Tuesday, May 19, 2009

Why NOT to Invest in Individual Stocks

I don't want to make it sound like you should never invest in an individual equity but doing so puts the odds against you. A stock can be manipulated so easily in this market. Sometimes legally, sometimes illegally. Rumors can make a stock rise or fall and you can get stuck in the middle. ETF's, Mutual Funds, even stocks which have a broader reach like CME or ICE is a better choice than an individual stock with limited breath.

I want to use Banks of America as the example for this particular article. While many traders and investors are buying, selling and shorting BAC stock, little did they know millions of shares were being created out of thin air, with no public knowledge, in order to generate "capital". They are allowed to do this due to their status as a retail bank covered by TARP. So the gov't gives them the green light to dilute shares without investor knowledge. To raise "capital".

Lets put yourself in 3 different situations. Lets say you are a long term investor in BAC. You are basing your investment on your belief BAC will return to profitability and return to levels BAC was before the Lehman collapse. You base your investment on valuation, meaning, P/E, and balance sheet. Then, you find out that millions of shares were flooding the market while you have ridden the stock down from 15 to 11, not knowing anything about the dilution. How does that make you feel? Well, too freaking bad sucker. You just got screwed and their ain't a damn thing you can do about it.

Now lets say you are a short term investor/trader and you bought BAC on May 10th around $13.50 and planned on selling it around $15 for a quick hit, but got stopped out at $12 a share because a week later you find out they were diluting your shares behind your back. How does that make you feel? Well too freaking bad dumb ass. You just got bitch-slapped by the gov't and the BAC BOD and their ain't nothin' you can do about it but take it on the chin and move on.

Now lets say you are day trader and you just sold 2000 shares of BAC short middle of the day today and after the close, you find out BAC has been raising $18B in "capital" behind your BAC and the market likes that causing BAC to gap up $2.50 in the morning causing you to get squeezed out. How does that make you feel? Well get with the program loser. You just got a financial wedgie and you are just gonna have to enjoy the feeling of cloth being rammed up your crack.

It happens all the time. The little guy will get screwed trading individual stocks. Don't bother. I can come up with dozens of stories like this. The game is being played on a field you are not invited to. You are an observer, not a player. So just observe.

1 comment:

  1. BD,

    Funny, LOL post. Witty & wise. I mostly agree. And yet, didn't you take a chance recently shorting BAC & AXP?