My adventure with a New York Broker (NYB) part 2


 

...a continuation from part 1

Since my track record with stocks was decidedly 'met some expectations' (that's a Boeing inside joke for 'below average'), I listened to Bob's pitch. Over several weeks, he shared with me the stocks that he was currently looking at, sort of 'freebie teasers'. He liked Verizon (VZ), because they were going to finally get the iPhone and the stock should run on that news. I made about 10% on that one. He liked Star Scientific / Cigarex (CIGX) for the products and research they had. I momentum traded that several times, making decent money most times, losing once or twice. He liked Wendy's (WEN) based on some merger rumors. I made about 10% on that one. He also encouraged me to buy more GNBT, the reason he contacted me in the first place. That one has gone down and stayed down.

Since Bob was doing better than I had been on my own, I was persuaded to convert some of my winnings into an account with him. The initial investment was TriQuint Semiconductor (TQNT).

30 days or so into my official broker relationship with Bob, he calls me to tell me that he has jumped ship from his old brokerage house to a new and better one; wouldn't I like to come along for the ride? Oh by the way, this new company has a former major banking CEO, a 'dark lord of the financial crisis' on the payroll. This should pave the way for even better research and hotter tips.

At this point (both before and after our formal relationship), Bob has been 'more good than bad' for me, and I'm intrigued to continue and maybe 'make some real money.' 10% gains (with the occasional loser) is not too shabby if your trading costs are minimal. What I'm just figuring out in hindsight is that with 3% commissions (usually buying *and* selling) as part of the mix, suddenly it starts to look like the game is rigged towards the house.

Transferring my account to Bob's new 'house', we closed out my position in TQNT for a gain of 15% or so after commissions. From there, we went into Valence Technology (VLNC). We stayed there for not quite two weeks, making a small gain that covered the commissions.

From VLNC, Bob moved me into NetEase (NTES). But here's a new wrinkle: Bob thought I needed a little leverage in order to take my gains to the next level. Not hugely leveraged, just about 50% more than I had in the account. I have never used leverage before, and frankly I was a little worried. Then again, this sort of 'sophistication' is why I was playing with an NYB to begin with. Of course *this* is the first trade with Bob that went south. We sold a month later at a 10% loss. (Hey, Bob gave me a break on that commission, chopping it back to 2%.)

Next Bob decided to move me into options. Options are more uncharted territory for me, but again, I'm all about learning and letting my NYB put me into the things that are going to be 'right' for me. Oh yeah, at this point I had to send him a small check just to 'round up' my balance to something he could buy options with. We bought Apple (APPL), on the theory that the iPad was setting the world on fire (and it was). Bought the Feb 19 '320s' for 17.79 and sold them a month later for 21.20. Seems like a tidy profit, huh? But wait, the commissions are higher on options so I netted about 10%.

From there, we continued the options run with Agrium (AGU). Bought the Apr 16 '95s' at $5.80. The option price then promptly began to fall, until two weeks later it was trading at about half that. Starting to notice a trend (losses outpacing wins, with house 'friction' eating my lunch), I really questioned my sanity for ever playing with a NYB. About that time, Bob called me and told me this would be a great time to pick up a bunch more of the Apr 16 '95s', as they were now selling so cheap. I was a little short with him, telling him that not only was my liquidity pretty tight (tax season), but that I had no intention of sending good money after bad.

The options for AGU did in fact come back up, and I sold them a few weeks later for $6.40. Again, seems like a fair trade, but after commissions I had a net *loss* of a few bucks! Bob calls me with the lifetime NYB quote:

From there, Bob continued riffing on options, this time with Itron, Inc. (ITRI). We bought the Mar 19 '65s' for $1.95 and watched them just decay away to nothing. As my buddy Genei says, 'The great thing about options is you can only lose 100%.'

At this point, my account balance with my NYB, Bob, is about zero. We don't talk for about six weeks. Then he calls me up after the 'Japan thing' (earthquake / tsunami). Bob says this has the market trading sideways; Google (GOOG) is sort of a metaphor for the market, and it will bounce back. It's just the sort of 'story' I've always liked: the recognition that a stock is unfairly beaten down, and I can make money off of it just because I'm smart enough to see it. I send Bob a check, and he puts me in Jun 18 '585s' for $26.10. You've heard this one before: faded to nothing. 100% loss.

Bob called me after that and we had a few minutes of mutual profanity (I'm not offended by this, I once worked on the docks) wherein he tells me they have fired their 'options guy' and it will never happen again. We haven't really spoken since, and I haven't sent him any more of my money.

If you've read this far, you might think I'm bitter, or that I think Bob is a bad guy. I'm not, and I don't. I have been schooled. Bob was entertaining to work with, and this whole 'investing as gambling' thing is exciting and seductive. I have come to realize that 'the house always gets its cut' (duh) in the form of commissions (I should state that I use the term 'commissions' as a catch-all for all fees associated with trading; for all I know Bob would say that part of it is due to the custodian charges).

I ponder whether my 'problem' is that my account was small enough that commissions just ate my lunch, if somehow larger sums would make the commissions seem small in comparison. And then I type this out and laugh out loud. I'm still a dreamer.

Is there a silver lining in this cloud? It was just the 2% of the portfolio that was play money. No actual life events (like retirement at 55) have been threatened by this little adventure down the rabbit hole. I now return to my boring investment strategy wiser, if not sadder. Thanks for reading.

"We turn your money and our experience into our money and your experience."

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