The economy takes a dive

There were certain assumptions I had made when it came to trading. First, a company is always worth something to someone. Second, trading is the way of in which thousands of individuals determining the price of a stock. And third, the price will always reflect the accurate value of a companies fundamental worth.

All of these assumptions were chattered in one year: 2009. More specifically in March 2009. That was the month in which all publicly traded stocks reached a low that I would have thought impossible. GE was selling for $6.5 a share on that month on speculation that it would incur heavy losses on its Eastern European loan portfolio. Citibank reached $1 a share, Bank of America was at $2.50 a share. Alcoa was trading for $5 a share.

I could not believe it. The S$P had hit 666 as its intraday close. I should have been a buying opportunity. But on that month I turned bearish. I have chased stock prices down and lost at every step of the way and was not willing to chase them anymore.

I was convinced that Citibank would be nationalized, that GE would experience massive losses, and that more companies would file for bankruptcy. It was the age of error as far as investing is concerned. What was to be trusted, who was to be trusted, who was lying and who was telling the truth. Everything was a big collage of confusion. In the middle of this uncertainty the assumptions I made seemed to be dead.

I turned bearish at the most opportune time to buy! But of course, I only say that now that I have see the outcome of the last few months. Since March 2009 to date, stocks have rallied 50%, some individual stocks have doubled, others tripled.

What happened? How could so many securities be worth zero at one point and then at another point in time double in price? Nothing makes sense to me in this environment. Financial statements are not to be trusted, management of companies is not to be trusted, government officials are not to be trusted, and financial experts are not to be trusted. How then can I operate in this environment?

Price and price alone seem to be a very good source of information. The question is then, how to read that price, how to read those fluctuations, and make an informed decision. It is very easy to look at a graph and see when one could have made money but is not easy to look at the current price and determine when one will make money. Somehow, valuation and price needs to be fused into a theory that can lead one to a better decision when it come to trading securities. Then there is the added catch of being right at the right time.

A friend bet that a company would file bankruptcy when the price of a security dropped to 0.40 cents overnight. I reasoned that the company had not filed bankruptcy and yet the price was reflecting a fact that had not yet happened. I bought a small portion of shares and I made money. But I sold it before I could maximize my profits. I doubled my money, but only in a small stake.

In this particular instance I used price and fundamental analysis to make a decision. I was right at the time, and he was also right but not at that time. The company filed for bankruptcy this weekend. We were both right but only one us made money.

Back to March. 2009. I froze all trading activity that month. I should have been buying! I did not. How can I explain my behaviour at that point? Quite easily - fundamental analysis had failed me. I could not trust the financial statements. In addition to this, I could no longer trust the management of these companies. I had been on so many earnings calls where the management swore that everything was fine just to find out a few days later that they were filing for bankruptcy, or being acquired at a substantial discount to their stated book value.

I will never forget the earnings call with Bearn Sterns. Management was asked what the the book value of the company was and the CEO stated that it was around $64, yet the stock was trading at 8. What a bargain I thought. If the book value was impaired the CEO should have disclosed that on the call. But he did not. Over the weekend Bear Sterns was sold to JP Morgan for $2/share. It seems to me that the book value was obviously impaired.

Then the same thing happened with Lehman. There was news on Friday that Lehman would be bought out, just to wake up on Monday morning to a bankruptcy. Washington Mutual was the same story. Wachovia was very similar. Management and government officials were lying about the severity of the crisis.

That is why I did not buy on March. I was completely repulsed by the entire financial systems and was in complete disbelief when the CEO of Bank of America and the CEO of Citibank stated that they would have a profitable quarter after a little less than a week earlier being bailed out by the government. I watched the price go up everyday thinking that it would come crashing down any moment. Prices did not crash, but the economy had. Even Warren Buffet made comments about the economy falling off a cliff.

I felt that I was being duped as prices went down and now I was being duped as prices went up. My assumptions had been slained by the system and the officials I was supposed to trust. The economy had taken a dive and it was bouncing back but my assumptions are still dead and may never come back to life again.

First Blog

Here it goes!

Perhaps there are too many blogs in the world. And certainly the world does not need mine! But after thinking about it for some time, and being inspired by others, I decided that I had to do it, if for no other reason than to have a diary as well as an outlet for a mental purging.

For some time now I have taken up an activity that only the crazy or very lucky decide to take up. Nothing physically challenging or intellectually difficult, but nonetheless, all consuming, addictive and emotionally draining.

I pity the person that is consumed by this passion. I have concluded that nothing good can ever come of it, even if one were to be successful.

So what is this self flagellating field that I have chosen and will be the subject of this blog? The answer: Stock Trading.

I first came across the topic when I was in college during one of my accounting classes. I had prior to this class taken calculus, physics, chemistry, philosophy and economics. I was at the peak of my intellectual abilities, but these subjects never caught my attention the way the subject of security valuation did when I first heard about it in this accounting class.

A new world opened up before my eyes in which anything and everything was possible. All the hard work that I was enduring finally seemed to have a tangible application - the analysis and evaluation of companies, and the ability to profit from that analysis.

Suddenly there was a reason to work hard. It all involved finding the leading markets, leading products and the companies which manufactured those products. The reward for all this work? A big pot of gold at the end of the rainbow. It was as though as alchemy truly existed, but it was in the form of taking public financial information, dissecting it, analyzing it, and making a decision to buy the stock of a company and watch the company's profit and price of its share levitate to the sky!

I was hooked! And there began a long, arduous journey to try to find my way into this world of trading. But try as I may I could not get the proverbial foot in the door. I could not find a job as a trader, and I did not want to go the financial analyst route. So I took a detour into another world which I learned to like and enjoy.

Then as technology advanced democratization came to trading. Companies sprouted all over the place to give anyone the ability to trade stocks on their own. Additionally, financial information had been set free from the exclusive realm of financial brokers. Now any individual could have access to all the financial information they could stomach and had the ability of buying the stock of the company to profit from all the information that was now readily available.

And so I embarked on this journey. It is a journey, not a destination. There is no end to creativity, and as such there will be no end to the potential products which teams of bright, driven, and well funded individuals will create.

Microsoft, Nokia, Yahoo, Amazon, Ebay, Palm, Research In Motion, Apple, Google and all those other innovative companies that now dominate their fields have arising in my lifetime. Some of them have stumbled, some have transformed and some will be consumed by stronger players.
Many more will come, and my only question is will I be able to recognize them without having the benefit of hindsight?