Wall Street Journal Portfolio Trading Analysis Finance Essay - Free Essay Example

Upon being assigned the task of creating a personal investment portfolio using The Wall Street Journals online resources with a cash allotment of $1,000,000 in simulated money, I was instantly intimidated and concerned. I had no experience with investing and was absolutely made uncomfortable by the idea that 15% of my course grade would depend on my performance and analysis in this stock market simulation. Although I should have been a bit more relaxed given the fact that I have done quite well in my past finance courses, I still felt a certain level of uneasiness about actually trying to apply the theory to real practice. Nevertheless, armed with my new student Wall Street Journal subscription and the project guidelines, I made a strong effort at trying to navigate the craziness that comes with working to create a profitable investment portfolio, while also maintaining a passive investment strategy. My strategy choice resulted from my understanding of the efficient market hypothesis which implicates a passive strategy as the best option given the assumption that stock prices reflect all relevant information and that it may essentially be pointless to try to beat the market through stock analysis (Bodie, 233). Portfolio Construction Process After finally being able to set up my Wall Street Journal subscription on May 13th, I found myself perplexed as I had no idea of where to start when it came to choosing stocks. As a result, I spent the next couple of weeks reading the newspaper and browsing online resources in hopes of happening upon an epiphany of some sort that might steer me in the right direction. Despite my staying abreast of my classmates comments and trading suggestions, I was still utterly unsure of how to choose a winner. All the same, with my belief that nothing beats a failure but a try I had no choice but to go ahead and make my first transaction on May 28th as I had no more time to waste on stalling. At that time I settled on the idea that it would be best to choose stocks from companies that I recognized which were also performing well at that time. The list that I lined up consisted of: AutoZone Incorporated, Bank of America Corporation, Dollar General Corporation, Goldman Sachs Group Incorporated , US Airways Group Incorporated, Sprint Nextel Corporation, Vanguard REIT ETF, and Washington Post Company. Prior to my purchase of the aforementioned investments I located articles which indicated potential positive performance of these investments. With regards to Sprint Nextel Corp., on Friday, May 21st, The Wall Street Journal ran an article discussing the possibility that the Federal Communications Commission would likely be issuing new regulations in order to make the telecommunications market more competitive (Schatz, B2). Given that Sprint has recently lost market share to some of its larger rivals, such regulation would definitely be beneficial to the corporation since it could aid in giving it a new edge on the competition (Schatz, B2). Sprint has also recently engaged in a large advertising agenda having had numerous full-page ads in The Wall Street Journal and other publications. Such behavior would also indicate good news for the company as it can likely obtain more customers and possibly regain some of its lost market share through a big marketing campaign. As a result of this assessment, I felt it likely that Sprint would soon see a price increase as a result of such positive news. Likewise, for Goldman Sachs Group Inc., an article detailing the great performance of Accretive Health Inc.s initial public performance, which Goldman Sachs managed, also shed a bright light in this corporations direction (Cowan, C6). Much the same effect that a positive earnings report for a company might have, the aforementioned news of Goldman Sachs strong performance in managing Accretive Health should have also yielded an increase in the market value of Goldman Sachs stock (Cowan, C6). This great indication led me to want to invest in the corporation. In keeping in the financial realm, my choice to purchase stock in Bank of America came as a result of an article describing the corporations plans to sell stake in its private Brazilian bank, Itau Unibanco Holding SA (Jelmayer, C3). This move would allow Bank of America to increase its capital levels (Jelmayer, C3). Such a step is certainly beneficial since banks with higher levels of capital are less likely to fail in the event that it makes a few bad loans. With a better capital structure, the bank is also apt to gain more confidence from the public, especially in the wake of the recent financial crisis. This renewed confidence in Bank of America would also lead to a higher market value for its stock. Also taking into the account that Bank of America is a highly traded stock, this increase would also probably be reflected rather quickly, thus yielding a quick profit. Given the aforementioned, I decided that Bank of America was a good choice, even though it would also give my portfolio higher risk given that it would not add diversification since like Goldman Sachs, it too has a basis in the financial realm. In turning now to Dollar General, my choice to purchase its stock did not result from the reading of any one article. Instead the notion came from glimpsing what I deemed to be a rather favorable trend. In this trend, the corporations stock was listed (on more than three occasions prior to my finally making the purchase of it), among the New York Stock Exchanges list of stocks which had highs. Although in hindsight, my purchase timing may have been too late, given that I failed to consider that most things that go up will also eventually come back down. At that time however, I thought that I had made a fairly logical decision. Similar to my discovery of Dollar General, I also found US Airways Group listed among the percentage gainers and as such I decided to go ahead and purchase it as well. As it turns out, this decision was a lucrative one since this corporation was my only stock selection which afforded me a positive net gain at the completion of this portfolio assignment. The only other net gain achieved from my investment portfolio resulted from my purchase of shares in the Vanguard REIT ETF. This development was one that