Several years ago I used to make "investments" based on fundamental analysis. I had a vague notion of technical analysis, but it was so arcane that I thought of it the same way one might think of astrology. Become a Complete Fool
I had an account with Merrill Lynch where much of my money was placed. I decided that I wanted to do a little speculative investing. So, I opened an account with Olde and put something like $50,000 there.
I was making some trades and making some money here and there. I decided I want to take out a short on a stock. I wanted to short 100 shares of a little internet company that sold books online called Amazon.com. I researched it. I couldn't believe the valuation that the market was giving this company.
It was trading around $100 a share. But I held off because I wanted to make sure I wasn't making a mistake. But the more I looked into it, the more convinced I became that this stock was indeed highly overvalued. Not only did they lose money hand over fist. But they were leveraged to the hilt with debt. Besides, the market capitalization on this upstart online bookseller already exceeded bricks and mortar book sellers like Barnes and Noble. It was ridiculous.
I observed the stock as it moved up and then went back down. I thought that the volatility signaled that the stock was exhausting itself. AMZN was ripe. When the stock surged above $130, I shorted 100 shares. Only 100 shares. How much could I lose?
The stock began an inexorable climb higher almost immediately from the time I bought it. First, AMZN breached the $150 mark. I became a little nervous, I admit. But what was there to worry about? I mean it was now trading at this absurd level. How much higher could it go?
Next thing I know, AMZN is trading above $180. It wasn't so much the $5,000 that I was down that bothered me, though that bothered me, as much as it was the principle at stake. What were the people buying this stock thinking? I had already done research. I knew it was overvalued at much lower prices.
Soon thereafter, AMZN broke $200. That made me down 50 percent. I was flabbergasted. I went over the numbers again. It was trading at so many times revenues that it would take unprecedented growth for it to ever justify the market capitalization. AMZN now traded at levels that were unheard of. Sears had been around 100 years and didn't trade at such an exorbitant valuation. Now how can you justify that? Sears had real assets. Real bricks and mortar stores all over the nation, selling a full line merchandise ranging from clothes and electronics to auto parts and window replacement.
What did I do? I decided that all those crazy buyers of AMZN stock would pay dearly for their ignorance and their stupidity. I bought puts. And I let my short stand. I would make money both ways. Shorting and on put options.
But the stock just kept climbing higher. And something else began to take hold. Bubble television began to cheerlead the stock among others. Maria Barteromo, alias "money honey", would begin the morning in premarket down on the floor of the exchange. She would be flapping her wings and chirping all over the place about this analyst's rating hike or that newly raised target.
Nonetheless, I was right. You see? I knew. I knew I was right. After all, I had the facts and the figures on my side. I couldn't explain why the stock kept going higher. I just knew that it shouldn't.
Then it happened. Out of nowhere. Some clown makes an utterly insane call. An obscure analyst who nobody had ever heard of. A guy from a no name company. The clown makes an insane call.
Amazon.com target raised to $400!
I actually laughed. I thought it was hysterical. I can't recall where AMZN traded at the time. I just believe it was somewhere around or above $250 and that I was short 100 shares from $130 something. Bubble television went nuts with that call. The hosts seemed to admire the temerity of such a daring and outlandish "projection" on the price as though it had become a game show.
I couldn't watch it anymore. I would take time away, knowing that eventually my logical assessment would be proved correct and accurate. Every time I turned on Bubble television, however, it had gotten worse. Inexplicably. I would see the letters AMZN, always colored puke-green, moving across the ticker at the bottom of the screen. Twenty, thirty, forty points higher than when I had looked the time before. That's $2,000, $3,000, $4,000 more money lost than the time before.
And there was Maria. Reminding everybody of the insane call made by the clown analyst. Like some ringleader at a circus, Maria barked out the words once again for the umpteenth time. "AMZN target was raised to $400" and wasn't it all incredible how much closer the stock had soared to that level. What a call! I felt as if I were watching Monte Hall on Let's Make a Deal. Only I didn't want to know what was behind curtain #1, #2, or #3. I was feeling sick about the whole thing. It had become a blur.
The stock had gone above $300 when I finally became frantic. What did I do? I printed out the SEC filings. I was going to comb through every 10K report. I was looking for any clue that could possibly explain how I could be so wrong. Something, anything, that might explain this irresistible force. I had a lump in throat. My face felt flushed with heat. How could this be? How could it?
With the stock at $360 plus, I got the call. The wise guy broker from Olde who suddenly didn't sound so friendly like he always sounded before. I would have to come up with some money. Maintenance call. I felt ashamed. I felt confused. I felt defeated. I mustered up the strength to mouth a few words. "For what?" "I mean for what?" "So that vicious beast... can keep chopping me up into little pieces?" "Look, I want you to cover that piece of [crap] short." "Now!" He made me say it again. He punched it into the system. Then he made me say yet again.
I thought I knew. What did I know? I had just lost more than $22,000 on a 100 share short. Can you believe it? I lost $22,000 plus! The AMZN short had gone against me for more than 220 points. And I just sat there and did nothing about it.
As if to add insult to injury, AMZN printed at $400 a couple days after I exited the short. Bubble television was absolutely euphoric. Looking back, I am surprised the clown analyst who made the insane call on AMZN wasn't given a ticker tape parade down Wall Street. Just so my humiliation would be complete. Instead, Merrill Lynch, my broker at the time, gave the guy a high-salaried job for his reward.
That's when I began looking into technical analysis. I never again relied solely upon fundamental analysis for any equity trade. No matter what. I always defer to the chart some way somehow. When I find myself standing on the train tracks with freight locomotive steaming towards me. I jump. I leap. I dive. I tuck and roll. Whatever it takes, I get the hell out its way!
I know it must sound like a clich�. And I would understand if it's merely taken as spin. But I really believe that loss pays dividends to me. Even until this very day. The money is gone. But I still profit from it. I really believe that. Maybe I need to. But I do.
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Several years ago I used to make "investments" based on fundamental analysis. I had a vague notion of technical analysis, but it was so arcane that I thought of it the same way one might think of astrology.
Become a Complete Fool