A Kodak Moment

Shares of Kodak soared more than 2,700% from July 27 to July 30. If you had a crystal ball or insider information, you could have turned $100,000 into $2.7 million as the stock rose from $2.13 to $60. The average trading volume for Kodak (KODK) for the past five years has been 481,000 shares. Two days before shares of Kodak climbed sharply, 284 million shares changed hands.

KODK_chart

The price of Kodak soared because they received a $765 million loan under the Defense Production Act so it can begin producing pharmaceutical ingredients.[1] I had no idea they manufactured drugs. Oh, and on the day before Kodak announced its deal, the board of directors awarded its chairman 1.75 million shares of company stock.[2]

Eastman Kodak was founded in 1888, 132 years ago, primarily to produce film for cameras. Eastman Kodak was a powerhouse, a blue-chip. They were added to the Dow Jones Industrial Average in 1930, where it remained for seventy-four years. Eastman Kodak was part of the nifty-fifty, a group of high-flying growth stocks, during the 1960s and 1970s, along with Bristol-Myers, Coca-Cola, GE, IBM, Pepsi, Pfizer, Sears, and Xerox. In 2012, Kodak declared bankruptcy, and one year later, they emerged from bankruptcy protection, a different company to focus on five divisions: print systems, enterprise inkjet systems, micro 3D printing and packaging, software and solutions, and consumer and film.[3] Pharmaceutical manufacturing is not one of their stated divisions.

My first photography class was in 8th grade. I borrowed my aunt’s 35 millimeter Pentax camera for a school project. I went to Thrifty’s Drug Store to purchase a roll of black and white film. When I finished my project, I dropped off the film at the drive-up Kodak kiosk in the mall parking lot. I returned a few days later to pick up my pictures – a few I still have today. When I became a stockbroker in the early 90s, Kodak (EK) was one of the first companies I purchased. It was going to be a cornerstone of my portfolio because of their growth prospects and dividend yield.

The recent move in Kodak shares may tempt you to hunt for undeveloped stocks in hopes of quick riches. Before you take the plunge and start buying low-priced, speculative stocks, here are a few suggestions to help you avoid some common mistakes.

  • Greed. Since peaking at $60, Kodak stock has dropped 72% to $17.05. The stock remains volatile as speculators try to trade around the news and catch another shooting star. I believe most traders will eventually lose money on this stock as greed attracts speculators like a moth to a flame.
  • Diversify. If you plan to purchase companies trading below $5, buy hundreds of them because most of them will lose money. If you can find one Kodak, among 99 losers, you’ll make money. According to YCharts, 2,826 companies are trading between $1 and $5 per share, so choose wisely. Spread your bets around the table.
  • Limit your speculative capital investment to 3% to 5% of your taxable trading account assets If you plan to purchase stocks below $5. If your account balance is $100,000, then your speculative trading pool will be $3,000 to $5,000.
  • Margin. Day traders try to amplify their gains by purchasing stocks on margin. My recommendation is to avoid margin entirely, but if you must use it, limit your debit balance to 10% of your trading account value.
  • Using options to leverage your gains on low-priced stocks is not recommended because an option is a wasting asset. Professional options traders will increase the implied volatility on options contracts for speculative stocks like Kodak, making them very expensive. For example, the implied volatility for Kodak’s August 21 call option with a strike price of 15 is 300, meaning option traders expect the shares to move up, or down, by 18.8% daily. By comparison, McDonald’s implied volatility is 21, or 14 times less volatile than Kodak.
  • Nimble. If you’re one of the lucky ones to buy a low-priced stock before it takes off, enjoy the ride. If possible, sell enough shares to cover your original cost and let the remainder run so you can play with the house’s money. However, if the stock starts to fall, cut your losses and move to a new idea.

Kodak was a juggernaut, generating more than $10 billion in sales in 1981, employing more than 120,000 at its peak, and producing 50 million Instamatic cameras between 1963 and 1970.[4] However, it lost its way, and it’s now trying to rebrand itself – again. I don’t know how Kodak’s deal will develop, so tread lightly and be careful.

