In one 24 hour period my entire net worth vanished due to a bad trade (Part 3 of 3).
- Jun 24, 2005
- admin
- Investing
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Note to readers: In this 3-part 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
~~~~~~~~~~~~~~~~~~~~~~~~~PART III~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
The first lesson somebody who invests in the stockmarket for a
living learns is that the stockmarket does not suffer fools gladly.
Even more to the point: the stockmarket has made a good career
out of parting fools with their money with relative ease.
And let there be no mistake about it – I was a total fool when I
invested my entire net worth into Comptronix.
At 7 a.m. Monday morning I had almost my entire net worth invested
into 5,000 shares of Comptronix at roughly $22 per share.
What was worse was that I was 6 months away from getting married.
Normally that wouldn’t be a problem for a man in his early 20’s
who had a bright future on Wall Street ahead of him.
But I had to pay for the majority of my own wedding. In addition,
the $110,000 I had invested was going to be used to buy our
first apartment in the city.
What was even worse though was that my fiance’ didn’t know about it.
As far as she was concerned I had never made that trade.
Why didn’t I tell her? For two reasons really.
The first is that at the time, I didn’t understand what being
married really meant. Intellectually I knew it was a partnership.
But in practice, I rationalized that I was still “single” and I
was able to do whatever I wanted to do with my cash.
I earned it myself didn’t I? (I have learned much about life and
women since then).
The second reason I didn’t tell my fiance’ is a reason far too common
among Wall Street suckers – I thought it was a “sure” thing. I figured
that I would invest the $100,000 and by the time my fiance’
found out about it, it would be worth a cool $500,000.
(I would be lying to you if I didn’t say that I had visions of both
of us dancing on the French Riveria while she whispered into my ear
what a devilishley clever Wall Street player I was).
And why shouldn’t I be bullish?
I had been given the advice from the Chief Technical Analyst at the
firm and he had made millions investing in stocks just like this.
In fact, this was his current favorite. He told me that he planned
to load the boat up himself. How could I go wrong?
But it did go wrong – in the worst way.
As I mentioned to you last week I went into the trading room on
the Monday morning after Thanksgiving and found out – much to my
utter shock – that Comptronix was selling for roughly
$2.50 per share.
In one day it was down $20. The $110,000 I invested was worth
$10,000 – Just like that.
When my trader told me the news I didn’t believe him. I thought
he was playing a joke on me. But he wasn’t. So I went to every
trader in the room and looked on each and every one of their
machines.
They all said the same thing: Compronix had cooked the books.
The numbers for the past 3 years or so were wildly inflated.
The stock was down 90% before the open.
I was still in such shock that I went to almost every single quote
machine in the ENTIRE FIRM and checked them. They all said the
same thing.
Looking back, I remember thinking to myself, “I have to reverse
this trade. This just isn’t fair. Who do I call to change this.”
But there was nobody to call. The Stockmarket doesn’t have a
“911” number to get you out of a jam.
So I went to the office of our firms Chief Technical Analyst, Dr.
Bob Johnston. He was just walking in and talking off his jacket.
The conversation went something like this:
ME (panicked): Doc, did you read the news?!!!
DOC (casually): What news?
ME (gasping): The news about Comptronix. There was a fraud.
The stock is down 90%! 90%!
Doc gave me a puzzled look and walked over to his quote machine.
Doc never lost his cool. It gave me a sense of comfort to know that
somebody else who plunged into the stock was as cool as he was.
Doc would know what to do.
After reading the news quietly for a few minutes, Doc shrugged his
shoulders and said, “Hmmmm….that’s too bad.”
“Too bad”? Was this guy smoking crack?
“What do you mean? What are we going to do?” I asked him.
Doc told me to hold my horses for a moment. He had to first print
out a position sheet of every account at the firm that owned the
stock so he could call an emergency meeting.
While he played with the computer I walked over to the window and
looked outside at the traffic. We were on the 14th floor of the
building and had a great view of the South Street seaport.
The view of the people scrambling to work did
absolutely nothing to calm me. I imagined that each and every person
owned the stock and had the same surprise waiting for them when
they walked into their offices. Yikes!
What did calm me down a bit was the thought that I was going through
this drama with other people at the firm. I knew several brokers who
were going to load the boat on the stock for their clients and others
who said that they were going to buy the stock for themselves.
