Catching Falling Beer Bottles is Better Than Falling Knives
Buy high, sell low and don’t lose your money in between.
OK, THAT was confusing! As far as I could tell from the owner’s convoluted ramblings, he was advertising momentum buying for his beer. Buy it before the price rises too far out!
Perhaps a better idea would be to buy popular brands early in the evening before their prices go up and then switch to lesser-known brands later as their price gets depressed from lack of sales?
The nice thing about buying beer this way and the point at which this whole idea veers off from the stock market is that the beer gets used up while stocks don’t. You drink your beer! You don’t want to just hold on to it to sell it to another patron later in the evening and so you don’t really care if your beer’s price went up or down after you’ve had it. You’ve already enjoyed it.
Momentum buying for stocks, real-estate or commodities isn’t quite the same thing. In this case, you’re not planning on EVER actually using what you buy, just on dumping it on to someone else at a price that’ll net you a profit. The danger with this approach is that it reeks of the idea of the Bigger Fool. It works as long as the price moves in the direction you were hoping for but at some point, prices reverse course and SOMEONE is stuck with the actual asset at what turns out to be a terrible price.
If it’s just beer, it’s not so bad. Drink it, enjoy it and wonder at the folly of having bought a 100$ can of Coors Banquet Beer.
Things get more hairy if you’ve bought a house in the hopes of flipping it only to find that no one wants it. Now you’re stuck with not only the house itself, but the mortage, the taxes, the repairs and the hassles. Blarg. Well, at least you can live in it. Flipping stocks is even worse because now, you don’t even get a piece of paper to burn as fuel if you’ve picked a company that goes bankrupt.
Momentum players might be horrified at the trade I put in for NNVC last week. They say that “The trend is your friend” and the trend for NNVC is clearly down. Buying a stock that’s crashing is also called catching a falling knife and it’s one of the basic things people get warned NOT to do!
One quick way to go bankrupt is to chase a stock on its way down. You buy some at 100$. You buy triple that much at 50$. You sell your house to buy boatloads more at 20$. You get your family and friends to buy all they can at 10$ and the stock goes to 0 a week later! Ouch. That’s gotta hurt! It’s also what you DON’T want to do!
So, how do you differentiate a falling knife from a mis-priced opportunity that’ll become a never-ending fountain of beer?
1. Look for clear cases where the outcome is binary. One side is clearly right and the other is clearly wrong. Cases where it’s black and white; where there simply is no middle-gound. If one side is right, the stock will be worth ZERO! If the other side is right, the stock will go up 50X.
Do your research, understand the company and all of the arguments pro and con. Know enough that you can discern clear falsehoods in one of the two propositions. If BOTH propositions clearly have problems, don’t invest either way because it’s not a sure thing!
2. Double-check anything you can to try and see where YOU might be wrong in your view of the final outcome. If you don’t find anything, check AGAIN!
3. Put your money where your mouth is and follow your gut-feelings AFTER careful research.
4. (optional) Have a beer and relax.
Wow… looks like the preliminary results for NNVC are in. 4$ today, up from 3.11$ at purchase. Nice! Even more interesting is that this move up came on the same day as BAD news hit the stock: another ambulance-chasing law-firm is coming after NNVC. How does a stock go UP on bad news!?
Ah… a quick look at institutional holders seems to bear an answer: Their holdings are way up since the last report. Someone’s been buying. That “someone” includes the Pension Fund of California! Nice.
Another recent case of this was Pretium Resources (PVG). Their stock tanked overnight to about 3$ when a famous third-party bailed out with some rather scathing commentary about the quality of the company’s gold resources. That stock’s trying to reach 7$ now, just a few short months later. But as all things, it’s easy to spot in hindsight, not so simple in real-time.
Mr Beerver also has other things to do than just watching stocks and reading news all day which is why he doesn’t hold very many stocks and why he doesn’t flip them. Once he put the effort into understanding a company, he wants to keep it for a good long while and reap the free beer it gives him.
How is this different from momentum players, though? They both seem to simply want the price to continue to move in a specific direction.
Mr Beerver’s different because he expects the stock price to move not because other people will buy into the story he bought but that the stock price will move because the story ITSELF changes for the better. Right now ISCO sells a skin cream and an eye cream along with cells for research. That’s nice. Soon, the story will be that ISCO has a cure for Parkinson’s disease! THAT changes the whole narrative and the dynamics of the stock! The new price when this becomes reality will be magnitudes higher than today’s OR (there’s always an or!) the failure to secure their patents in Europe will destroy their hopes and permanently damage the company’s potential, preventing the price from rising above 15 or so in the future.
Which outcome do you feel is more likely? Are you confident enough to invest your money into this idea?