Nostalgia often leads to idle speculation. ~ J. Paul Getty

August 4, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

 

[1] https://finance.yahoo.com/news/kodak-stock-skyrockets-deal-drug-200548406.html?.tsrc=rss, By Michelle Jones, July 29, 2020

[2] https://www.cnbc.com/2020/08/01/eastman-kodaks-top-executive-reportedly-got-trump-deal-windfall-on-an-understanding.html, Reuters, August 1, 2020.

[3] https://en.wikipedia.org/wiki/Kodak, Website accessed August 3, 2020

[4] https://theweek.com/articles/481308/rise-fall-kodak-by-numbers, The Week Staff, October 3, 2011. Website accessed August 3, 2020

Did You Miss the Rebound?

The first few minutes of a flight are exhilarating as the pilot throttles the plane down the runway and points its nose heavenward. A stock market recovery is fast and furious, particularly after a steep drop. If you miss the start of a recovery, you will forego substantial gains. From the March 23 low, the Dow Jones, S&P 500, and NASDAQ have climbed substantially. The NASDAQ is up 57% while the S&P 500 and Dow Jones have risen more than 45%.

^IXIC_^SPX_^DJI_chart (1)

Did you miss the rebound? Is it too late to get back in the market? If you liquidated your portfolio in March, should you now repurchase your stock holdings? If you’re still standing on the tarmac looking up at a soaring stock market, you can take comfort in knowing that the Dow Jones and S&P 500 are down to flat on the year.

^SPX_^DJI_chart

Outside of large-cap technology stocks, most sectors are performing poorly this year. Small-cap stocks, international companies, and real estate holdings are trading in negative territory. Small-cap and real estate stocks are down more than 14% for the year.

^MSEM_^SML_^MSEAFE_^SPCSERES_chart

Despite the recent rally, it’s not too late to invest in the markets, especially if you purchase a diversified portfolio of funds. It doesn’t make sense to time the market if you own a basket of funds because you will always have some sectors trading up and others trading down. It’s better to stay fully invested so you can take advantage of the long-term trend of the markets. You will miss opportunities if you regularly buy and sell your investments.

Also, markets move. Today’s winner could be tomorrow’s loser. As I mentioned, large-cap technology stocks are outperforming most sectors this year, but it hasn’t always been the case. From 2000 to 2010 the NASDAQ lost 44% while emerging markets rose 102% and small-caps were up 68%.

^IXIC_^SML_^MSEM_chart

According to Dimensional Fund Advisors, a 60% stock and 40% bond portfolio has generated an average annual return of 8.97% since 1926. A moderately balanced portfolio of stocks and bonds has weathered 94 years of booms, busts, wars, pandemics, corrections, depressions, and recessions. And, for the brave who refuse to sell, it has produced generational wealth. A one-dollar investment in 1926 is now worth $3,350. Of course, 94 years is a long time, so what has it done lately?[1]

A Dimensional 60/40 model is up 6.36% for the year and more than 16% for the past twelve months. For the past three, five, and ten years, it has returned more than 10% per year.  On a rolling ten-year calendar, the model has never lost money. The best ten-year performance for this model started in 1982, averaging more than 17.5% per year. The worst decade started in 1929, generating a gain of .21% per year.[2]

Rather than trying to time the market, focus on your financial plan and your personal goals. A portfolio that you own for decades based on your goals will yield better results than attempting to buy at the bottom or sell at the top.

Let time in the markets work for you and your family.

“Time is free, but it’s priceless. You can’t own it, but you can use it. You can’t keep it, but you can spend it. Once you’ve lost it, you can never get it back.” Harvey Mackay

July 21, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

[1] https://returnsweb.dimensional.com/, data ending 6/30/2020. The 60/40 index consists of the S&P 500 and long-term government bonds

[2] Ibid

I’m the Captain Now

A high-profile internet celebrity is leading a legion of day-traders with his antics. He recently said, “I’m the captain now,” and referred to Warren Buffett as an idiot.[1] Yesterday on CNBC, he said he had generated returns of 400% after “catching on” to trading.[2] Day traders have moved from gambling on sports to trading in bankrupt companies like Hertz and Chesapeake Energy.  Should you follow this Pied Piper?

