For those with weak stomachs, heart conditions, or dedication to long-term buy and hold, let me warn you that what you are about to read will frighten you. Reader discretion is advised, but who can resist a good scare?
According to a news article from Reuters, Home Depot (NYSE: HD) call options traded with heavy volume yesterday based on speculation that Sears Holdings (Nasdaq: SHLD) chairman and investor extraordinaire Eddie Lampert was interested in buying its shares.
This quote from Tim Biggam, options strategist at Man Securities, made the hair on my neck stand straight up (emphasis mine): "This rumor has prompted enormous option volume on the call side as hot money players buy first and ask questions later."
Before I get into trouble, this is not a knock on Mr. Biggam. He is making a comment on the situation. But it's scary to think that his comment probably is not far from the truth and it probably goes on all the time.
Ohh-wah! It gives me shivers reading it again.
Look, I am sure there are traders out there who have a good "feel" for the market and trade with their gut instincts. And I am sure that there are other traders out there who work to assess the risk associated with each situation and know how to get in and get out of positions quickly to make a profit on lots of trades.
For me, buy first and ask questions later would be as profitable as poking a gorilla with a stick to see what his reaction will be. It doesn't seem like anything good can come from either action.
Sure, Mr. Lampert is a successful investor, having generated some impressive returns at his hedge fund ESL Investments by buying companies like AutoZone (NYSE: AZO) and AutoNation (NYSE: AN). And it's clear that if traders want to front-run him (establish a position ahead of someone), like people try to do with Warren Buffett when he's reportedly establishing a position, Lampert's destined to stay of the top of the investment mountain.
But to me, this makes no sense. Why would I want to invest in something I might not know anything about just because someone else is doing it? Lots of people have (cough-cough) invested in real estate over the past few years. Not me. I don't know much about real estate. So there's no way I would want to invest in a company just because a famous investor may or may not be involved.
Sure, I may miss out on some "easy" returns. But the funny thing is I like asking questions and doing investment research. That way, I can allocate my money to places that are going to generate the largest returns for the lowest amount of risk. And to do so, it's probably in my best interest to, I don't know, understand what the company does and why it should generate those great returns.
Call me crazy, but that's just me.
Actually, I think speculators are needed for markets to work properly. If everyone invested the same way, markets wouldn't function as well or create interesting opportunities once in a while.
But as a Fool, please, I beg, don't poke the gorilla with the stick. He's just going to pound you into the ground. And don't buy a stock just because Warren Buffett or Eddie Lampert or even great Fools like Philip Durell and Bill Mann may or may not be buying. Find out why the company is worth your investment dollars and then make the decision. Yeah, that's right, ask questions first and buy later. Not the other way around.
Man, I'm still shivering.
For more market foolishness, check out:
Home Depot and AutoZone are both
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recommendations. Don't just buy their shares. Come take a
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to Inside Value to find out why lead analyst Philip Durell thinks they're good investments and then decide for yourself if they are. That's being Foolish.
Fool contributor
David Meier
does not own shares in any of the companies mentioned.
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