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,

makingourway