chk999 (99.98)

Breaking The Buck

May 04, 2009 – Comments (3)

I noticed something interesting during the recent stock market downturn.

There seems to be a psycological barrier when a stock price drops towards one dollar.

Companies that are perceived as still having some value will get down close to it but will not close below it.

Companies that are perceived as the walking dead will punch down through it and stay there. Some of them do a reverse split to get back above the buck, but that seems to be in the "lipstick on a pig" catagory action. Like with Sun Microsystems, the price still kept falling and they just recently got bought for a pittance.

I think what is going on is a version of what Malcolm Gladwell calls "thin slicing" which is where your brain is doing some sophisticated pattern matching that you aren't conciously aware of. There has been enough collective market experience that the price is a marker for future expectations and companies that are thought to be dying get the price pushed under a buck. It would be a cool back test to see what the survival rate was for companies that broke the buck versus the ones that got close to it but didn't fall through.

This starts to explain why companies want their stock price to stay in the 5-50 range. Rationally, it makes no difference, the only real criteria are what are you paying for earnings and how reliable are those earnings, but companies will do a stock split when the price seems to be staying above 100 or so and will do anything to keep the price from falling below 5.

I really only have one takeaway from this and that's if you've been holding on hoping for a stock to recover and it closes below a dollar, sell. It might recover, but that's not how to bet at this point.

Chris - still holding on to tvinq, mostly for the entertainment value