I found especially surprising since this exchange traded fund is one that consists of real estate, an industry that has not been incredibly well-off recently (Vanguard-Vanguard Fund). My initial purpose of making this investment was to add diversification to my portfolio, and given the fact that it earned me a profit when nearly all of the rest of my portfolio did not, lends to the idea that it was a good choice. Portfolio Performance Despite having what I deemed to be fairly sound rationale for my investment choices, after making the first transactions to set up my portfolio, I saw immediate losses on 50% of my investment choices. The outlook didnt get much better from there and just a quick glance at the graphical performance of my stock choices (found in the Graphical Representations) illustrates why. All stocks except for Goldman Sachs experienced major drops in market value before making slow rebounds. Rather than making a quick decline, Goldman Sachs descended slowly and doesnt appear to be rebounding any time in the near future. Figure 9 compares all of my portfolios investments to each other on a single graph. In reviewing it, it is quite obvious that the portfolio was not adequately diversified as most of the investments moved in step dropping and rising at nearly the same times, although not always to the same extent. In closing my portfolio I experienced a loss of $13,785. Throughout the performance o f the portfolio my highest overall gain was $1,210 from US Airways and my greatest overall loss was $8,060, resulting from my investment in Washington Post Company. Lessons Learned Given the immense deficit that I experienced as a result of my investment choices, I was able to take away a lot of lessons as a result of participating in this portfolio simulation. The first and possibly most important idea that I realized was the importance of detailed research. Reading a few articles and making sweeping assumptions does not guarantee that one will experience the return that they expect. I also learned that investing takes a lot of time, concentration, and patience. Especially given the volatile state of the stock market lately, having a tough skin and being able to quickly rebound from large losses is essential. After my first losses I quickly discovered that I didnt have the stomach to watch massive amounts of money swirl down the drain, whether real or simulated. I also felt pangs of buyers remorse, but instead of getting rid of some of my bad investments, I couldnt seem to let them go, instead preferring to hold on to this vague fantasy of a complete turnaro und possibly appearing out of nowhere. I also realized that there is no room for emotions when it comes to investing since most of my bad decisions resulted from emotions not based in logic or laced with concrete support. Additionally, I do feel that had I gotten started earlier, I may have had the opportunity to earn greater returns. In keeping on the topic of time, I also ascertained that a passive hold and wait strategy may not have been the best choice since there was simply not enough time to realistically expect high returns after holding the stocks for only a few days. If given the opportunity to do this project again after having taken this course, I would make a few simple changes which I feel could have really benefited me. I would make better use of the ratios that we learned which can indicate everything from liquidity to profitability. I would also have tried to more accurately diversify my portfolio such that I wouldnt have had such major losses. In engaging in this project prior to having learned all the topics covered in this course I truly feel like I was only able to scratch the surface of what it takes to be a good investor. While I realize that there are some changes that I could have definitely made to allow this project to go quite a bit a smoother, I do also feel that the makeup of the project itself could also be adjusted. A starting point or list of potential stock purchases to begin with would have been especially beneficial. Such an addition would certainly aid those students who, like me, may have also felt unprepared or lacking in direction. Nevertheless, I do recognize the value of being able to get hands-on experience as many times there is no better way to learn than by doing. As such, I truly feel that this project provided me with an experience that I wont soon forget, one that taught me volumes not only about investing, but also about myself. Figure 1: AutoZone Inc. Performance during Project Figure 2: Bank of Ame rica Corp. Performance during Project Figure 3: Dollar General Corp. Performance during Project Figure 4: Goldman Sachs Group Inc. Performance during Project Figure 5: US Airways Group Inc. Performance during Project Figure 6: Sprint Nextel Corp. Performance during Project Figure 7: Vanguard REIT ETF Performance during Project Figure 8: Washington Post Co. Performance during Project Figure 9: Entire Portfolio Performance during Project 5/13/2010 Cash $1,000,000.00 5/28/2010 AutoZone Inc. AZO US Stock Buy $191.92 500 $10.00 ($95,970.00) 5/28/2010 Bank of America Corp. BAC US Stock Buy $15.92 1,000.00 $10.00 ($15,930.00) 5/28/2010 Dollar General Corp. DG US Stock Buy $30.56 1,000.00 $10.00 ($30,570.00) 5/28/2010 Goldman Sachs Group Inc. GS US Stock Buy $144.81 500 $10.00 ($72,415.00) 5/28/2010 US Airways Group Inc. LCC US Stock Buy $8.70 1,000.00 $10.00 ($8,710.00) 5/28/2010 Sprint Nextel Corp. S US Stock Buy $5.21 1,000.00 $10.00 ($5,220.00) 5/28/2010 Vanguard REIT ETF VNQ US Stock Buy $49.67 1,000.00 $10.00 ($49,680.00) 5/28/2010 Washington Post Co. Cl B WPO US Stock Buy $467.30 500 $10.00 ($233,660.00) 6/11/2010 AutoZone Inc. AZO US Stock Sell $189.30 500 $10.00 $94,640.00 6/11/2010 Bank of America Corp. BAC US Stock Sell $15.60 1,000.00 $10.00 $15,590.00 6/11/2010 Dollar General Corp. DG US Stock Sell $29.97 1,000.00 $10.00 $29,960.00 6/11/2010 Goldman Sachs Group Inc. GS US Stock Sell $135.64 500 $10.00 $67,810.00 6/11/2010 US Airways Group Inc. LCC US Stock Sell $9.93 1,000.00 $10.00 $9,920.00 6/11/2010 Sprint Nextel Corp. S US Stock Sell $4.87 1,000.00 $10.00 $4,860.00 6/11/2010 Vanguard REIT ETF VNQ US Stock Sell $50.00 1,000.00 $10.00 $49,990.00 6/11/2010 Washington Post Co. Cl B WPO US Stock Sell $451.22 500 $10.00 $225,600.00Portfolio Transaction Listing