Use access key #2 to skip to page content.

Stop buying crap

Recs

24

September 29, 2010 – Comments (17) | RELATED TICKERS: GMCR

Everytime a scandal comes out with a company, investors say oh look a nice buying opportunity.  I used to do the same thing (on caps not in real life).

1) The price of a stock is based upon demand.  If nobody trusts it and nobody wants to own it, it can be a great "Value" but youll lose a lot of money on it if nobody buys it at a higher price than you (unless they pay dividends, but that never happens)

2) You're just buying a piece of paper with 1-5 letters on it if its all a fake.

3) These stocks ALMOST NEVER recover.

I can list about 15 chinese stocks (especially FUQI), and dozens of stocks in other countries (Even America) where people have lost a ton of money trying to pick up a "great value that was blown out of proportion by an investigation"

Its one thing if muddy waters investigates you (which still ruins your stock price).  It's a lot worse when its the SEC

I don't know about you guys but if a stock has a P/E of 1 and a P/B of .000001, but the stock price never goes up....doesn't seem like such a great value to me.

Stop buying these companies, the risk/reward is terrible....especially when the company is already overvalued.

17 Comments – Post Your Own

#1) On September 29, 2010 at 5:43 PM, Euro247 (33.09) wrote:

Well Dead cat bounces DO happen, although sometimes they happen soooo fast that many miss out...it becomes an issue when you actually decide to buy and hold these

Report this comment
#2) On September 29, 2010 at 6:21 PM, TSIF (99.96) wrote:

I agree, the risk/reward, the majority of the time will result in getting eaten alive and if someone is listening to a bunch of bitter/hopeful stockholders while the retail investor bleeds out at any cost, then they are most likley going to get bite.  The attitude that something must be oversold at any level is dangerous.  So overall, I very much agree with your blog.  Value isn't just P/E and P/B. If it stinks it isn't getting picked up.

You do note there are exceptions, and for somone with eyes wide open who "specializes" in these and understand the risk/reward and various reactions, there is some money to be made, but it's not a sentiment play.

  As Euro247 indicates, thinking you got them at bottom and holding them through a bounce and then several smaller oscillations that all fade away is "Foolish".  Believing the first assault is bottom is also "Foolish". I booked half my gains on DYP, up 20% and all my gains on DGW (about 15%). Booked gains on SAY and was glad I didn't hold them!  I have taken my share of losses playing this game and there is no perfect recipe, so overall, best to be avoided if and put the funds on something safer, like the slots at the casino that are only about 35% against you!  :)

Report this comment
#3) On September 29, 2010 at 7:20 PM, neamakri (< 20) wrote:

I think that opportunities do come along.

On December 29,2008 I bought tata motors (TTM) at $4.39. This is when American car companies died. Four days later I sold TTM at $4.71.

When satyam (SAY) had their CEO scandal I purchased at $1.85. Five weeks later I let it go at $2.95.

These were purely speculative, but my gut said buy!

Report this comment
#4) On September 29, 2010 at 8:15 PM, Valyooo (99.43) wrote:

True. But there are so many better deadcat bounces...any other negative news than investigations (besides bankruptcy) for example

Report this comment
#5) On September 29, 2010 at 8:23 PM, Valyooo (99.43) wrote:

That last comment was supposed to post 2 hours ago

SAY was actually the exception I had in mind

Yeah I made money off of ONP but that was because they had just opened up to investigation and muddy waters was thought to be fraud. Made 12% in one day then bailed

Tsif, totally agree with everything you said

Oversold bounces are usually only good with a solid company that keeps dropping, using the oversold levels to trade it. Or another way (much more risky but works with stocks u know inside and out) is to wait for the stock to have a very low volume day and then buy like aib. Dropped, dropped, droppppppppped, then yesterday didn't move around as much so I made a mental note and then today it exploded. Samething happened with ADY. But I certainly wouldn't call it a bottom

Report this comment
#6) On September 29, 2010 at 8:25 PM, Momentum21 (50.12) wrote:

If one thought the ticker was Crap he/she would not buy it! Do you have a consistent method for identifying Crap before it becomes Crap?

 TSIF (99.81) - if you were playing those stocks (DYP and SAY) for a bounce you were depending on the luck of your timing and I disagree with that strategy. Who cares about 15% when you are risking everything perhaps?

There is a difference if you are investing over longer horizons with an event-driven strategy. If I am going to take a chance of SAY (which I am doing right now in RL) I am not playing it to scalp 15%...I am going double+ or nothing potentially. 

I am betting that if you choose wisely and spread your risk you can outperform even if you choose a bad apple or two.  

Not every equity in China is fraudulent and I think there are many equities priced that way. 

