In one 24 hour period my entire net worth vanished due to a bad trade (Part 2).
- Jun 17, 2005
- admin
- Investing
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Note to readers: In this short-term series I share events that
actually took place in my life that had a huge impact in how
I invest.
The names of people/places/things have been changed for obvious
reasons.
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TIME AND PLACE:
XYZ Brokerage Company on corner of Wall Street and Water Street
in New York City, 1992.
CAST OF CHARACTERS:
Dr. Bob Johnston (“Doc”), Chief Technical Analyst & Retired Doctor
Jay Livingstone, Senior Vice President of Investments
Bob Billings, Founder and CEO of XYZ Brokerage Company.
Mark Garrenz, Equity Trader
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
The date was Monday, November 23rd 1992. Thanksgiving Week.
Wall Street was a ghost town.
Frank D., a tailor who would sold custom fitted suits and dress
shirts at all of the major firms always told me that the only people
who went to work on Holiday weeks were people who wore dress
shirts that had pen pockets.
I looked at him as if he was crazy. What he told me next was even
more bizarre.
It seems that Frank had conducted a career experiment during his
20 years as a tailor on Wall Street.
According to him, Wall Streeters who bought dress shirts from him
WITH PEN POCKETS in the breast were “order takers.” Frank claimed
that people with Pen Pockets carried pens and were therefore called
on by their bosses to take orders and write notes.
On the other hand, people who wore shirts without pen pockets were
order givers, or the big bosses.
Frank went on to say that he never came to the Street around holiday
time because shirts with pen pockets were less expensive then their
pocketless brethren and Frank didn’t want to waste his time
selling clothing to order takers.
According to him he was looking for long-term business and people
that bought pocketless shirts always had a higher career trajectory
than people who didn’t.
When he first told me this I laughed at him. I was sure it was just
a salespitch to get me to spend up.
But to hedge my bets I bought one pocketless “order giver” shirt.
And on that particular Monday I strolled into the office in my brand
new shirt, that Frank had delivered the day before.
I might not have been a boss but I showed up ready for business.
As soon as I walked in I glanced at my pocketed brethren – four
other rookie brokers who were sitting around chatting it up.
I smiled at them and made my way to the trading desk to make sure
that there was a trader present. Thankfully there was.
As I said earlier I had business to do.
As I had mentioned to you last week, our Chief Technical Analyst,
Dr. Bob Johnston (“Doc”), had told me about a stock he loved
the Friday before.
The name of the company was Comptronix.
In his presentation to the firm he highlighted his investment
philosophy brilliantly by telling the salesforce that the stock
had all the characteristics of a real winner:
1. A Strong Chart: The price of the stock had been in a tight
trading range for a year and was now “breaking out” on heavy volume.
2. Good Fundamentals: Doc reasoned that the reason the stock
was breaking out for the company was because sales and earnings
exploded over the prior quarter.
Now you have to remember – Doc was a technical analyst. He made
investment decisions based on stock charts and price/volume
movement.
Although fundamental analysis played a role in his analysis, it
was a small role. Doc reasoned that stock charts FOLLOWED
fundamentals, so if a stock were moving higher it was likely due to
the fact that the fundamentals were strong.
In other words Doc believed, as do most technical analysts, that
you don’t need to study the fundamentals of a company. Because the
action of the stock price told you everything you needed to know
about the fundamentals.
Of course I couldn’t argue. I had just gotten my first job and I
barely knew the difference between a “10-Q” and a “10-K.”
What I did know was that Doc was worth – by some estimates – close
to $100 million dollars.
I knew that Doc had shorted the entire stock market in the weeks
proceeding the 1987 crash.
I knew that on regular days Doc wore a $75,000 Patek Phillipe
watch. On days when he would have to go to a bad neighborhood,
Doc wore his $10,000 Cartier.
In short, I knew Doc understood how to make money. Real money.
Far more money than I ever thought about.
That’s why I had spent the entire weekend studying Doc’s favorite
stock, Comptronix.
I checked the chart. I read all the news I could find.
Everything looked golden.
And then on Sunday I went through my bank account and savings
and took a long, hard look at all the assets I had to my name.
I had about $120,000 in cash. I don’t come from a wealthy family
or anything. I had just saved my whole life and was saving almost
everything I earned from my new job.
Since Comptronix was selling for roughly $22 per share I knew that
I could comfortably buy 5,000 shares and have a little cushion
left over.
My thinking was simple: If Doc was right, as I believed he was, than
why not take full advantage of it?
If I believe him to be right than why waste time with 500 or 1,000
shares. If somebody is right they are right – the size of the
trade is irrelevant.
Wouldn’t it be a sin if I didn’t take advantage of this wonderful
information at my disposal?
So on that very Monday I walked in – pocketless shirt and all – with
the intention of buying 5,000 shares of Comptronix.
But there was one catch. I was getting married in roughly six months.
And although my fiance and I weren’t technically married, we knew
what each other had in the bank and if I lost 90% of my money than
that would be a problem when we sat down to buy our first apartment.
Nothing I couldn’t handle I thought to myself.
By the time I left work that Monday I was the proud owner of 5,000
shares of Comptronix at roughly $22 per share.
On Tuesday the stock was .50 cents higher. That night I decided that
I could take the rest of the week off.
Why not? I was well on my way to becoming a player.
As long as I live, I’ll never forget what happened next.
When I came in the following Monday – the first day back after
the Thanksgiving weekend – I sat at my desk and read the news
as I ate my breakfast.
Suddenly, something on the quote machine caught my eye.
It was Comptronix.
But instead of selling for $22.50 per share, the quote machine
said “$2.50” per share.
Two dollars and fifty cents per shate? There must be a mistake.
I though there was a problem with my machine.
I went to the trading desk. They had access to pre-market trading
and news that I didn’t have on my machine.
It wasn’t long before I realized that I had been duped – shareholders
of Comptronix were the victums of accounting fraud.
Accounting fraud.
I lost 90% of my entire investment that morning.
I’ll never forget the feeling I had. I actually wanted to reverse
the trade. For some reason, I felt shocked that the trade was
so final. It was utterly bizarre.
Next week I’ll discuss what I learned, how I recovered and how
I broke the news to my fiance!
(Continued next week)……
–Dylan Jovine