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Breaking The Buck

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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

3 Comments – Post Your Own

#1) On May 04, 2009 at 9:48 AM, portefeuille (99.56) wrote:

Rationally, it makes no difference

I have no idea why so many in the U.S. seem to be so obsessed with absolute stock prices. And how can the Dow Jones Industrial Average still be paid attention to (for "criticism" see for example here)? When I got to know how it is calculated I simply could not believe it.

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#2) On May 04, 2009 at 9:55 AM, portefeuille (99.56) wrote:

(I think at the time my top3 reasons not to live in the U.S. were Bush, the death penalty and the way the Dow Jones is calculated ...)

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#3) On May 04, 2009 at 4:00 PM, BigFatBEAR (29.55) wrote:

Haha, incidentally Port, I think those are the top 3 reasons most Americans didn't want to live in the US either...   ;)

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