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Gemini846 (91.33)

Don't make these mistakes!

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October 23, 2008 – Comments (2) | RELATED TICKERS: HTM

2 Simple mistakes I made earlier that you can avoid.

While I know that this space is our favorite place to call everyone a communist and talk about beheading king paulson, this is still an educational trading site. I'd like to take today's time to go over a really simple mistake I made recently; a real "should have known better" and talk about how you can avoid it.

The first mistake is trading technically against the fundamentals. Consider the 6 month chart of HTM:

http://finance.google.com/finance?client=ob&q=AMEX:HTM

For nearly a year the stock had a downward trend (due to no real cash flow/ negative eps). It's a speculative play at best. I think it has long term prospects but we have no real idea when they will actually start making a profit.

The stock has occilated between the $2 and $3 range at about 1 month intervals. On Sept 13 the chart turned positive and I set a low limit order to buy at $2.05. I green thumbed in CAPS at 2.13. The low on the day was $2.06 so my order never got elected, which ended up being a good thing for me. The stock popped for half a day and then dove like a runaway train along with the S&P during the first week of October.

Not wanting to take a red thumb I stayed in and made one of the worst mistakes any investor can make. "It will come back." Now I know that in CAPS it is a valid strategy to sit on long term loosers until they come back in play because they may take a short term run that out-performs the S&P putting you in the green long enough to close. The reality is that I would have stopped this out at about $1.60 or so give or take depending on the beta but if I had let emotion get in the way expecting a short term technical bump I would have lost 60% (like my CAPS score).

The words of wisdom (mistakes to avoid):
1) Don't buck the fundamentals when you are expecting a technical move. It will likely be shallow.
2) Don't let emotion get in the way of preventing a huge loss. Know when to cut and run.

I hope this concrete example helps someone. It's going to be a wild ride.

2 Comments – Post Your Own

#1) On October 23, 2008 at 12:30 PM, leohaas (99.28) wrote:

Your advise works well on an investment, not on a bet. The fundamentals for HTM have not changed much. The only thing that has changed is the oil price. With it, all energy prices have collapsed. That explains why HTM is down so much.

Surely, when you bought HTM, you knew they weren't making any money. Therefore, your reason to buy could only have been speculative. What exectly is the logic behind stopping out on a bet? When I go to Atlantic City, I either go home when my predetermined amount of cash is spent, or when I hit a nice jackpot...

By the way, thanks for this reminder: it also means that HTM is now way more attractive than it has been in a long time. I will attempt to double my position in HTM this month, because I still think this company will make a nice profit in the future if they survive.

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#2) On October 24, 2008 at 7:16 AM, Gemini846 (91.33) wrote:

Yes, I could see HTM returning. I do agree with the long term premise of the company, and I do think that the plants are working (and eventually they will sell electricity).

Why would I stop out on a bet? Why leave the table when you're loosing? Perhaps we have a different idea of when we've "lost".

By saying it's a bet, you are basically throwing the money away and if you loose it cool if you make a butt-load cool right?

Why would I not want to pull out at 1.60 knowing the trend is downward due to them having know cash, knowing that they have broken all support and that oil is falling making thier product worth less?  Your point of maximum pain is $0.00, mine is $1.60, the point where I know I've "lost the bet" and need to leave the table.

Couldn't I always buy back in at $0.60? There's nothing wrong with your desire to reduce your average basis either. If I'm committed to the position then by all means average it in. I just feel that the odds of getting a large pop after it breaks that downside support was significantly stacked against me.

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