You Idiots Deserve To Be Poor

May 25, 2012

"I want to be young, smart and successful! So I'll do it vicariously through these people."

From Bloomberg:

Ryan Cefalu, who lives with his wife and two kids in Baton Rouge, Louisiana, saw in Facebook’s much-anticipated initial public offering a chance to buffer his retirement fund. His expectations fizzled along with the stock within the first minutes of trading.
“It’s disheartening to know that things get over-hyped,” Cefalu, a 34-year-old data-systems manager who spent about $4,000 on the stock, said in an interview.

Let’s assume that quote isn’t taken out of context, although it’s hard to imagine what context it could be taken out of. The most overhyped IPO in history, and Mr. Cefalu is expressing surprise at what, exactly? He’s implying that he bought the stock before it was overhyped, or that said hype has something to do with his losses.

Here’s another fool who deserved to soon be parted from her money:

“I thought it would be fun to get in on the initial frenzy,” said Linda Lantz, an online marketer in Granite Bay, California, who bought 100 shares. “Now it makes me think ‘Oh God, should I bail or is it going to come back?’”

Fun? Where is the fun? Is it inherently “fun” to have a line in your E*Trade account that reads:

100 FB NASDAQ 5-17-2012 $39.84?

If you want fun, go target shooting or buy a kitten. (If you want lots of fun, combine the two.) More to the point, if you’re investing for fun, you’re in even worse shape than a guy who goes into debt to film a movie and then begs for people to cover the expenses.

You invest to make money. Sweet feathery Jesus, how much more obvious a point could this be? Look, we get that an iPad or a Birkin bag conveys something about your status and tells passersby that you want them to think you have disposable income. But Facebook stock? You do know that corporations no longer issue physical certificates, right? You can’t literally show your stock purchase off to people unless, again, you invite them to look at your computer screen while you’re logged into your brokerage account.

Michael McClafferty, a freshman finance major at Michigan State University, saw his “first big investment” turn into a $3,000 loss when he sold the shares at $35.
“I didn’t want to lose more,” McClafferty said. “I didn’t know what to do.”
The 19 year-old student estimates he spent $8,000 more than he wanted to while repeating orders that wouldn’t go through on the first day, and failing to cancel them because of the technical problems.

Anyone want to bet on whether Mr. McClafferty has incurred any student loans? We hope to God that he has rich parents financing the education that he’s getting but that isn’t taking. This would be slightly more forgivable if he were majoring in sociology.

Some out-and-out lying doesn’t hurt, either:

Pat Brogan, a Yahoo! Inc. manager who trades on sites run by E*Trade and Fidelity in her spare time, called the experience of buying Facebook stock the “biggest fiasco” in her 30 years of day trading.

Two points from Ms. Brogan’s debacle. Number 1, no one day-trades for 30 years, for the same reason that no one plays day-Russian Roulette, day-wrestles grizzly bears or day-shoots up heroin for 30 years.

Also, risking your own money in the hopes of returns isn’t something you do “in (your) spare time.” It requires a little more intellectual commitment and wariness than do quilting or playing Gran Turismo 5.

Alright, a 3rd point. What was she expecting? Of the thousands of equities she could have chosen to purchase last week, she picked the one with zero history as a public company. If you’d asked her “Why’d you buy Facebook today, instead of Hewlett-Packard or Time Warner?”, what do you think she would have answered? Or any other sheep who thinks investing is about status and internal feelings of hipness rather than making a mother-loving profit?

Because they thought they could beat the system. They’d be the ones to buy Facebook at (its opening price + x), then sell it hours later at (its opening price + x + y). Which is to say, they had to know they wouldn’t be the absolute first in line, right? And that the people who did get in earlier were entitled to their own profit, right? Still, Ms. Brogan and her compatriots had it all figured out. They’d get in early enough to allow those preceding investors their profit, then enjoy their own as they cashed out to the next round of lemming/piranha hybrids on the horizon.

Oh, who are we (and they) kidding? The day traders and speculators who tried to buy Facebook stock as early as possible would have held onto it had it risen. Fortunately for them, or at least for us, it didn’t.

But no, the alleged “30-year day trader”, the college kid, and the Louisianan looking to settle his retirement in one day know more than the insiders do.

The chance of you purchasing Facebook stock at the appropriate minute on the day of its IPO, then selling it within a day or two at a substantial profit, is nonexistent. First, you don’t know as much as the stock’s underwriters do, and second, if you’re greedy enough to try and time the market like that, you’re not going to be satisfied with a modest $4 or $5 gain. You’ll want that baby to rise to hundreds of dollars a share, just as AOL (now around $28) and Yahoo! ($15 or so) did. Otherwise you’re alleging that the avarice that got you there in the first place can be kept in check at certain points. Come on.

We do way too many sports analogies on this site, but that’s not going to stop us from doing another one. If you sink a half-court shot to win a Kia Sorrento at halftime of an NBA game, even if you hit nothing but net, the home team’s general manager is not going to offer you a contract. Not even at the league minimum. You got lucky. The ability to consistently hit half-court shots is as rare, and as practically useless, as the ability to time when to get into and when to get out of IPOs. We say “practically” useless because you can’t build an offense around 3-point attempts taken 47’ from the basket, any more than you can build an investing strategy around knowing when to board and disembark the IPO train.

