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Lucent
In Reply To:
LU--Stock Reversal?

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By babyfrog
December 18, 2003

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Margin? MARGIN? MARGIN!!!!!????!!!!

You went on MARGIN to buy a PENNY STOCK? A penny stock that hasn't shown itself able to put two profitable quarters together for several years? A penny stock that is busy alienating its retirees, handing out massive bonuses in an attempt to provide some semblance of employee morale and retention? A penny stock that has had a massive run up in the past few months to well above anything that can be justified by its fundamentals?

And now you're down 30 cents on a stock that trades under $3.00. On Margin? Did you not read anything about the company before you speculated in it? Did you not notice how absurdly weak the last quarter's $0.02 profit really was, financially speaking? Or how, if that $0.02 had somehow continued for four consecutive quarters, a year of $0.08 profits and a price around $3.00 would still give Lucent a PE around 37??? In a company that has filed for the right to perform reverse splits?????

125,000 shares? Bought at about $3.17 per share (if you're down $0.30 at Lucent's current price of $2.87). That's $396,250 invested on margin. Presuming your broker has a 50% purchase requirement, that's $198,125 of your cash plus $198,125 of the broker's cash that you've put at risk. Speculating in a high-risk penny stock.

First of all, a $0.30 drop from your $3.17 purchase price is less than 10%. If you can't stomach a 10% drop in an investment, you shouldn't be in a high-risk position like Lucent. Second of all, if you're on margin, you shouldn't be putting so much of your portfolio in one position so that a single stock being volatile within an expected range will put you at risk for a margin call. Thirdly, if you haven't done so, read this: http://boards.fool.com/Message.asp?mid=12251371 and learn from it.

Regardless of what Lucent may or may not do in the near future, in your shoes, I would do the following, immediately, if not sooner (*):

1) Clear the margin. At $2.87, 125,000 shares of Lucent is worth $358,750. With a margin debt of $198,125, selling would net around $160,625. Harsh, and a net investment loss, but better than potentially losing it all in a margin call.

2) Have the account converted to a CASH account. If the broker won't convert it to a cash account, change brokers and find one that will open a cash account.

3) Research good companies. Ones with positive earnings, cash flows, and expected growth rates. Buy a basket of diversified securities that I believed had decent prospects. If I weren't feeling like doing the legwork, I might buy an Index Fund or one of those "Total Market" funds...

4) Have patience and the ability to watch the portfolio fluctuate on a day to day basis. Think in terms of the total portfolio, not just one individual security, but still be willing to cull out stocks whose futures no longer looked like they could meet my desired returns.

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Best of luck to you!
-Chuck

(*) This is what I would do in your shoes, this is not a recommendation for what you should do. You got yourself into this mess through your own greed and ignorance. You can get yourself out of it any way you so choose, or you can hold on and hope until the margin call comes. Either way, I'm not giving you anything that should be construed as advice or guidance or a recommendation.


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