The Motley Fool Discussion Boards
Investing/Strategies / Bonds & Fixed Income Investments
|Subject: Re: AMBAC 5.95% Debenture Maturity 2/28/2103||Date: 12/21/2012 10:32 AM|
|Author: globalist2013||Number: 34570 of 35527|
Kudos to you for the thoughtful post on AKF. Now comes a tiny disagreement from me.
You advice selling *if* a price of $8 could be obtained. But take a look at a chart of where AKF is now trading. http://www.advfn.com/nyse/StockChart.asp?stockchart=AKF There are no bids, and the last reported price (nearly two years ago) was $4.22. Without an active market, the owners of AKF will have to discount their position if they want to dispose of it. This is the reason I'd advise them to sit tight and to let the BK work itself out. They are far more likely to realize a higher value.
The lowermost chart chart on the linked page is instructive. It can be assumed that AKF came to market in 2003 at a price pretty close to $25. By Jan, 2007 (the left-most edge of the chart) the price had fallen to about $18. It climbed a bit in a dead cat bounce back up to $20 and then fell to $15, setting up the first leg of a measured move. In other words, an observer's expectation at that point should have been that prices would fall to $10. Instead, they fell further, but they did retrace to $10, a fractal move that set up a second measured move that did play out exactly as it should have with prices tagging $5, whereupon it began trading sideways in the $7.50-$5 range.
OK, now step back and think about what the buyer(s) did. From a price chart alone, it is obvious that they tried to catch "a falling knife", but they had no exit plan in place in case they were proved wrong. In other words, they committed the very amateur mistake of trying to buy into a Stage Four stock and --worse-- they failed to trail a stop.
Again, look at the chart. We know the entry-price was $14. Therefore, we know the buyer(s) were making a bet that they knew better than their counter-party to the trade that the price was wrong. However, they failed is allow for the possibility that it was them who were wrong, and they had no exit plan.
For reasons that are beyond me to understand, using stops is a controversial topic in many of TMF's forums. But using a hard stop would have gotten them out of their buying mistake while the damage was still tolerable. O'Neil suggests 8% as a good rule of thumb. But let's give the stock "wiggle room" and say 20%. With an entry at $14, a hard stop would have been set at $11.20, or a loss of roughly $3 per share instead of the $6 loss per share they are now hoping to settle for that will probably be closer to a loss of $10 per share if they try to sell in a market without active bids.
Again, step back and look at the larger picture. Nobody buys perfectly. Nobody sells perfectly. It just doesn't happen. Mistakes and misjudgements get made. Mistakes and misjudgments have to be expected, *and* they have to be managed *before* they become expensive and painful. As simple a thing as setting a stop would have avoided the troubles the buyer(s) now find themselves in.
"Amateurs look first to their upsides. Pros look first to their downsides."
|Copyright 1996-2015 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us|