Of RIM Blackberry, Value Investing and Leverage

I am sure you read of longest ever worldwide Blackberry network outage last week. The three-day blackout interrupted email and Internet services for tens of millions of frustrated users and inflicted more damage on an already tarnished brand. It is definitely threatening to cost the granddaddy of all smartphones more business when it's already struggling to keep up in a crowded marketplace. Even for many Blackberry loyalists, this could be the straw that broke the camel's back.

BlackBerrys get their email through RIM's centralized setup, allowing the company to offer a high level of security. But when something goes wrong, it affects millions of people at the same time. Blackouts are not localized to one company or one carrier, as other outages are.

When I read this, I personally feel the sentiment - no, I have never used any Blackberry but my relationships with RIM stocks had been turbulent to say the least.

When I first delved into the world of stock investing, value investing is only belief I held on. It still is, but that's just one among the many things in my list. 

In June 2010, when I bought the stocks, it is a value stock for long term holdings, whichever angle you look at it. Balance sheets are solid, and cash flow's strong. The intrinsic value is there, and it was truly undervalued at its price then. The technical analysis for entry is all in the right places. 

In its heydays before 2008 market crash, its market price was hovering at $ 130+. It is an unmistakable bargain at $ 60+ - huge one.

However, what I, and as many people, failed to see is the rapidly declining market share in the smartphone market one quarter after another. It is currently at a beaten down price of $ 22+

Steve Jobs said you cannot connect the dots looking forward, but in this case, we too, could not connect the dots looking backwards!

I sold my RIM portfolio exactly 1 year after I bought it. Right after the quarterly earnings in June 2011 to be precise. Even then, I was losing more than 30 bucks per share, or about 57% of the cost. It was not a great feeling, but in share market investing, we will all come to realize that faith and hopes will bring you disappointment. By the way, if you were in my position, don't lose any sleep over this because there are more important things in life.

I didn't do panic selling. However, I took quite a huge risk and leveraged my RIM holdings by purchasing put options shortly before the earnings D-day, having picked up tips from my mentor. This is in spite of the rising Implied Volatility as it approaches earnings announcement, which rendered options to be priced higher. Not for the faint-hearted :)

That has enabled me to recoup most of the losses incurred when the options went from out of the money to deep in the money. How deep? An unbelievable 20% stock price drop in one single day. For put options, the gain is a few hundreds of percent.

What would you have done differently if you were in my shoes? Have you made a wrong entry buying the wrong stock, and end up having unrealized loss but finally made a comeback?

Note: This post is a contradictory article to a simplified personal finance concept. I don't usually blog about stocks investments; these are not the domains of a man in the street. Foreign stock market investment takes a lot of time and effort; and currency exchange risks are something one must be able to stomach. Very taxing for anyone with a day job unless you are a fund manager or investment banker.