Thursday, June 14, 2007

MVIS and Black Swans

Well first off I took out $2500.00 from the account to pay for a nice vacation at the beach, coming up in July. I believe that Stockalicious will keep my YTD gains the same, even though I withdrew cash. Just in case you cared, or were paying attention.

Of course the other reason the account took a hit today was because of the MVIS retracement. Fully 25% of my portfolio is in MVIS. There has been plenty to say across the blogosphere about MVIS, and many have differing opinions on what the future holds for the company. Obviously, I believe the company will make-good on their promises. However, when one holds 25% of portfolio value in one position, there are some risks, not to mention the volatility when the position retraces (like today). One must understand the risks and be able to stomach the volatility. When considering risk, Black Swan type events must be considered. A Black Swan is an event that cannot be planned for and is one that typically is completely unexpected. Some might call it a worst-case scenario. However, Black Swan events can also be positive. How does this apply to MVIS? First of all, lets consider a worst-case scenario type event. Now by the nature of a Black Swan, it is difficult to predict what the event might be. Lets say for Microvision that the Black Swan is that a competitor (previously unknown to the market) is able to produce a better PicoP type projector, and is able to get it to market and land the big contract with Nokia, Motorola, etc. For this illustration, lets say that it drives MVIS stock down to $1.00 a share. Where the stock would actually trade during this type of event is hard to say, but I believe the company has enough products in the pipeline that it would still receive some value by the market. For my portfolio, in this type of event, I would lose $4.30/share, which would cost me $25,800. This would put my portfolio value at $87,106, and at a loss of 16K for the year, and roughly 15% down. Knowing this may allow you to consider my weighting of MVIS differently. I could easily weather a worst-case scenario Black Swan, and still live to trade the very next day.

Many writers will only mention the worst-case scenario Black Swan and do not like to mention that Black Swans can also be positive. Best-case Black Swans can often be a new, disruptive technology. It may be a development which suddenly frees the world from reliance on fossil fuels, or it may be the development of a full-color laser projector which turns the average cell phone into a full-fledged media player. In this example, I am of course considering that MVIS's technology could be disruptive, and could present to the cell phone, video game, automobile, and aerospace industries a Black Swan.

Now lets consider that the positive Black Swan occurs. MVIS finds itself in contracts with Sony, Nokia, NASA, the U.S. Military, and GM. (Before you chuckle, MVIS has signed agreements with 2 of the 5 aforementioned industries). To stay conservative, lets say the stock goes to $10.00/share. Again, I'm being conservative. I now make $4.70/share, or $28,200.00. My account swells to roughly $141,000.00, giving me a percentage gain of almost 40%.

You do the math. 15% loss vs. 40% gain. That is almost a 3 to 1 reward to risk.

I normally avoid being rude or crass on my own blog, but I'll tell you, you've got to have balls for this folks, and a desire, above all else, to be rich. Many can lay around wondering what if. Many can live their lives in fear of what might happen. Me- I live my life in fear of two things: that I will never be filthy rich, and that I miss out on a great exciting life because I allow fear to control me.

If I have time tonight, I'll update the blog as to what trading I did. SWHC reported numbers AHs, and they look great. The stock is trading up nicely. Unfortunately my shares will get called from me tomorrow.

15 comments:

idlesin said...

Excellent post!

Caffeinated said...

Black Swan events can also be inspiration for excellent money management posts. Thanks Wood.

Woodshedder said...

Thanks cafe. You still in Hans I guess? I'm still waiting for a re-entry.

Jeffrey said...

Great post Woody.

Caffeinated said...

GS upgrades HANS, up $1.3 AH.

downtowntrader said...

What beach are you headed to? I'm headed for a couple beach getaways soon. One in late June and the other after July 4th.

Joey

Woodshedder said...

You are kidding me cafe! That is great news for HANS longs. I only wish I would have acted today! Ahhh there is always tomorrow. Did I mention I was stopped out .10cents from the low on the big dump several days ago? Damn!

Woodshedder said...

Joey, Folly Beach, S.C. My old stomping grounds, treasure of my youth. Where are you heading?

Cruxmonger said...

HANS to the sky. I'm talking like Heaven.

Broker A said...

Someone needs to "Black Hawk" Ducati.

Brent said...

That Ducati sure is a good "certified patent valuator", yesereeee Bob..!! Classic.

CNL said...

Shedder...great post. You wouldnt believe me if I told you what percentage of my portfolio is in MVIS or how many shares I control through my combined options. But if MVIS tanks I will survive since I am young have a lucrative job and am single.

Woodshedder said...

thanks CNL.

While the constant doom and gloom from the MVIS haters gets tiresome, we should always be aware of what the worst-case scenario would do to our capital. Unfortunately, the nature of a Black Swan is that a true event of that type cannot be understood until it happens, which makes it almost impossible to plan for.

Those traders who have blown up and lost everything have typically refused to acknowledge that a worst case scenario could happen. Once traders acknowledge the possibility and examine the effect it would have on their portfolio, they have gone a long way towards preparing themselves for such an event.

downtowntrader said...

I'm staying in Florida. Marco Island (west coast) and Highland Beach (east coast).

Joey

Bill said...

I call positive extreme events "golden swans." Search the blog for my post on them.