It is Sunday again, a time when I like to reflect on the aspects of the public market that daze and amaze, that confound and astound, the fun and games that can thrill and send chills down the spines of retail investors.
Life lessons can be hard, very hard. Often its only through getting beaten up that we learn things. Battle scars, bumps and bruises can be great teachers. Of course there are stubborn individuals who will never learn, who insist that their way of doing things must be right, even if the results are always bad. "This time will be different", is a common mantra. But its often said that only fools keep doing the same things over and over while expecting different results.
I've never met anyone who's goal in the markets is to lose money, lots do of course, but the goal from the start is to make profits. However lots of people lose money, tons of people losing tons of cash. And too often these individuals had ample oppourtunity to put some green into their pockets, but they couldn't bring themselves to hit the sell button, it was too hard.
Well I'm going to tell you some things right now, and in my opinion these are things you're not likely to read anywhere else. No industry player is going to share what I am about to share, not with some retail schmuck hoping to make a buck in the public markets.
Here it is.
At times when a stock has made significant gains, when investors have big "paper profits" but no capital gains, this is when the market will often employ all its devices and tricks to convince retail investors that sellers are getting screwed, that they're being swindled out of their precious shares. And this is never more true than with highly speculative stocks for poorly managed companies that are bleeding cash.
At times when a stock has made significant gains, when investors have big "paper profits" but no capital gains, this is when the market will often employ all its devices and tricks to convince retail investors that sellers are getting screwed, that they're being swindled out of their precious shares. And this is never more true than with highly speculative stocks for poorly managed companies that are bleeding cash.
Read that last paragraph again, please....
What am I talking about? What are these devices....these "tricks". There are far too many, but I can certainly give some examples. Here are three of my favorites....
The after hours drop on small volume.
You've bought a stock, 5,000 shares at $2 and now its trading at $10. That means you've made a 500% return, but only if you sell. And you're thinking about it, but then you see a 50 share trade after hours or pre-market that drops the PPS to $8.50. "What the hell"?!?!? You're incredulous.
At $10 your 5,000 shares were worth $50,000 but at $8.50 they're only worth $42,500....$7,500 just disappeared. "The bastids are screwing with it and trying to scare out the stupid, well I'm not stupid....I'm gonna hold tight, hell I might just buy some more"!!!
Beware that Ice Berg!!!
That $2 stock you bought that's now trading at $10....you still decide that maybe it might be time to take some of those shares and turn them into cash. You go to execute a trade and you see 5,000 lots bidding at $9.95 but on the ask side there are only 5 lots on the offer at $10. It looks like demand is massive and supply is limited.
YOU'D HAVE TO BE CRAZY TO SELL NOW!!!
Hell, with so much demand and supply so low you might decide to buy some more. Watch out!!!
Those 5 lots you're seeing on the ask, they might just be the tip of an iceberg.
An Ice Berg Order allows a seller to have one portion of their sell order visible, and the other part hidden. While there may just be 5 showing there could be another 10,000 as the hidden portion. It looks like there's hardly anything available, when in fact there is tons. Those 5,000 bid lots could also be a "bluff" placed by the big player who's also behind the massive hidden iceberg order.
The Scoop
This is the best one in my opinion. Maybe you still decide its time to take some cash off the table, despite what appears to be massive demand and limited supply, and regardless of that 50 share trade outside of regular market hours. But you're not 100% sure so you decide to test the waters with a limit order, offering 2,500 of your 5,000 shares at $10.25. You're not even sure the PPS will go that high, the order might not even fill.
BUT IT DOES....your 2,500 shares are gone, and your buying power now reflects the $25,625.00 you've just made from your trade. That's over $20K in profits. BUT WAIT!!! The PPS is still under $10??? Shares are still being bought and sold at $9.95 and yet someone came and scooped up your 2,500 shares for $10.25 each. You're dumbfounded, "SOMEONE REALLY WANTED MY SHARES".....it certainly would seem that way. So much so that they went over the market price to buy them.
But it might just be the same player with those 10,000 lots hidden in an iceberg order who bought your shares, the same party with the big bluff bid. 10,000 lots of 100 shares each equals 1,000,000 shares on the offer side....your 2,500 shares (a piddly 25 lots) are peanuts. And now you might just buy them back, even if your buying sends that $9.95 price over $10 and up to $10.10....You're still ahead, you sold them for $10.25.
Think you won? Think again.
After selling 2,500 shares for $10.25 you had $25,625 in cold hard cash. We'll say you then bought them back at an aveage price of $10 costing you $25,000. Instead of $25,625 you've got just $625 in your account. And the PPS will probably climb some more, but having seen someone go "over market" to scoop up your shares, you're not going to sell them again, especially if there are things like analyst predictions of much higher prices coming. Obviously those who are selling, they're not as smart as you. They're taking cash, but you're know your shares are worth more than cash. Maybe you'll sell some at $15?
After selling 2,500 shares for $10.25 you had $25,625 in cold hard cash. We'll say you then bought them back at an aveage price of $10 costing you $25,000. Instead of $25,625 you've got just $625 in your account. And the PPS will probably climb some more, but having seen someone go "over market" to scoop up your shares, you're not going to sell them again, especially if there are things like analyst predictions of much higher prices coming. Obviously those who are selling, they're not as smart as you. They're taking cash, but you're know your shares are worth more than cash. Maybe you'll sell some at $15?
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There's more of course, tons more in fact. But that's the way it is, and in point of fact I would argue that's the way it has to be. Its a zero sum game, with every trade that takes place one party gets cash and the other gets shares. You can't have your cake and eat it too, and you can't have your shares and the money they're trading at both at the same time. Life is a pain.
Why does it have to be this way? Because this is real life, and real life is about winners and losers, there's no "everyone gets a trophy" in the public markets. This is a trillion dollar industry. There are brokerage firms, media outlets, analysts, promoters, and of course the public companies themselves, many of which are using shares as capital to fund operations and pay salaries.
If everyone wanted to buy at the same time, where would the shares come from? Or if everyone decided it was time to unload, there'd be nobody handing over cash. Imagine a football game with both teams lined up on the same side of the ball at the same time, both wanting to play offence or defence with no opposition. It wouldn't work.
In the market game the big players have a multitude of ways to convince retailers to buy high and sell low so that they can do the opposite. A retail investor can win, but its damn hard and most I would argue will fail.
But I know retail will keep trying, and now hopefully some are better armed so they'll know what's going on.
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