Long: HEAT, SAY, DYP, CSR, FEED and XIN

And I own lots of other crap too! : ) 

Report this comment
#7) On September 29, 2010 at 8:26 PM, Valyooo (99.43) wrote:

Also, these companies should pay a dividend to prove they're not corrupt. If the price falls so low that the p/e is 2, then they would only need to have like a 20% payout to show a monster dividend that would send the price soaring

Report this comment
#8) On September 29, 2010 at 8:36 PM, 1277507302 wrote:

Looks like everybody's swing trading. Time to go long China ;-)

Report this comment
#9) On September 29, 2010 at 8:59 PM, topsecret09 (38.63) wrote:

  STOP BUYING EVERTHING AND START RAISING CASH !     {Fed officials clash over efforts to aid economy}   The smoke and mirrors are going to be exposed very soon. This economy Is VERY sick and It Is on life support. 6 million more people will lose their unemployment Insurance In November. The consumer Is tapped out. There Is ZERO job creation. The housing crisis Is getting WORSE. Do not listen to the media spin. Listen to your "GUT"...      TS          Fed officials clash over efforts to aid economy

By JEANNINE AVERSA (AP)

WASHINGTON — Divisions within the Federal Reserve over how to pump up the economy and lower unemployment came into sharper view Wednesday.

Three Fed officials squared off in competing speeches over how much help would come from one likely next step — buying more government debt.

Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, argued that such an effort may not help the economy much. Charles Plosser, president of the Federal Reserve Bank of Philadelphia, made a similar point.

But, Eric Rosengren, president of the Federal Reserve Bank of Boston, said Fed policymakers must do what they can to bring some more relief.

The Fed delivered a strong signal last week at its meeting that it was prepared to act if the economy weakened. High on the list of unconventional tools is buying more government debt, known as quantitative easing.

The goal is to force down rates on consumer and businesses loans even more to get Americans to boost their spending. Doing so, would help the economy.

In their speeches, Kocherlakota and Plosser expressed skepticism that quantitative easing would drive down rates nearly as much as such efforts did during the recession and financial crisis.

Because financial markets are in better shape now than during the crisis, the difference between the rates on super-safe Treasury securities and rates on other consumer and business loans has narrowed.

"I suspect that it will be somewhat more challenging for the Fed to impact them," Kocherlakota said. A new debt-buying program "would have a more muted effect," he concluded.

Plosser said: "Monetary policy is not a magic elixir that can solve every economic ill."

However, Rosengren said buying more government debt could benefit the economy, and therefore should be considered.

"It is important that policymakers be open to implementing policies" that are aimed at lowering unemployment and preventing inflation from getting too low, which could put the country at risk of deflation, he said in a speech in New York.

Many economists believe the Fed is likely to announce action when it wraps up a two-day meeting on Nov. 3, the day after the congressional midterm elections.

Although the Fed has yet to coalesce around a specific plan, one idea put forward by James Bullard, president of the Federal Reserve Bank of St. Louis, is gaining closer scrutiny.

Under Bullard's approach, the Fed would initially buy a moderate amount of government bonds — perhaps in the range of $100 billion or less. After that, the Fed would review the economic climate at each meeting and decide whether it needs to buy more government bonds to bolster the recovery.

That would allow the Fed to avoid making the kind of upfront commitment to buy government debt on a large scale in the trillion-dollar range. It also could ease concerns among some Fed officials about carrying out the type of large-scale interventions seen during the recession.

The Fed ended up buying a total of roughly $1.7 trillion of mortgage securities and debt, as well as government bonds, during the recession.

Another big buying binge would complicate the Fed's efforts later on to unwind all its stimulus. There are also concerns that another large-scale effort could spark inflation later on or trigger a wave of speculative buying that could create bubbles in the prices of bonds or commodities or other assets.

On Wednesday, the three Fed presidents in their speeches weighed the pros and cons of buying government debt in general, rather than the specific Bullard proposal.

Rosengren is currently a voting member of the Federal Open Market Committee — the group, including Fed Chairman Ben Bernanke, that makes decisions on interest rates and other policies that influence economic activity. Kocherlakota and Plosser will both be voting members next year, although they participate in the Fed meetings and debates over policy moves. Kocherlakota spoke in London, while Plosser spoke in New Jersey.

Copyright © 2010 The Associated Press. All rights reserved.

       http://www.google.com/hostednews/ap/article/ALeqM5hTlA7m2TuKuKz6FcqFx3b34S1lAQD9IHNKA00?docId=D9IHNKA00

Report this comment
#10) On September 29, 2010 at 9:03 PM, TSIF (99.96) wrote:

Momentum21:  Valyooo wasn't singling out any particular class of stock as CRAP.   (Nor was I).  He was specifically talking about a stock that had a catalyst downward. Many people jump into those without evaluating the risk with the hope/expectation that the market over reacted.  This is sometimes true, but its actually very rare.  One can hedge their bet if they do some research and look at it open minded, but in general the market is herd mentality and open minded or not, a sell off may not correct.   

