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Paper profits alone do not seem to provide sufficient incentive to sell,
although they should. A psychological jolt may provide that catalyst. A
wise old broker named Fred sat daily by his office window feeding the
pidgeons. The office was referred to as the bucket shop by the lunchtime
crowd, a term coined from another era. Fred was discussing trading with a
novice investor. This young trader to be had handsome profits in a stock
purchased for 5 and now selling for 15. There had been talks about
overvaluation and a coming correction. So he had recently been reading
about setting stop losses and hesitatingly told Fred he wanted to put in a
stop loss at 13. Fred turned quiet as he scratched his pot belly and then
smiled at the trader to be with a somewhat puzzled look. He said, "Look,
if you are willing to sell it at 13, why not sell it now at 15?"
Impeccable logic. The novice was unaware of the lack of liquidity in a
crisis. After all from the summer of 1986 to the summer of 1987 there was
plenty of liquidity to buy anything with a ticker symbol. He assumed it
would be just as easy and quick to sell. Just a phone call away. After
all didn't he read that the specialists were there to ensure an orderly
market. He felt secure. Hadn't his savings and loan IPO doubled from a
proforma of 10 to 20. Hadn't he made a bundle in Newmont Gold and other
gold stocks. For a year no matter what the novice bought it went up, he
sold it and bought something else. The procedure was repeated over and
over again. He was a genius. Where had common stocks been all his life.
Why show up for work at the UC campus where all those smart people went
everyday, he had found nirvana in stocks. Fred had been encouraging the
novice to take some of the new found gains off the table all summer long.
Yet this novice did not respect the advice of this self taught broker who
got his license from taking a home study course and then doing
apprenticeship in a back office fileing room. He ignored the wizdom Fred
had gained from the real world of watching traders come and go year after
year. Fred just sat there day after day feeding the pidgeons...he never
traded. Sometimes he would get up and look at the monitor on a desk across
the room from his own to get a quote for a caller on the phone. If anyone
new came in the bucket shop and wanted advice Fred would say, "buy five
stocks, a food stock, an oil stock, a computer stock, a gold stock, a
silver stock." Thats it. Nothing sophisticated. Fred could not even boot
a computer. In October of that year the novice learned the alternate
wisdom of setting a profit goal and taking some off the table rather than
using a stop loss. He learned what the term liquidity mean't...no
bid...how come the phones aren't answered....nowdays it's the network is
jammed....he learned what margin calls are...He started all over again in
November, back to where he was in the summer of 1986. It puzzled him how
all the money could just disappear like that. He discovered that stocks
can be one way certificates of deposite. The term auction market took on
real meaning. There was a knot in his stomach and a pain in his head that
he had never felt before. Most of all he wished Fred had been more
insistant on raising cash in the summer. After all '29 was in Fred's youth
and the financial markets were more controlled now, you can trust the
federal reserve to do the right thing in a crisis, rather than drain
liquidity, it would be added, smooth sailing into the future as far as you
can see...stocks are where its at. Its what you don't see coming in the
night that gets you. Its different this time...or so the media would have
you believe.
BobR
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