Today was a great opportunity to witness the raw power of stampede for the exit on a stock. Focus Media Holding was at the centre of a report released by controversial investment firm Muddy Waters alleging fraudulent business practices. This is the same company that has made headlines in the past by obliterating stock prices of the companies they feature. Because Muddy Waters usually sells short (e.g. they take a bet that a stock is going to fall in price) many of the names they feature, if the stock drops they stand to profit.
While not illegal, it is controversial. Muddy Waters has exposed several cases of improper or fraudulent activity from Chinese companies listed on American and Canadian stock exchanges (such as Sino-Forest – to read more click here). While some of these claims have turned out to be true, others have been refuted. Regardless, what happened today with a stock price losing over 50% of it’s price in less than 30 mins in the middle of the trading day is not something you typically get a chance to see.
Even though the video does not have sound you can see how quickly the prices fall (this video catches the sell off into the day low) and that anyone trying to get a “bargain” at $12 ends up having to ride this stock well down underneath $10 and not really knowing how much further things will go. This kind of falling stock is usually called a “falling knife” because even though the price is dropping, trying to catch it on the way down can be very dangerous. One of the scariest moments if you own/trade a stock is when the stock exchange intervenes and halts trading activity because it’s really anybody’s guess as to what happens next. Luckily for FMCN shareholders this halt was lifted and trading resumed about 10 minutes later only to be halted another time as the price rose dramatically from the day low.
The take home lesson: even if you do your homework on a stock, there are opinions out there that can move the perception on what something is worth. When opinions go negative though, the results are often dramatic, emotionally driven drops in price and stampedes for the exit. Markets always try to “price in” (i.e. factor in the ‘cost’ ) certain scenarios and this video shows you how fast and volatile that process can be. Enjoy!
This is a great interview with Kyle Bass (Hayman Capital) that captures two things really well: approaching opportunity and how media sometimes approach trading.
The first compelling point of this video is that is shows viewers how successful traders approach opportunities and the calculated fashion in which they “speculate”. While it is true that there is risk in what traders undertake, you can see how entirely rational Mr. Bass’s assertions about the world are. If you listen very carefully to what is being said you will hear that in spite of his very negative outlook on the world in 2006, he still had positions (i.e he owned stocks) that believed the market would go up AND positions that the believed that the market was going to go down. In simple terms, the cost to take the bet against the market was so low, and the potential reward so high that even though his ‘negative’ bet was “wrong” for a year and half while the markets still rose, when that negative bet paid off, it did in a big way. Despite having both lost and gained money, his gains exceeded his losses and in the end that is what makes your trading portfolio grow.
The second really interesting part about this interview is that it highlights the way in which the media/press sometimes sensationalize issues at the expense of being accurate. In other words, they try to shock viewers rather than inform them. While the questions were pointed, Mr. Bass’s responses were often unfairly interrupted and in spite of the interviewer trying to construe Mr. Bass and traders like him as the source of problems in the markets, he did an excellent job of pointing to the real causes of the financial mess, and most importantly how to think through hedging against what could be around the corner.
If there’s one thing that you can guarantee about the stock market, it’s that everyone has an opinion. At first blush, it seems fairly obvious that with so many different people participating in the market, there’s bound to be differences of opinion.
What many observers and inexperienced investors/traders don’t do, however, is to look deeper at what it is they’re actually saying by admitting that there are so many different opinions. By acknowledging the differences of opinion in the market, the most profound insight is that not everyone can be right at the same time. In other words, somebody has to be right and somebody has to be wrong. It is this very disagreement, in fact, that makes a market.
Two’s company but three’s a market?
So why is this seemingly trivial piece of information actually incredibly valuable? To understand why, we have to take a step back and understand first where a “market” comes from.
Simply put, a market arises because a buyer wants to buy something and a seller wants to sell something. Where they have to come to some agreement on is price. It is for that reason that markets are sometimes referred to as “price discovery mechanisms”. One of the favourite questions Sparx encourages beginner traders to ask is: “how much is something worth?” Think about that for just a moment. The answer is “whatever someone is willing to pay for it”. Without both a buyer AND a seller, there is NO market.
Markets are born out of disagreement; they are built on one party believing one thing and another believing the exact opposite. For this reason, buyers and sellers compete directly with one another in what some call a “zero-sum” game meaning that the “winner” wins at the expense of the “loser”. While this is mostly true, there are also slews of “middle men” or brokers that facilitate buyers and sellers’ transactions (more on that in another article).
Most people believe that in order to be successful in business, you have to be profitable, and for the most part they’d be right. The primary “goal” is quite easy to measure – are you profitable or are you not? If you talk to any salesperson or sit through any company sales pitch, however, you may hear a different depiction of what businesses are. Namely they are “problem solvers”.
Whichever way you characterize it, businesses exist to supply products or services for those that demand (either want or need) particular products and services. It is helpful to point this out because if you decide you want to trade, it is much more practical to think of trading as one would if they were opening/operating their own business. If you were to think of stock trading as a business you might start to ask: what type of business am I? Who are my customers? Who are my competitors? Who are my collaborators? What kind of market is there for my product/service? If you are trading a stock, though, what “problem” are you solving?
One very useful way to think about trading stocks is by way of an analogy with a convenience store. The convenience store is in the business of having everyday items available in a convenient location. Customers usually pay a bit of a premium for the “convenience” of not having to go out of their way to get the desired item. As a stock trader or investor, you are a convenient source of an item (stocks) that may be in demand. You solve the problem of inconvenient access to a stock for a buyer or seller.
The Money Talks Insider Conference is another in a series of regular events hosted by Michael Campbell, a well known figure in the Canadian investment world, most notably for hosting the radio show Money Talks. This conference will feature some popular traders and analysts giving their opinions and perspectives on market conditions and investing ideas. To find out more information or to register online go to: http://www.moneytalks.net/moneytalks-insiders-conference.html
*Special Note via Stockscores: If you wish to buy tickets to attend the conference, use the promotion code SOBC2011 and receive $25 off plus $50 of your ticket price will be donated to the Special Olympics. Even if you can’t make it to Vancouver, it is possible to watch the conference on video, the information page has more details.
For traders and investors, there are many different resources out there that can provide information on everything from new products and services to trading strategies or trader education. Whether they be on the web or in person, connecting with experienced traders or investors is a fantastic way to not only build your trading knowledge base but also a chance to network.
If you are interested in webinar click the link below or select your region to find out about events in your area.