Day trading is complicated. If it were easy, everybody would be doing it. It’s my understanding that “the captain” is worth more than $115 million, and he is trading with about $3 million, or 2.6% of his net worth, so he can afford to lose 100% of his capital. He can afford to swim in the deep end of the pool without fear. Several years ago, a client was investing in trust deeds by lending money to people who couldn’t borrow from traditional resources like banks or credit unions. He was a multi-millionaire, and he could afford to lose a few thousand dollars if his borrowers defaulted on their loans. A relative of his wanted to follow his investment strategy, but she couldn’t afford to lose any money. Her net worth was in the low thousands, so if she lost a portion of her assets, it would be catastrophic.

Despite the worst economic data since the Great Depression, day traders are partying like it’s 1999. They appear to be making a killing by trading stocks and ETFs like Hertz, American Airlines, Luckin Coffee, and the JETS ETF. Their portal of choice is Robinhood, where traders can execute their orders sans commissions.

Here are a few tips if you want to start day trading.

  • Have a plan. Work on your entry and exit points. Know what you’re going to do before you start trading. Identify a few stocks and get to know their trading patterns – as best you can.
  • Only invest with money you can afford to lose. If you can lose 100% of your trading capital, and still support yourself and your family, then give it a shot. Limit your speculative trading to 3% to 5% of your investment capital.
  • Only trade in your taxable investment account so you can write off your losses. Do not day trade in your retirement accounts.
  • Do not borrow money to trade. Avoid margin. Leverage is your friend when stocks rise; it is the enemy when they fall. Your account can go negative if you employ too much margin – meaning if you borrow money and you lose it all, you may owe your brokerage account money because of your deficit.
  • Take your gains. If you’re successful, ring the register to lock in your profits. Yes, you should let your winners run, but if you’re trading in bankrupt securities and you make 20%, 50%, 100%, or more, take your profits off the table.
  • Cut your losses. If you’re losing money, cut your losses and sell your stocks so you can live to see another day. Try to limit your downside to 7% to 10% per trade.
  • Inform your spouse, loved one, or significant other that you’re about to embark on a trading journey. Let them know you will be speculating with a portion of their treasure. It’s better to inform them from the beginning that you may lose significant amounts of money. In this case, it is better to ask for permission than it is to beg for forgiveness.

In 1999, the NASDAQ soared 85%; by October 2002, it fell 77%, and it would take seventeen years for the index to reclaim its previous high. The severity of the drop and the prolonged drifting in the market wiped out a generation of day traders. As one speculator said, “I never did make any money out of that,” he admits. “I’m just not able to make it work. It’s harder than it looks.”[3]

Captain Phillips is a movie about a small group of Somali pirates who hijack the Maersk Alabama. When the lead pirate makes his way to the bridge, he looks Captain Phillips in the eye and says, “I’m the captain now.” As the movie ends, “the captain” was arrested by the US Navy, and the Seal snipers eliminated his associates. It didn’t work out for the pirates because they bit off more than they could chew, and they didn’t have a plan.

I’m sure there are successful day traders, but they almost certainly do it for a living, it’s their 9 to 5 job. And, if they have figured out day trading, they’re probably living on a private island somewhere in the pacific.

Happy Trading

“In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” ~ Benjamin Graham

June 16, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and are not suitable for every investor.

 

 

 

[1] https://www.thewealthadvisor.com/article/warren-buffett-idiot-says-investor-who-claims-daytrading-easiest-game-ive-ever-played, The Wealth Advisor, June 10, 2020

[2] https://www.youtube.com/watch?v=Q0t_7R2sv4w, website accessed

[3] https://money.cnn.com/2000/08/09/investing/q_daytradewhere/, August 9, 2000