Greed: Anatomy of A Trade – Vringo Meta Post Edition

I guess I should write another post about Vringo, since the stock has gone bonkers over the last 24 hours.  Warning: this will not be a post arguing about  VRNG’s valuation – it’s a post about my own trading mentality/philosophy/psychology.

In my prior posts on Vringo, I wasn’t trying to convince anyone to buy or sell shares of Vringo ($VRNG: long), and I want it to be clear that I am still not doing anything of the sort – let’s get that out of the way.

I also never really got explicit with what my thesis for Vringo was, other than to disclose that I was long the stock.   A few people asked me what my logic was, and my reply was quite honest:  “I think I will be able to sell the stock to someone else at a higher price.”  I didn’t mean that in a wise-ass manner, what I meant is that I thought that there would be an opportunity to capitalize on hype/hope/optimism.   Contrast my reply with the possible reply “I think the stock is worth a lot more than it’s currently trading at.”

Anyway, yesterday’s news was that Google’s motion for summary judgment was denied, and that the judge ordered the parties to attend settlement talks on October 9th.  Now, I *thought* that the market had expected the motion for summary judgement to be denied.   Numerous lawyers also tell me that, although we all know that the judge cannot force the parties to settle, such orders for settlement talks are reasonably standard given the summary judgment denial.  So that shouldn’t really be a shocker either.   That leaves me sitting here wondering: “what changed?”

Well, the stock is up 75% since the news broke (let’s call it $ 3.00 to $ 5.25), so either

1) my assumption that the market had expected summary judgment to be denied was incorrect,

2) buyers of VRNG have gone crazy, or

3) although settlement negotiation orders from the judge are relatively standard, the odds of a settlement  of some sorts are now significantly higher.

I think the truth lies somewhere in a combination of #1 and #3, with a small dose of #2 thrown in there for good measure.   I’m not exactly sure how the odds of a settlement can increase dramatically if nothing of note really changed (ie, if we really DID expect SJ to be denied, and settlement negotiations really ARE the standard logical following from that), so at least part of one of my assumptions is clearly wrong.  Let’s move on.

I want to try to enunciate my own risk management of positions like this.   Unfortunately, I don’t have a lot of experience managing positions where I have massive gains over very short time periods like this.   I was long Barnes & Noble ($BKS) back in May when Microsoft ($MSFT – no positions) announced an investment in the company, and I managed to liquidate my position in the early morning for a 100% overnight gain:  that was easy: SOLD TO YOU, SUCKA.   Vringo is not quite so easy: I don’t think this is a STYS (that’s “Sold To You Sucka,” in case it’s not obvious) and yet, I need to get back to why I was in the stock in the first place:  hype/hope/optimism is currently in viral mode.   That was my thesis.  So should I sell?

I’m not asking the audience for answers here – in fact, I don’t WANT your answers: I don’t want this comment thread to turn into a Yahoo Message Board forum of people pumping VRNG and others bashing it (although from what I’ve seen on the Stocktwits stream, sentiment seems to be at ludicrously bullish levels – that’s another red flag for me, and something I find terrifying.   The presence of at least some bearish users on the stream would make me more bullish…).  I don’t want your opinion on how much the stock is worth in a settlement scenario – believe me, I’ve considered all of that, and it’s not what I want to discuss here.  I want to talk about some basic trading rules that I’ve already written posts about.

My Rule #2 was “Know Why You’re In A Trade.”   I’ve already explained why I was in this trade initially: I didn’t view VRNG as a core value long position that I was going to put away for my possible-future-grandchildren’s IRA accounts to hold for 50 years.  I viewed it as a trading vehicle that I’d have the opportunity to sell for a profit.  Well that opportunity is certainly here, right?   I mentioned to some colleagues this morning, “If you had asked me last week, when $VRNG was languishing at $3, if I’d be willing to sell my shares for $5.25 next week, I would have said “YES!” before the words were even out of your mouth.”   That’s an important psychological train of thought to realize, especially since I tried to take some time earlier in this very post to explain that I don’t think there has been any earth-shaking news in VRNG that has changed my assessment of the “value” in their shares to the extent that the stock price has jumped.   What I’m trying to do here is give an honest, accurate evaluation of my own past and present thoughts on the position – if that makes any sense.

So the long-story-short version is: I didn’t sell my position.   Well, I sold about 20% of it so far, but I’m holding 80%.  Why?  Well this is what worries me: I worry that the answer is GREED.   Greed kills in the market.  There’s an old saying:  bulls make money, bears make money, but pigs get slaughtered.  I am introspective enough to admit that greed is a factor in my trade management, which scares me.   On the other hand, I can also “convince” myself that the story for VRNG has indeed changed with this new news, and that the stock definitely has more value now, and that I should hold for either 1) higher stock prices based on legitimate value or 2) higher stock prices based on MORE HYPE TO COME!   Again, introspectively, I’m cognizant of the dangers of “thesis-drift,” or “thesis-fitting,” where one morphs his trading thesis to fit the current news situation.

My Trading Rule #6 was “Have a plan.”   This is of course very much intertwined with Rule #2 – one’s plan is related to why one is in a position.  As I mentioned above, I think if I was being honest, my “plan” was that I’d be selling a lot more of my position at current prices than I have actually sold.   My “plan” then, must have changed – and again, I am honest enough with my own trade analysis to know that although I can certainly try to convince myself that there are many reasons that the stock is going to continue to go higher, a key factor is still greed, which usually doesn’t end well.

Not knowing when to take profits on a huge winning position is a fantastic problem to have, but it’s also an opportunity for a trader to evaluate his own trading process.   It’s not an easy thing to do, but being aware of when you are drifting from your thesis and when you are letting greed drive your strategy can, I think, only help in the long run.


my prior posts on Vringo

Rule #2: Know Why You’re In A Trade

Rule #6:  Have a Plan


Disclosure:  I am long $BKS – I had liquidate my entire position in May, and began repurchasing a small position last month.  I am long $VRNG.    It is quite  likely that I will be buying or selling shares of VRNG over the next several days.

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