" I am not playing it to scalp 15%...I am going double+ or nothing potentially. "

And I agree if I've reseached the company and am willing to take my risk, but on a company that had a catalst, double or nothing sounds like a much riskier play than scalping 15%!  I agree timing is very subjective, but there is a pattern to a lot of the equities that get hammered.  Plan the entry and the exit,  (for better or worse).  Planning a strategy on losing was not something I was very good at for a long time. The rearview mirror sometimes showed that exiting was not the optimal move, but over time I've determined that any time you exit when you made the call rationally is a good time to exit.  I researched DYP and determined that even if what they were cited for was true, it should not have been the catalyst it was. I patiently waited for it to double dip. If it had not, I wouldn't have entered. (Which is why half my money is still on the table).   UTA crashed because of one blogger who didn't understand the company. 

  If it's a company you were watching anyway then a CEO leaving, a one time event, or a bad quarter may be great opportunities to go long.  In the examples Valyooo gives, most are too risky if the wound hasn't been taken care of.   Taking some money off the table on the way up or setting your bottom and taking your hit if things keep going south makes a risk call more palettable.

 neamakri   Sometimes my gut talks to me too, but sometimes I find out later it was indigestion, not a buy signal!!!  The gut alone is too risky for me.  Be ready to exit with a slight loss if the gut sells you short!!!

Report this comment
#11) On September 29, 2010 at 9:30 PM, topsecret09 (38.63) wrote:

Food Stamp Use Skyrockets in Unexpected Places   PoliticsFood Stamp Use Skyrockets in Unexpected Places

Published September 29, 2010

|FoxNews.com

The number of Americans on food stamps has skyrocketed in some unexpected places, underscoring the trouble families are having just trying to scrape by as the economy falters. 

According to Census data released Tuesday, last year 10.3 percent of all households were on the benefits known formally as the Supplemental Nutrition Assistance Program. 

Forty-six states registered an increase, but six of them -- some of which do not suffer from high unemployment -- saw their food stamp rolls swell by more than 30 percent over the prior year. The six states are Arizona, Florida, Nevada, New Hampshire, Vermont and Wisconsin.

Though Nevada's 14.4 percent unemployment is the highest in the nation, Vermont and New Hampshire have some of the lowest rates -- 6 percent and 5.7 percent, respectively. 

Recent federal statistics have shown that families are signing up for the program in historic numbers across the country. The number of Americans on the program reached a record high of 41.3 million in June. The increasing monthly totals have set records for 19 consecutive months. The aid is available for recipients with incomes near the poverty line, not just the unemployed. As expected, the rise in food stamp recipients coincides with a rise in poverty. 

Separate Census figures released Tuesday showed the number of people in poverty grew to 43 million last year. Census estimates released along with the food stamp report showed increases in 31 states between 2008 and 2009 in the number and percentage of people in poverty. That includes all six states that saw the number of food stamp recipients grow by more than 30 percent.   http://www.foxnews.com/politics/2010/09/29/food-stamp-use-skyrockets-unexpected-places/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+foxnews%2Fpolitics+%28Internal+-+Politics+-+Text%29&utm_content=My+Yahoo    

Report this comment
#12) On September 29, 2010 at 10:26 PM, Mstinterestinman (23.19) wrote:

GMCR has 80% market share of the premium coffee market I have real money says this investigation ends up being about as bad as GS was only a much smaller fine.

Report this comment
#13) On September 29, 2010 at 11:09 PM, Valyooo (99.43) wrote:

And did gs rebound? No it kept sliding now goes nowhere

Report this comment
#14) On September 30, 2010 at 10:57 AM, JaysRage (88.76) wrote:

I've made similar statements in similar blogs.   Not everything that has a depressed price is crap.   If you know the difference, then you can pick up cheap shares of a quality company at rock bottom prices.   This happens all the time.   Uninformed investors dump at the first sign of trouble, shorts pile on and before you know it, the stock price no longer begins to reflect reality.   It happens both ways.....with good and bad news......

If you are informed and free of emotion, you can really take advantage of these over-correction situation.   In many cases, you don't even have to buy "crap".   You do, however, need to know the difference between "crap" and "over-correction".  

Report this comment
#15) On September 30, 2010 at 12:30 PM, chk999 (99.97) wrote:

There is a "Yes, but" here. Many stock prices crash because the company is garbage. But sometimes the market goes crazy and sells off good stuff with the bad. There is where fundamental analysis helps you pick through the garbage to find the gold. 

This is not an argument against extreme suspicion (indeed it is an argument for it) but against blanket condemnation without doing the research. 

Report this comment
#16) On September 30, 2010 at 2:23 PM, Valyooo (99.43) wrote:

This blog was specificaly referring to fraud investigations. I agree with jaysrage and chk in regards to other stocks. Infact, if u are talking about investing (not trading, there are tons of ways to make money trading) the ONLY way to make good money is to buy stocks that were oversold. I made a bunch of money off of rig with the bp thing and I made a 400% gain off of tck last year. But I don't buy frauds

Report this comment
#17) On October 01, 2010 at 11:53 AM, Mstinterestinman (23.19) wrote:

Yeah I'm on the sidelines till we know more about the investigation. Took a small profit off the table if this gets really bad you'll never know till its too late and I had almost 3k on the line.

Report this comment

Featured Broker Partners


Advertisement