Herman School of Business
Beware The March To Oblivion...
People want to know why they shouldn’t buy up these great stock bargains. Shouldn’t we all start getting as much Bank of America, Citicorp, and even AIG into our hands now that prices are pennies not dollars?
I touched on Dilution in yesterday’s post and some don’t fully understand this concept. Your stock that has plummeted to pennies is heading toward oblivion and it almost seems as though the final insult is that they stand on the edge of the ledge, waiting to jump off to sure death, until the professionals shear the sheep one last time. C’mon people, the professionals are shorting these stocks because they see the companies are tipping over the ledge and before they fall off they are using them for the last bite of the apple.
“The situation is always worse than the acquirer thought” is a quote from the largest short-seller in the world, Jim Chanos. In other words the chances your battered stock will be saved by a buyer are dwindling.
Years ago there was a very successful clothing chain called “Merry-go-Round” and it had a great run in Maryland. The young people flocked to the store for the latest clothing fads as their buyers seemed most in tune with the tastes of that time. The operating statements showed they had great taste and ideas for inventory but the math didn’t match the costs of operations. No one was doing anything nefarious, they were just losing money by keeping prices affordable and did alright until sales slowed down just a bit. The company toppled over backwards. While the company filed for bankruptcy, where 91 percent never return to health, people rallied around the stock which had fallen to mere pennies a share. People had strong positive feelings about the Brand and couldn’t imagine it would disappear.
One of my brothers-in-law grabbed a few thousand dollars worth of stock. So did others. This caused a spike in the price. Look…it’s coming back! Alas, there were never enough true believers in the name…because smarter people were actually reading the financials…and ultimately the stock went to zero.
Just like some of the stocks you are chasing today…they are headed for zero!
Take one thousand dollars to a casino. Play a hand of blackjack and win. Let it ride. Now you have two thousand dollars bet. You win again. Let it ride because now it is four thousand dollars you are betting and a win means you have eight thousand dollars. BOOM. You win again. Do you really think one thousand dollars can end up sixteen thousand dollars in five hands? It can happen but you know it won’t. Listen you could catch a win chasing the declining stocks.
I’ll tell you what…you keep betting on those falling knives and I will keep my thousand dollars in my pocket…until I see something that the math tells me really could happen.
- Posted: 4 March 2009
- Comments: 1
- Category: Business failure
What, not a gambler, Herman? Haha…thanks again for the great advice.
Written by William Heese on 5 March 2009