Stock Market Video
Don't Do This! World-Class Mistakes
A Cause A Day Keeps Reality Away
In Case You Missed It
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In this week's Stock Market Video, Mike Cintolo discusses how
the market's intermediate-term trend remains down, and thus, he's
playing things relatively defensively--holding some cash, not
doing much buying, but also not selling much at this point
either. He also points out numerous tight set-ups he's watching,
many in non-growth sectors. Stocks mentioned include
Michael Kors (
KORS
), Silver Wheaton (
SLW
), Catamaran (
CTRX
), Ensco (
ESV
)
and the
Financial (
XLF
)
and
Emerging Markets (EEM)
exchange traded funds.
---
It's always fun (and instructive) to read stories about people
who are noble and good and successful;
Investors Business Daily
always features at least one in its front section. These people
give us good models to follow and give us hope that we, too, can
overcome stiff odds and triumph at what we do. But I have to
admit that I'm also drawn to stories about people who screw up
royally. These stories allow me to feel superior-or at least
lucky-and invite speculation about the answer to the age-old
question "What was he thinking?!?"
Don't Do This! World-Class Mistakes
In light of recent market fluctuations, I thought I'd share a
few tales of greed, bad behavior and just plain mistakes that
have popped up in the financial press over the years. I'm leaving
out plenty of stories of pyramid schemes and outright fraud,
preferring ones without hardened criminals at their heart. Think
of them as "Shark Week" or "Storm Stories" for
investors.
- Kent Ahrens was a securities trader for First Capital
Strategists, a firm that had been around since 1980, but only
registered with the SEC as a registered investment advisor in
1988. Ahrens, for reasons known only to himself, decided to
make some unauthorized trades on behalf of First Capital's
Common Fund, a fund that consolidated holdings for a group of
college endowments. After losing $137.6 million for the Common
Fund, Ahrens pleaded guilty to one count of fraud, paid a fine,
and agreed to be permanently barred from ever handling anyone
else's money. Not a bad idea.
- In 1995, Barings Bank-a venerable institution that had
financed the Louisiana Purchase and the Erie Canal and was
Queen Elizabeth's personal bank - was declared bankrupt and was
bought by the Dutch bank ING for one British pound. This
ancient institution, founded in 1762, was wiped out by the
unauthorized trading activities of one 28-year-old man named
Nick Leeson. Leeson was a young star at Barings, in charge of
the bank's Singapore securities office. His real job was to
execute trades for other departments and clients of Barings,
and to make tiny arbitrage profits by exploiting differences in
Nikkei futures trading on different exchanges. With no
supervision, Leeson soon moved into the immensely risky
business of trading futures on the Nikkei 225 stock index and
Japanese government bonds. After some initial bad luck, he kept
raising his bets, hoping to cover his losses. He managed
to conceal those losses until they reached about $1.4 billion
(!), at which point Barings didn't have enough money left to
meet a margin call and was declared bankrupt. Leeson had a
number of years in a Singapore prison to think about where he'd
strayed from the straight path.
Of course it doesn't take criminal behavior to bring about
disaster; in the computer age there have been lots of honest
mistakes, instances of what computer geeks call "fat fingering"
the trading keyboard, that have had dire results.
- In 2005, a lowly computer operator at Japanese securities
giant Mizuho Securities made a little mistake. He was supposed
to sell one share of stock from the company's holdings in
J-Com, a manpower recruitment firm, for 610,000 yen.
Instead, in one of those "oops!" moments that happen to all of
us, he sold 610,000 shares of J-Com for one yen apiece. That
was, unfortunately, about 40 times more J-Com stock than Mizuho
owned at the time. The firm tried to cancel the order within
two minutes, but the Tokyo Stock Exchange blocked the
attempt. The cost to Mizuho of having to buy enough stock
to cover the sale is said to have completely wiped out the
company's profit for three months. It also resulted in the
resignation of the Chairman of the Tokyo Stock Exchange when it
was decided that the Exchange's trading system was partly to
blame, tagging it with half of the loss.
