Market Maxims
Research for Online Investors

by John Dalt

10/19/09

The market is out of the blocks this morning, racing to where we do not know.  How will we know when we get there?  One fears the arrival will only be recognized by looking back to see the corner we turned.

It is easy to be caught up in the frenzy, almost everything we buy keeps going higher.  Maybe we need to buy more…  But, doesn’t it have to end sometime?  We were shorting the market back in May, and got our head handed to us.  Therefore, we jumped on the train, and have ridden it now for over four months to good results.  Being the ever-greedy soul, we do not want to lose any of our gains back!

There are a couple of great quotes that come to mind, and every trader ignores at their peril.  The first quote, and most popular is from John Maynard Keynes, “The market can stay irrational longer than you can stay solvent.”  That really is succinct to anyone who thought they ‘just knew’ the market was ready to turn, only to lose money on their ‘sure deal.’

One of the drivers of the market run up is short covering by traders that just knew the market had to go lower, all along the way.  Short covering is like rocket fuel to a market trending higher!

One of the most difficult emotions for most beginning traders and investors to control is the contrarian urge to call a top (or bottom) and go against the crowd in a momentum market.  Absent technical indicators, or any justification, they follow their ‘gut’ feeling and watch as the market cleans their ‘guts.’

The last year has presented many opportunities for novice and experienced traders to be on the wrong side of a trade.  Who would have ever thought Goldman Sachs (GS) would drop all the way to $47 last fall at the height of the credit crisis, or Citi (C) to $0.97 in March?  I must confess, I traded C at $1.16, and it scared me to death, wish I still owned it.

Another quote we should keep in mind (or even better) write down on a post-it note and put by our computer, is from Jim Rogers, “Markets often rise higher than you think possible, and fall deeper than we can imagine.”

The market does not have to make sense; history is littered with traders that forgot the maxims given us by two great trader/investors.

I will never forget hearing the news of bankruptcy by SemGroup fourteen months ago.  Tom Kivisto was a star basketball player at my alma mater and well respected in the business world.  His company went broke, because he could not meet margin calls on a Friday.  He was short crude oil, knowing it was overpriced with inventory growing at Cushing, Oklahoma.  His massive short covering on contracts drove the market higher until he filed bankruptcy.  The market fell on Monday.  One day between bankruptcy and untold wealth.  Shame.

Aubrey McClendon, CEO of Chesapeake Energy (CHK) was cleaned out of his stock ownership during the market sell off last December.  In five months, the stock collapsed from $74 to under $10 per share.  Mr. McClendon believed in his company so much, he bought shares on margin.  When the price headed down he bought more.  Then he had to sell, and sell, and sell, until he had none left.  Thank goodness, the board of directors increased his pay, so he was not left a pauper.

These are two high profile cases, but they are a repeat of the same story that is played out again and again. A broker friend told me that over 85% of new online traders lose money, trying to buy “falling knives”.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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