The perils of taking on 'The Street'

I have no illusions about this blog's significance.  My little island in cyberspace is a tiny speck, a dot on the ocean that is the public markets. That's why you will frequently see me referring to Avoid The Bag as a meaningless and insignificant little blog, (or words to that effect) because that's what it is.

Do I have bigger aspirations for this space?  Yes and no.  I would be lying if I didn't admit to some delusions of grandeur.  Of being a beacon of market wisdom and reasonable commentary, with a large following.  But I also know the dangers that would come were that ever to come to fruition, which I highly doubt will happen in any case.  

If you read the disclaimer at the bottom of this site you will see right up front something that, to me, is very important.  I have not and I will not accept any payment or compensation of any kind to write anything about any stock, either bullish or bearish.  With that being said, I do eat my own cooking, and when I'm bullish on a stock I will take out a position.  And if I'm bearish and thinking a stock is overpriced and due for a correction, I will try to profit from that as well....that's how the market functions.

But I also know that for a market to function you need two things, buyers and sellers.  Yes, I know that is obvious, but I believe it merits repeating.  

The Bath Tub 

The best analogy I have ever heard involves representing the market as a bath tub.  Let's say there is a stock that we will call ABC, and its trading for $1.  The tub will represent the market for ABC and the water level will be the share price.  At $1 we will say there is one inch of water in the tub.  Water added to the tub is the buying that occurs, selling conversely is represented by the drain.  So long as there is a reasonable balance between buying and selling, then the water level or price per share will remain about the same, the water being added equaling the water going out.

For the sake of this example we will say that ABC is a speculative stock, that the company represented is currently losing money.  We will also assume that the company has sought out a big name partner, and that if the deal is finalized the news of this partnership is reasonably expected to create a lot of excitement and buy side interest in the stock.

Although it is illegal I for one am convinced that when deals and partnerships are being negotiated and other significant developments are in the works, that there are obviously individuals in the know. And while trading on insider information is counter to the rules, I have little doubt in my own mind that there are individuals who seek to profit regardless, not directly certainly...but maybe by proxy.

Back to the bathtub.  Those who have perhaps caught wind of the big partnership plans could reasonably be expected to want in, to establish a position by going long on ABC.  Now, they could just storm in and start buying, causing the water level of the tub to rise.  The danger there is that the rising water level might cause the drain to plug, as those inclined to sell hold on tighter to their shares because of the rising price.  And other players may see the water level rising and start competing for the available shares, driving up the price and defeating the idea of buying low.  

A better method might be to borrow some shares and sell them, going short in other words.  This has the effect of taking a pitcher and scooping water out of the tub, causing the water level and hence the PPS to drop.  This brings on fear in shareholders and may induce them to sell while the PPS is low.  

And so it goes, ABC's water level stays around $1 as those anticipating the big deal load up.  As the deal gets closer those who have been loading up stop scooping water out, they cover off any outstanding short positions and start driving the PPS higher.  This often brings on the attention I just mentioned, other players see ABC's bathtub rising so they want in too.  The tub rises higher and higher, from one inch to two, and then three and then five.  ABC once worth $1 is now trading at $5.

Then the news hits, ABC has just finalized a major partnership deal with a leader in their business space.  New releases are issued, social media catches fire and ABC is being talked about in stock forums all over the Internet as buyers storm in.  Maybe the deal is announced on CNBC or other similar media outlets.

Now the tub really starts rising, in a few short days or weeks the level of water goes from five inches to ten. But don't forget the drain.  If people are buying then others must be selling.  As the tub gets up around twelve inches or $12, the water stops rising.  The volume of water pouring into the tub is still high, but an equal amount of water is going down the drain as those who got in early and cheap start leaving. 

And if the deal doesn't bring in any added revenue, if ABC is a company that issues shares to finance its business, then those who jumped into the tub with exuberance and excitement may find themselves trying to keep themselves clean with an ever diminishing supply of dirty water.  

A good analogy but not perfect

I like the bathtub analogy, but it does have its flaws.  Often there are shares that weren't bought when the PPS was at $1.  There are option grants and warrants and shares that may have been used as payment for good and/or services.  But overall this example provides an excellent general overview of how the market functions.  And I think it is most useful when considering companies that are speculative in nature, with companies that are not yet profitable and perhaps never will be.

So whats' the point

The point of this posting is in the subject line:  The perils of taking on 'The Street'.  When I reference 'The Street' I am using it as a euphemism for industry players, or market hacks as I like to call them. I am not talking about the website or news service of that name.

The stock market is a zero sum game, every trade involves a buyer and a seller, one gets shares and the other gets money.  The 'smart money' players who buy low and sell high, they need others doing the opposite, selling low and buying high.  And this latter group is invariably dominated by retail investors, the target audience of this pathetic and insignificant little blog.

I get attacked almost daily in social media for my opinions.  especially when I refuse to drink the Kool-Ade about some speculative money losing company's forward looking promise when its trading at or near its highs.   No worries, I get it.  

'The Street' is far more powerful than any little ol' Joe Retail blogger, I know that.  If this blog and my opinions were to ever get too popular, then the market would have to slap it down....and with the money that industry players have at their disposal it would be an easy thing to do.

Good luck in the markets retail players, its a shark tank...so pay attention to those sharks, they usually try to disguise themselves as playful friendly dolphins.