Painful Lesson #1
Why would a seller be willing to take a price 7% below the current market price?
By Jon DeBry,
Last Update: 4:30 PM MT Dec 11, 1998A couple of years back,
I owned a stock with good earnings and good growth prospects. From all outside
appearances, the company was doing fine. After being brought public at 12 or so and
running up to 20, it had slowly backed up to 15, but I considered it a normal
consolidation, especially considering the fact that the slide occurred during general
market weakness.
One day as I’m watching a real-time chart of this stock's activity, a block of
forty thousand shares goes off one dollar below the current bid price. Obviously, a
large institution was anxious to get rid of a large block quickly. Figuring that I knew
the fundamentals (and not seeing any news to trigger the drop), I bought more. I
thought that the seller must have been selling for some reason other than the
fundamentals, and I was going to take advantage of that large, stupid, behemoth's mistake!
Foolish me. Two days later, the company announced they wouldn’t meet
earnings expectations, and the stock was docked another two dollars. This information was
absolutely telegraphed to me ahead of time, and I ignored it. Worse yet, I increased my
bet against the institution.
In a better move, I took my lumps and bailed when the news was announced instead of
hanging on to a losing position. I got out at 11 or so. The stock drifted around 11-13 for
several months before the company announced even more disappointing news and the stock
price dropped to 5.
This leads to one other bit of popular conventional wisdom, which is that if a company
has one bad quarter, it’s probably going to have another.
And, of course, this shows the buddy-buddy system of Wall Street – obviously
someone at the company let on to someone at an institution that bad news was on the way.
This illicit communication saved the institution tens of thousands of dollars, and cost
small shareholders like myself the same amount.
Conclusion: If someone with more money and better connections than me
is betting in a different direction than me, I better re-evaluate my position quickly. |
