Post of the Day
March 23, 2000

Board Name:

Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light.

Subject:  The Real, Real Risks of Margin
Author:  globalstreamer

Fellow Fools,

I write this for several reasons, many of which are not clear to me at this point. I do know that I have had a horrible day and so I need to cleanse myself. I also write it to educate (but not necessarily amuse or enrich) members of a community for which I have great respect.

I am 27 years old and I have learned more from this community and site than any other, hands down. Today, however, I punctuated a painful, painful lesson - one which I will grow from. It may prove to be the most valuable investing lesson I ever learn. Here's the short story long:

I have been a Fool for quite some time - I've got all the books, several pages on the site are in my top bookmarks, I listen online to the radio show religiously each and every week. I believe the Gardner Bros. to be genuine and well-intentioned. I have been to a Fool book-signing. I wear a Fool ballcap.

Though I have rarely posted - I have lurked on these boards silently and considered myself a member of this community for quite some time. Many of you are funny, some of you are brilliant. I feel fortunate to know this place. Over the last 2 weeks, I have been involved in the Rule Breaker Seminar. Unfortunately, I haven't been able to get much out of it. Here's why:

When the Fools recommended CRA in December, I placed a small amount of my modest, yet not-too-shabby-for-a-20-something, portfolio in it. As you all know, it began to do very well. Enjoying the success and beginning to learn more and more about the company, I continued to buy more. I began to use a "margin" account to buy Celera. I was borrowing from my broker to buy more and more. The stock continued to rise. Things were looking unbelievable from my vantage point.

Next, the unthinkable. In the last 2 weeks, Celera has fallen from its high of 276 to 85 at one point today. Why I will never know - perhaps just to teach me this lesson.

As it fell, I told myself what a great chance it was...what a sale...what idiots the sellers were, running scared from meaningless Clinton/Blair comments and throwing all biotechs in the garbage...blahblahblah, etc....

On the way down, I began to sell my other stocks to get Celera, cheaper (and again, using that MARGIN)

I couldn't believe it at 170 and I bought.
I was stunned at 150 and I bought.
At 130, I sold every other stock I owned and margined myself to the gills.

I was all Celera, all the time. And I was convinced I'd turn a massive profit on the swing back. I held each and every share until the bitter, bitter end - which came, (surprise - bitterly!), this morning.

When Celera hit $85 a share, my online broker was forced to sell my entire position to cover my margined debt. At that point in time, my shares were not worth the margin debt I owed, much less the required level of minimum maintenance.

The fact that the stock bounced 21 points from that makes it just that much more disgusting - though if I had been truly Foolish, I wouldn't have been so outrageously margined and the this morning's brief meltdown wouldn't have really mattered.

As I sit tonight - I have no shares of Celera in my account and an account that was worth almost $60,000 and was full of 6 promising, fantastic stocks is now worth $0. In fact, it's worth less - I must send $1,500 to the broker. I wiped out three years of Foolish saving and investing in TWO WEEKS with reckless, careless margin debt. It has almost made me physically ill.

BUT I am doing my best to maintain a happy grin and vow to get back on the horse and ride it smarter this time. I really have no other choice. It might be quite some time before I post again at the Fool, needing some time to heal my wounds and focus on my future. But I will be back eventually with a basket of Rule-Breakers and Rule-Makers and I will learn from this tough, brutal lesson.

I will again dig in and I will again change my financial destiny. This time, I'll do it with stocks I own and I will not get caught up in hysteria or visions of overnight riches.

Chin up, Fool on.

I wish you all the best of luck and hope my lesson here helps save someone from doing themselves what I have just done.

Go To This Post |  This Board |  Post a Reply

Liked this post?
Read more posts by this author.

More Recommended Posts
Get past Posts of the Day in the Archives