Twitterer @DubaiAtNight, who was one of the most insightful commenters on Control Your Cash back when we allowed comments, put it best:

Imagine if had been Koch Industries that went public. (As if. The Koch brothers aren’t stupid.) The biggest private company in the world then opens itself up to general investors, and a combination of nefarious underwriting and technical glitches leads to a bunch of unprepared dilettantes losing their money. The U.S. Senate, the President and the SEC wouldn’t be able to land on Koch management fast enough. The 1%, keeping the 99% down, etc., etc. Meanwhile, if a tousle-headed 20-something with an affinity for hoodies is at the helm, and if the product in question is something commonplace, benign, and beyond most people’s technical understanding, no big deal.

Investing isn’t a freaking game. It can be fun and rewarding, but a) not over the course of an afternoon and b) it takes work. Here, read this and step back from the maelstrom. You can thank us when you’re rich.

Filed Under: Bad Examples, Investments Tagged With: , , , , , ,

Reuse, recycle. (Already reduced)

December 9, 2010
Neptune

Neptune. Stayed undiscovered for centuries, has no people. Now THAT's a smarter planet.

This post ran on Free From Broke back in June. Let’s see how prescient it looks today.

Why do people get excited when their favorite retailer holds a sale, but not when Wall Street does?

Let’s start with the obligatory disclaimer – this is not an encouragement nor a discouragement to buy or sell particular securities, stocks carry risk, consult a financial advisor but you don’t have to, etc.  That was for that infinitesimally small segment of the population that is a) literate enough to read this post, yet b) dumb enough to do whatever a disembodied online voice suggests.  There, now you can read the post absolved of any obligation to think.

Most investors know, in theory, that it’s foolish to buy at the top of the market and sell at the bottom. (Of course, human nature means that the opposite is true in practice – otherwise the top and bottom wouldn’t be where they are.)  But it’s equally foolish to assume that the market will carry you along indefinitely if you just buy a flat representation of it and don’t research at all.  We have 12+ years of real-world evidence of that.  Factoring in inflation, the Dow has risen by an average of .4% annually since February of 1997.  Your index fund would have been better off if it had collected tin cans since the Packers last won a Super Bowl. (1.3% annually now. The Packers are 8-to-1 to win the Super Bowl.)

There is such a thing as overdiversification. You might find stability in a comprehensive index fund, but it’s impossible to find any significant value.  Buying a basket of Dow stocks, or something similar like a Wilshire 5000 index fund, will likely give fantastic returns over an 80-year period.  If you plan on not waiting until you’re 115 years old to enjoy your money, there are more targeted ways to go about attempting to build wealth in the stock market.

Instead, look at companies that are temporarily wounded, i.e. whose stock sells at a discount. Earlier this year, when the global CEO of Toyota (NYSE: TM) was being grilled on Capitol Hill for selling cars to people who confused the brake with the accelerator, the company’s stock sank.  But some fleeting bad PR can’t negate a decades-long reputation for value and quality.  A few weeks after our demonstrative congressmen and senators finally pulled the curtain on their combination political theater/witch trial, Toyota stock had quietly gained 15%.

Around the time Toyota emerged from a bruising at the unfair hands of public opinion, British Petroleum (NYSE: BP) made Toyota’s problems look trivial.  BP traded at $60.48 the day the Deepwater Horizon spill began.  Today it’s at $36.52, a 60% drop.  (And now it’s at 42.81, an annualized 37% return from when we recommended buying. Why are we not giving stock tips professionally? Oh, right, the licensing exams.) The rig’s manufacturer, Transocean (NYSE: RIG), has fallen from $92.03 to $50.04 over the same period, a 46% decline.  (And today it’s at 70.93, an annualized 101% return. AHEM.) Fortunately for Transocean, it’s in an industry with few players.  Also, most people had barely heard of it since it doesn’t sell directly to the public.  (When was the last time you bought an oil rig?)  This distinguishes Transocean from BP, which plasters its logo everywhere and goes out of its way to embed itself in the public consciousness.  Thanks to that insistence, almost everyone identifies the Gulf of Mexico spill with BP more than they do Transocean.

Both BP and Transocean have otherwise healthy financials that can normally withstand a one-time event. Then again, Deepwater Horizon is some event.  But a wounded company isn’t a doomed company: despite the Exxon Valdez disaster, ExxonMobil went from pariah to the world’s most profitable company in just a few years.  Johnson & Johnson rebounded after the Tylenol scare of 1982 and came back stronger than ever.  There are several ways to murder a company along with its stock: obsolescence (Atari), poor economics (General Motors) and rampant crime (Enron) are three of the most efficient.  But for a temporarily disabled company with a history of success and goodwill (in the general sense, not the accounting sense)?  A resurgence is more likely than you think.  Don’t confuse a broken bone with a bullet wound through the cranium.

One more time: there’s always value somewhere in the stock market, but very rarely can you make money simply by buying into the market as a whole.  In fact, the times when the market (as a whole) rises fastest are when the gains are most dubious and tentative – case in point, the dot-com bubble and ensuing crash.  More accurately, there’s always value in the stock market among particular entrants.  Finding the ones whose stock prices have suffered for no better reason than that of public perception is as wise a place as any to start.

Apropos of nothing, Walmart might be looking at a sexual discrimination suit with 1.4 million plaintiffs this week. The stock lost $47 million in market capitalization in one trading day this week. A good time to sell? Start this post again at the beginning.

Filed Under: Investments, Making Smart Choices, Math, Net Worth Tagged With: , , , , ,