Wednesday, February 15, 2012

The stock market expert

I am currently reading Michael Lewis's Boomerang: Travels in the new third world, a hilarious account of the events that led to the economic meltdown in Iceland, Greece and Ireland, and of course, eventually, the rest of the world.  Iceland's situation was due to the fact that every fisherman wanted to be a financial investor, Greece's was due to inflated accounts and Ireland's was due to the collapse of the banking structure.

Iceland was especially funny, because I could exactly relate to what happened.  I am not a fisherman, but I did turn a financial investor with fantastic results.  So, let me tell you three stories; these stories changed the way I invest.

The first story was pretty devastating as an early investor.  After making tons of mistakes by investing in worthless companies, I thought it was time I took on the big guns.  I realized that if you actually want to make money, it should be done not by volume but by the quality of the stock.  I felt that buying 1000 shares worth 5$ was not as good as let's say buying 40 shares worth 120$ each.  So, that's exactly what I did by buying the latter.  In about a week after I bought the highly valued 40 shares, the stock price tanked to about 90$.  And as was(even is is applicable here) my trait, I panicked, ending up in massive losses worth 1200$.  That's like losing many months of savings.  I think I must be one of the very few investors who made a loss after having shares of the company that has the ticker AAPL.  Sigh!

The second story also involves the AAPL ticker.  I thought I had learnt my lesson, and I felt everything was a good learning experience.  I bought ten shares of AAPL at 240$ or so, the figures I don't remember exactly.  Those days, I was car pooling with my colleague at work.  Both of us, as a practice, used to discuss our acts of bravado in the financial world.     

"Dude, I always have a problem with the stock market.  Whenever I invest in a company, that company tanks." I said, frustrated with myself.

He was cool.  "So, what did you do now? Let me know which company.  At least, I'll short it."

"No way man.  This time, I have invested in Apple.  The stock is only heading north.  Nothing can bring it down."

After some time, the same day, during work, I received a mail from him.  The email had the derogatory Hahahaha.  Even, before I could open the mail, he walks into my office and lets out a massive laugh.  

"Did you read the news man?" he asked.

"Why? What happened?", I shot back.

"Check out the news", he said.

I opened Google news and the Wall Street Journal screamed out "Apple's Jobs to take medical leave."

That was Steve Jobs's first medical leave of absence and I know the stock lost 10 to 15% in a single day.  I have no idea how much I sold it for.  I don't want to remember such things.  

The third story is a bit more complicated.  I generally did not deal with stocks in the banking sector.  It's a different matter that I do not deal with any right now.  My under-graduate pal was praising the adventures of his friend, who had made a lot of money in the stock market.  

"Dude, he has invested in a lot of steel companies, but majority of his investments are in the banking sector.  He has already made 25,000$."

He continued further.

"You know what? He bought C (Citibank) when it was at 1$ and BAC (Bank of America) at 2$, and he is reaping the rewards now.  C was trading at about 4$ and BAC at about 8 or 9$."

I was overawed.  "Wow, that's pretty cool, man"

"What's your friend saying? What should we do now?"

"We should invest in banking stocks man.  No doubt about that.  Banks can never collapse.  The government always protects them."

"So, what are you thinking about? What do you have in mind?"

"Let's invest in AIB (Allied Irish Bank) man." He said pretty confidently.  "I have already purchased 600 shares at 8$."  

"I don't have so much.  Let me buy about 300."

I think that was the only day in our lives, we saw that stock at 8$.  

Then started the onset of the Ireland banking system collapse.  The Irish Banks were issuing loans to real estate developers massively, and after a point, as the real estate market collapsed, there was no way for the Banks to recover the money.   
The stock only went downhill.  We sold the shares at 2 or 3$ incurring a massive loss.

Both of us turned philosophical.  We came to the conclusion that the stock market was a pretty hard learning ground and it wasn't good for amateurs like us to enter the fray.  

We had to blame someone.

"All these things are controlled by the government."  And of course, my friend had to let out his trademark quote.  "Money earned through stock market is not hard earned money.  Anyway, it will go out of our hands.  So, forget it."

I had half a mind to reject the quote, but that would have only made things worse.  

So, these three stories thought me a severe lesson.   Never ever put money in the stock market.  It is like playing with fire.  So, today, as I saw the AAPL stock going up, I was tempted to buy 5 to 6 shares.  I almost placed the order, but then withdrew at the last moment.  The stock was trading at 525$.  An hour later, I checked up the value, and it had gone down to 508$, and it ended the day at 495$.

It felt good.  But, it also felt bad that I still hadn't learnt my lesson completely.