Of course I didn’t get joy from the thought of other people getting
hurt by the stock. But the feeling of knowing that other people
would be in the foxhole with me – even to just share a beer with –
was comforting.
I turned around and walked over to Doc. The sheet had just finished
printing. He grabbed it and looked at it. Then he looked at me.
“So, who owns it? Who should I call into the conference room?” I asked
him trying to get him to hurry it up. It was 9.15. The market was
going to open in 15 minutes. We had to get a move on it.
Doc handed me the sheet. I wasn’t prepared for what I saw next.
My name was the only name on the list.
There wasn’t one person at the firm who bought the stock beside me.
Not even Doc.
When I asked him what the heck was going on he told me that due to
Thanksgiving week he hadn’t had the chance to buy it yet.
Furthermore, he had to run to an analysts conference up the block so he
had to leave. He told me he would talk to me as soon as he came back.
He patted me gently on the back, put on his coat, and walked right out.
Just like that he was gone. I was all alone.
I was speechless. I slumped into his chair and stared at the screen.
Red flashing headlines just kept shooting across the monitor informing
me just how bad the fraud actually was. It was like a torrential
downpour of bad news.
It took me an hour to compose myself. During the time I made the
decision to sell my stock and take my losses. I felt that trying to
win a lawsuit was simply not worth the angst of having to look at
the stock every day for the years it would take to resolve the problem.
In other words I thought the cost of a “negative head” would compound
the cost of my original mistake. And that was something I could
not afford. So I walked into the trading room and sold my entire
position. It was the best decision I had made as an investor to date.
What lessons are there to be learned from this experience? There are far
too many to list here, but I will share 3 of the most important with you:
Lesson # 1: Stocks are more than intangible pieces of paper.
You see, whether Doc owned the stock or not is irrelevent. He was
buying the stock just based upon what the chart told him.
My experience with COmptronix scared me straight. From then on,
I needed to know AS MUCH AS I COULD about the business behind the stock.
As far as I’m concerned I’m as paranoid as the guy from C.S.I. – I
want to know everything so I don’t get caught in a trap.
That’s why I never got caught up in Enron, Worldcom or any of the other
frauds of the late 1990’s. Everything has to look “just right” before
I invest.
Lesson #2: Consider the Source of any “Tip.”
Everybody has a “tip.” Just the other day, a friend of mine who works
in the computer field told me that he knew about a secret deal between
a large computer company and a small one that would make the small
company the “standard” in the next generation of chips.
I ignored him. And I advise you to do the same. You see, people like
to appear smarter than they are. This is not a put-down, it’s just
an observation of human nature.
So they give tips as freely as if they were dishing out candy to kids
on Halloween.
I can say that without hesitation that 99.99% of them are garbage.
Ignore them.
The only time you should consider somebody’s advice is when you’ve
checked their reasoning AND IT MAKES SENSE TO YOU. Because if it’s
a losing trade I assure you the tipster who was so liberal with
the advice will button up faster than a pair of Levi’s – and that’s
only if he/she REMEMBERS that they gave you the tip in the first
place (most of the time people don’t).
AND MARK MY WORDS: If you subscribe to another newsletter and they
write a recommendation that’s just a one or two paragraph blurb
than it’s likely that they’ve only put one or two paragraphs
WORTH OF THOUGHT INTO IT.
Is that the person you want to go back to if there is ever a problem?
No. All you’ll get is B.S.
That’s why we write such intensive reports here at Fallen Angel Stocks
every month. We want you to SEE what it is that WE SEE when we like
a company.
We’re paranoid. Cautious. Slow. Old-Fashioned. And whatever other
adjective you want to throw at us.
Lesson #3: Handle Conversations with Significant Other “Like a Man.”
Sure, our financial loss was devastating. That’s why I took out
my fiance’ for dinner and planned to give her the news like a man.
Instead I got drunk.
It was only when we got home, and I fell onto the bed in a drunken
stupor, that I confessed what happened.
The last thing I saw before I blacked out was a look of shock on her
face.
In both my professional life as well as personal life I sure had
a lot of growing up to do…..
Have a great weekend….
–Dylan Jovine
P.S. If you’ve enjoyed these stories email me back and let me know.
I’ll try to write them as often as time permits.