Friday File: Catching up with that “Motley Fool Conviction Buy”, plus thoughts on AIG and Berkshire

Checking in on that "like buying Amazon" stock, plus some updates on insurance stocks in my portfolio

By Travis Johnson, Stock Gumshoe, March 31, 2017

have an example of a crazy return in my portfolio this week, and it’s getting close to the time that I have to make a decision about it. My remaining position in Shopify (SHOP) April Call Options, on which I’ve already taken a profit in excess of my initial investment, was glowing on my spreadsheet as a 1,000% gainer earlier in the week (it’s down a bit from that now, but still).

That’s the kind of thing you could build a hype-filled newsletter ad around… just a few of those a year and soon your $5,000 turns into a million dollars! It’s so easy!

But, of course, most people, including me, don’t want to take those kinds of chances with large sums of money — and we know that such short-term gains come only with extremely high risk of loss. When I bought those SHOP options last Summer, I thought the growth rate was such that the options were underpriced… a rise of 50% in the shares was not a shocking notion for a small cap with strong underlying growth and a lot of attention from the Motley Fool and others, so betting on a rise from the low $40s to $60 over more than six months was worth the risk (the options cost about $1 a share). But there was also much more than a 50/50 chance that those options would be worth zero if SHOP reported just one bad quarter, so the bet has to be small enough to absorb a 100% loss without gnashing of teeth.

And even a month ago, I certainly had no conviction that SHOP would continue rising rapidly after their earnings release — I took profits on some of my options contracts after the last earnings report, because selling a little more than half of my position meant I was guaranteed at least a small profit on the overall investment… conceptually, that takes the remaining options down to having a cost basis of zero, and I can risk zero all day long for the chance of higher returns.

So I can in no way take credit for saying that I knew SHOP would be near $70 by this week… but I left myself open for that possibility, regardless of how crazy SHOP’s valuation now looks, because small and scalable growth companies often get crazy-looking valuations, and the difference between trading ...

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