No. of Recommendations: 5
Consider this situation: You buy 10,000 shares of Sunshine Mining (issued shares = 50 million) at 70 cents –-or 2.8% of your account -- on a hot tip from your Canadian hunting outfitter, Frenchy Jim, that Sunshine's field geologists have renewed their lease on the cabins they are renting from him and have been telling him he ought to think about building some more. A month later the company makes a favorable press release on their now completed survey and share prices go to 2.50. You sell half your position. On the strength of their stock price, Sunshine latter announces a 10 million share stock offering at $3/share, which is favorably received. As the company moves equipment into the area to begin operations, the price rises further, hitting 3.75, and you sell another half of your remaining position. But by now, the local tribes are beginning to get annoyed and don't want to see yet another watershed destroyed and file law suits that Canadian government insiders are considering favorably. When word of that leaks out, the stock instantly falls to 50 cents, and you close your position.

How many hands were involved in trading those 10,00 shares, and which were the strong and weak ones? I'd suggest that the trader, and those who sold to him or bought from him, were both strong or weak as circumstances changed and the money was transferred from one account to the next. If the trader had foresight, he would have managed his position differently. But shoulda/woulda/coulda doesn't cut it. In retrospect, did he do a good-enough job? More importantly, given how he managed the trade, is it likely that he would ever blow up his account so badly that he would put himself out of the game?

Let's continue the story.

Sunshine's stock languishes further, falling to 15 cents as the law suit drags on. Our trader, who knows the area well from years of hunting with Frenchy, suspects the real value of Sunshine's property holdings might not be in the minerals they will likely not be able to access, but in the standing timber and the land as recreational property. To confirm this he does his DD from the viewpoint of a control investor this time. Convinced he is seeing an opportunity, he puts together a partnership and quietly begins buying again, ending up owning 5.5% of the outstanding, at which point he launches a proxy fight, --the stock jumps to 50 cents on the news-- wins, kicks out the old board of directors, concedes the law suit, and announces plans to reshape the company as a steward of the land with exclusive access to the best hunting and fishing facilities in the area, and shares jump another 50 cents, beginning a slow climb that reaches 2.50 by year's end.

Again, who were the strong hands and the weak hands?

My point is that at every price point for any stock, some people are buying or selling correctly, given their time frame and investing intentions and their understanding of what the company's situation and prospects are, and some are buying or selling at prices that will prove to have been too cheap or too dear had they done their homework in manner that would have enabled them to make a prudent timing decision.

Buying prudently, on the basis of good DD, and then being vindicated in one's judgment when the stock does go up as expected, but then riding those gains down as the market declines until the issue is trading below where one entered, (and in fact is oversold, were one to take a fresh look at the issue,) but giving up on it in disgust and selling for a loss is one of the classic pattern I was pointing to of how money moves from weak hands to strong hands.

As I keep saying, mistakes, errors of judgment, and the truly unknowable and unforeseeable are going to happen. That's simply the nature of investing. But an investor's concern is, first, to preserve capital (by avoiding being one of the weak hands) and, second, to appreciate capital by attempting to be one of the strong hands. Knowing which is when, and how to do it, is a matter of experience and judgment that whining about losses only distracts from the learning process by displacing attentions from one's own actions (which one can control) to those of others (which one can't control, but can manage oneself with respect to).

Dings are going to happen. Decimations/devastations don't have to. (A linguistic note: the two words, though commonly conflated in modern, informal usage, imply different magnitudes if one is aware of and respectful of their etymologies). If huge losses do happen, complaining about them might elicit sympathy, and looking for someone else to blaming might make the loser feel better, but neither tactic fixes the problem of the loss, nor puts into place mechanisms and attitudes for coping which the huge variety of investing problems and further losses that await the unprepared.

Though I've run this example using stocks rather than bonds, the dynamics are the same. How does an investor make good decisions in the face of uncertainty, without betting too little or too much? Where is the proper balance between reward and risk? On whose shoulders must the final decision and the final responsibility lie? It's a scary job, and one that we aren't trained to do by the schools, who emphasize conformity, compliance, and group control, not individual courage or contrarianism. So, obviously, when we use group-think as our decision process –-and the stock investing has become a national sport, on the par with football-- we feel entitled to blame the group if our team fails. We whine and want to change the rules, enacting laws to banish the bad guys (or, these days we just bomb them).


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