Tuesday, June 15, 2010

Catalyst Craze

Doesn't matter if it's a bubble market or a bearish one, a catalyst can always move a sector or a single stock. It happened around 1997 (or was it '98?) when Chrysler announced its merger with Daimler. I didn't have a computer (yet) and was up early that morning (Hawaii time), calling my broker by phone to buy shares of Chrysler at 40.

I didn't expect it to move to 42 or 43 so quickly, but shares went all the way to 46 and I called the broker again, asking him to sell. He didn't seem so excited, but I was just about in a cold sweat as he took his time. I'm glad one of us had his bearings.

An hour or two later, Chrysler shares drifted back down to 43, and again, I pounced. I sold again that day at 46. (If I'm off by a buck or two, forgive me. It was a long, long time ago.) That was my first day trading in the market and I haven't fallen out of love entirely since.

I made a ton of mistakes along the way and stayed out completely for years at a time, but one of the few constants I can't ignore is the power of a catalyst. On that day, it was a huge international merger that turned out, a decade later, to be an absolute dud and bust. But for a few hours, I made more money that I could in months working my "regular" job. That's what the power of a bullish market and a willingness to trade on a catalyst can do.

But the biggest mistakes I've made came on top-heavy risk that left me in the hole, i.e. the murderhole, with shares in some stocks you probably have never heard of. Looking back, those were terrible stocks I wish I'd never heard of, either. It was the Internet Bubble, and before it burst, I was in a shitload of pain simply because I didn't control risk. I wouldn't advise everyone to completely avoid speculative plays. But in stocks that are moving strictly on momentum, it's incredibly important to recognize the speed and power at play and to get out before it gets you. There's a reason why many spec plays are on penny stocks, sub-5 stocks, whatever you want to coin them.

Trading a hot, established issue like Chrysler (then) or Citigroup (now) has its risks, too, which is why I advise tight stop-loss points (mental or physical) or tight trailing-stop points. As many great writers have penned, finding a winning stock isn't always difficult. Finding the right exit point(s) is much, much more challenging. Sell half if you have the slightest doubt about your paper profits. Sell the other half later.

I don't mind missing a run like I did when I was younger. Sure, I'd love to have shares of AAPL at 242 or 233. But there will be solid entry points again at some time. Apple will still be a monster company, at least for the near future. No stock has had as many catalysts as AAPL, seemingly every quarter, and sometimes more than once per quarter.

Apple has the luxury — though I can't imagine for how much longer — of such a strong Cool Factor that fans will put up with inconveniences and shortcomings. Even today's botched iPhone G4 pre-order launch in the Apple Store basically crashed and crashed and crashed. Yet, APPL surged right up to 259. Few companies can get that kind of love. When analysts and hedge funds spin today's crash/iPhone order story, they can tell themselves that this is a GREAT problem. Demand is never bad news.

Frustration? That's never a good way to treat loyal customers whether it's Apple or AT&T at fault. That's why I can see starting a position in GOOG at some point. There's room for two winners. But really, AAPL will still rule. How many people actually do a Google dance? In a store?


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