Separation of Fool from Purse

I recently received the following from an audience member.

I paid $500.00 for 5,000 shares. The shares tripled almost overnight. I’m an investor not a trader. I didn’t sell. Again, almost overnight, the price went to zero. Do I have any recourse? How can I get this out of my portfolio?

Because I so often hear and read of such stories, I have decided to put my response to his query front and center in this post.

I was not aware that TAGG was still being flogged as a penny stock. It is a fraud perpetrated upon those who are looking for a “get-rich-quick” scheme only to soon be separated from their purse.

Let us look at the basics of your transaction. You claimed to have purchased 5,000 shares for $500.00, which means that you paid $0.10 per share. Let us take this transaction apart in an exercise to demonstrate that you do not know what you are doing. Anyone who purchases a stock at $0.10 per share is not an investor: rather that person is a speculator. I am a deep value investor: however, I will not even consider any ticker symbol with a market price of less than $4.00. Also, you spent $500.00 on this transaction. I do not know which broker you used nor do I care. The arithmetic is simple. Say your trading cost is $10.00: that means you paid 2% of the total transaction amount in transaction costs. We will not even start to consider the bid/ask split problem, slippage, liquidity, & etc. By paying 2% going in and 2% coming out of a ticker symbol, you have already paid someone else 4% of the total transaction amount just so you can lose money on an ill-considered transaction: that means, you were betting that the market price of the ticker symbol would appreciate by $25.00 by the time that you intended to sell it. By the way, I would bet a dollar to a doughnut hole that you never thought about the rules by which you would sell the shares. If I am correct, you are not an investor: you are a fool intent on retiring poor and being a greeter at Walmart. Let us look at that $25.00 claim: you would spend $10.00 purchasing the shares; you would spend $10.00 selling the shares; and, you would have to make enough to pay the income taxes that $20.00 assuming that your average tax rate is 25%. This means that you were betting that the market value of the shares would appreciate 5% just to break even. What were you thinking?

Also, did you give any consideration to the people on the other side of this transaction: odds are that they were shorting the ticker symbol whilst you were intending to go long. I find it incredulous that any one would be long against a short on a stock trading at 10¢ per share: that is just too much to get my simple mind around.

Also, did you do any research on this company? Years ago before I purchased REGI, I travelled from southwest Minnesota to the other side of Des Moines, Iowa, to visit the plant that the company had in that location. The first thing I looked for was whether the parking lot was full of vehicles of the employees and what was the condition of those cars. That told me almost everything that I wanted to know about the company. Then I considered the condition of the plant, was it using electricity efficiently, was it using rail instead of semi for transportation. I then visited the office: were the employees happy with their work and their pay, & etc. Upon return home, I carefully examined the financials of the company; I read the transcripts of the past 4 quarterly investor conferences; I studied biodiesel credits and at what price were those credits were trading. In other words, I knew more about the company, most probably, than the employees working at the company. I established the rules by which I would sell the shares. Only then did I purchase shares. The appreciation in the stocks by the time that I sold was quite satisfactory.

As to what you can do now that you have lost money: first rule, never lose money; second rule, never forget the first rule. You could file a complaint with the FBI and the SEC. A few years back, an agent from the FBI contacted me about John Bell. Amongst all the information that I gave him, I informed him that because the FBI was so incompetent that they could not even find a buggar hanging out of their nose, they would never find or convict John Bell. John Bell is still alive, well, and perpetrating frauds upon idiots willing to believe his stories about “fantastic penny stocks”. With President Bannon in the White House, your chances of ever getting the FBI or the SEC to do any thing are about as good as your having a date with Ivanka Trump: good luck.

You could try to sue: good luck.

Here is my advice: register for automatic withdrawals from your paycheck every month to fund your 401(k) or 403(b) retirement account and utilize the matching program offered by your company. That matching money is a freebie, use it. Instruct the manager of your retirement account to put everything into either VTI or RSP. Leave the money alone until you retire at 72: you will be just fine.

And, please, do not try to invest in any ticker symbols on your own: you do not know what you are doing. If you insist on repeating such foolish trades, then first purchase and memorise the following books: Graham and Dodd, Securities Analysis; Graham, The Intelligent Investor; Philip Fisher, Common Stocks, Uncommon Profits. Also, stay away from anything regarding investing that was written after 1960. Further, turn off your television, your radio, and stop reading any news paper other than the Wall Street Journal, the Financial Times, and Barrons.

I hope that this helps.

Nathan A. Busch

 

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