundamental equity valuation - different than the typical size of equity used in most index funds. You can read more about it in this article by Lawrence Carrel. In order to have sufficient funds, I'll probably need to kick in some extra cash from savings - this is a decision I'll have to act cautiously upon in light of upcoming expenses.
  4. Investigate the above funds carefully, compare to competitors
  5. Sell Shanda
  6. Add cash if needed to afford minimums.
  7. Invest in at least two of the funds

I'll inform you on my progress.

I'd be grateful if anyone would share their thoughts on this approach and my potential investments.

Have a great week,



Dude said...

It appears that you equity investments are holding up well according to the June 30th update. Curious are you in fixed rate investments or equity for your retirement and brokerage accounts.

My equity idex funds have suffered but given overall market conditions, I'm confident it will bounce back and then some with the fullness of time. The only concern is the length of the fullness of time.

makingourway said...

Great comment, Apollo!

I'm mostly in equities.
The majority of my retirement savings are in SWERX - schwab's 2040 life cycle fund. I'm playing it conservative with my retirement funding.
Accoring to morningstar it's 81% in equities, 12% in bonds and the rest in cash and other investments.
I have quite a bit of money (about $78k) tied up in insurance related investments, some are whole life while others are variable policies). They tend to lag market trends and will probably deliver unpleasant results this month.
One note, schwab's SWERX did make a fantastic recover near the very end of June when it looked like the Fed had licked inflation.
I think my overall fixed income investment total is less than 18%.
I agree with you about seeing a rebound, eventually the indexes will come back. I'm a bit concerned about long term large equity growth in the US - especially after reading Bernstein's analysis, however, I think tax changes regarding dividends occurred after he wrote the book - I wonder how lower dividend taxes would effect his assumptions?

Right now I'm considering putting more money into the market, however, I do have a family health matter that may be quite costly, so it's tempering my urges.

At the very least I'm probably going to sell some SNDA (enough to take about a $3k capital loss and leave me with a bit over $2k to invest). I will also consider selling some of my Russell 3000 index. The SNDA proceeds will be used to by Russia or India ETFs or funds while the Russell 3000 proceeds will be used to buy the Deutsche Bank ETF mentioned in the article -- assuming I have enough cash to meet their minimums.

Hope all is well and am looking forward to more postings in your excellent blog - how is the return to civilian life?


mOOm said...

My guideline now for individual stocks (nto counting closed end funds and similar investments) is now 1-2% of net worth per stock. I have few, as there is little reason to think I am better at picking these stocks than fund managers can. I would look really at solid companies whose price is at a bargain level for whatever reason. Currently I own two telecoms - one someone recommended - one pays high dividends and is beaten down now though but I originally bought at the IPO of a subsidary that they acquired and three health related firms that I reckon shouldn't be negatively impacted by recession and have had for a long time - bought when they seemed cheap. One did very well (Ansell) but again bashed recently but don't see reason to sell now.

For short term trading I am entirely based now on ETFs (QQQQ, GLD etc.). Too much risk in individual company stocks for that purpose. My edge is in technical analysis and maybe in picking fund managers.