Confessions Of A Recovering Trader

I did a bad thing.

I acted on an impulse and bought shares of a stock that wouldn't pass DivGro's selection criteria. In fact, I looked at the stock chart and based on what I saw, I decided to buy shares worth more than double the amount I usually spend on buys.

Before founding DivGro in January 2013 and subscribing to the philosophy of dividend growth investing, I was an avid trader. I looked at technicals and ignored fundamentals. I studied stock charts and trends, trying to determine the best entry points and looking for patterns that would suggest future price action.

In my days as a trader, I would often recognize or talk about stock tickers without even knowing the name of the company behind the ticker! Like most technical traders, I believed there was no reason to analyze a company's fundamentals because the stock price accounted for all that data. And charts told the complete story!

I used trend lines, channels, support and resistance, and volume analysis to confirm trends and chart patterns. I learned to recognize patterns like head and shoulders, cup and handles, double bottoms and tops, triangles, flags and pennants, and various types of gaps. I used several different moving averages to identify current trends and trend reversals, and certain indicators to form buy and sell signals.

While I was quite successful as a trader, the busyness of trading and the associated stress started to take its toll. I slowly started to broaden my horizons, first by reading more widely about fundamental analysis and value investing, then honing in on dividend and dividend growth investing (DGI).

At the end of 2012, inspired by several dividend growth investing blogs, I decided to create my own dividend growth portfolio and to share my thoughts in an accompanying blog while managing the portfolio. My first post on 10 January 2013 announced DivGro to the world and the rest, as they say, is history!

So what is this bad thing I did?

One of the weaker picks I've made for DivGro is PennantPark Investment Corporation (PNNT), a business development company focused on generating current income and capital appreciation through debt and equity investments. PNNT invests primarily in middle-market companies in the United States, through senior secured loans, mezzanine debt, and equity investments. 

I bought 215 shares of PNNT on 10 September 2013 at $11.63 per share, arguing that this Dividend Challenger with its 6-year streak of dividend increases was significantly discounted to my fair value estimate. The company paid dividends of 28¢ per quarter, so initial yield on cost (YoC) was a whopping 9.63%. 

Unfortunately, PNNT froze its dividend right when I bought my shares. Rather than sell the shares, I argued that for such a high yield, I could afford to take on more risk. Looking back, there's no doubt in my mind that I fell for the high yield. At about 10%, the dividend yield was exceptionally high and I should have looked harder at the sources of payment behind the dividend, the profitability of the company's business model, and the safety and sustainability of the dividend.

Not long after I bought the shares (red dot in the chart below), PNNT's share price started to decline, dropping all the way to $4.65 in January 2016:

Looking back at my monthly review for January 2016, I notice that PNNT's total returns were down 30%, despite receiving $602 in dividends from the company:

I considered cutting my losses on PNNT on several occasions, but taking such a big loss would have been rather painful.

After reaching the low point of $4.65, the share price started to recover – to my delight – and the recovery seems to be continuing unabatedly! The stock is up 28% year to date!

Of course, full recovery to my entry at $11.64 is still a very long way away... PNNT now trades for $7.89 per share, or $3.74 below my entry price!

And here is where my past as a trader entered the fray. Desiring to accelerate the recovery and based purely on the recent trend, I bought more shares of PNNT:

18 July 2016: Bought 785 shares of PNNT at $7.22 per share

Since PNNT still pays a dividend of 28¢ per share, my initial YoC for this buy is 15.51% and the average cost basis of the 1,000 PNNT shares is $8.17. The buy added $879.20 to DivGro's projected annual dividend income. 

Here's an updated chart with my new entry point (the green dot) and the average cost basis (magenta line) indicated:

And here is a snapshot of my PNNT position as of 28 August 2016. Total returns are now in positive territory due to dividends totaling $722. At $7.89, PNNT's current share price is still a little below my average cost basis of $8.17:

So, there you have it... I'm confessing to having done a very un-DGI-like thing. I bought more shares of a company that would not pass my selection criteria!

I'm taking a chance, a calculated risk. I'm hoping PNNT's share price continues to trend up. I hoping the company continues to pay rather than cut its dividend. I hoping the stock's 14% yield doesn't turn out to be a sucker's yield – at least not before I hit my average cost basis at $8.17...

If this trade pays off, I'll be satisfied but still a little ashamed that I've allowed my trader's past to usurp my investor's present, if only temporarily.

If it does not pay off, I'll learn a dear lesson and have a laugh about it all...

Either way, I'll sell my shares of PNNT soon, hopefully at or above $8.17 and hopefully before PNNT decides to cut the dividend.

It took me a while to own up and write this confessional and now I can carry on being the dividend growth investor I know I can be!

Happy investing and don't do what I did!

Thanks for reading! I hoped you enjoyed this article. Feel free to confess your own little transgression below (if you have any!). Or give me words of encouragement never to do such a bad thing again :-)