(It's a nice footnote to the J-Com story that an unemployed
freelance trader who bought a ton of the mispriced stock wound
up with a profit of about two billion yen (about $18 million)
after the dust settled. Even financial disasters can sometimes
rain gold down on those who least expect it.)
- Just one month later, on the first trading day of 2006, an
employee at the investment bank Nikko Citigroup was trying to
buy two shares of Nippon Paper for his private portfolio. (Some
Japanese equities are very expensive, and Nippon was trading at
about 510,000 yen a share) He followed all of his
employer's rules and put the order through Nikko's own trading
department…with one small error. You guessed it: his order was
put through for 2,000 shares. The compliance department
apparently failed to notice that the order (worth about $10
million) was more than 74 times what the employee had in his
account. This one took months to iron out, but there were no
high-level resignations.
- And finally, just to show that these things just keep
happening, on August 1, 2012, a software glitch at Knight
Capital caused the company's computers to buy billions of
dollars worth of 148 different stocks. By the time the company
unwound the unwanted positions, its losses were up to $460
million and the company was on the verge of bankruptcy. The
outcome of this particular trading disaster is still in
doubt.
If these tales of financial disaster are helping you to put
the current market rumblings in perspective, you can find lots
more on the Web. Just Google Joseph Jett and Kidder Peabody,
Toshihide Iguchi and Daiwa Bank, and Robert Citron and Orange
County, California. You'll find links to many more.
If you're in the mood for even bigger financial disaster
stories involving speculation and gullibility, you might check
out the Tulip Bulb Mania (crashed in 1637), the South Sea Bubble
(crashed in 1720), the Mississippi Bubble (crashed in 1721), the
Florida Real Estate Bubble (crashed in the late 1920s), the
Nikkei Bubble (crashed in 1989), or the Tech Bubble (crashed in
2000), or the Housing Bubble (crashed in 2008), with the latter
two providing the downside shocks that have made the past 11
years such a perilous time for equity investors.
All of these stories teach the same lesson, but it seems to be
one that every new generation of investors has to learn first
hand. That is: if it seems too good to be true, it probably is.
Or, to put it another way: crashes always occur; but they occur
only
when a majority of investors believe that a crash is impossible
and that it's
really
different this time.
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Here's this week's Contrary Opinion Button. Remember, you can
always view all of the buttons by
clicking here.
A Cause A Day Keeps Reality Away
Admittedly, every one of us has our own personal reality, and
knowing true reality is something for
philosophers. Nevertheless, if we are open-minded, we can
understand enough of
other
people's realities to come closer to understanding the collective
reality that governs the stock market, which is
good. Contrarily, if we are too wrapped up in
causes
, we are liable to be blinded to the reality of others and commit
grave investment errors. (Note: this is the only quote
attributed to Jim Fraser, co-host of the Contrary Opinion Forum
in Vermont for many years, and I've been unable to determine
where he originally published it.)
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In case you didn't get a chance to read all the issues of
Cabot Wealth Advisory
this week and want to catch up on any investing and stock tips
you might have missed, there are links below to each issue.
Cabot Wealth Advisory10/29/12 - The Best
Investing System
Tim Lutts takes on the task of identifying the best investing
system, comparing the pros and cons of four: small-cap, growth
stocks, value stocks and exchange-traded funds (
ETFs
).
Cabot Wealth Advisory 10/30/12 - 20 Tips to
Become a Better Investor
Mike Cintolo keeps this list saved on his computer; whenever
he's in a rut, he reads through these tips to make sure he's not
violating some core principles. Stock discussed:
Silver Wheaton (
SLW
).
Cabot Wealth Advisory 11/1/12 - 3 Revolutionary
Investment Ideas
Tim Lutts writes that businesses with revolutionary factors
are where he finds some of his greatest investments.
Interestingly, his three ideas are related to automobiles. Stock
discussed:
Polaris Industries (PII).
Have a great weekend,
Paul Goodwin
Editor of
Cabot Wealth Advisory
and
Cabot China & Emerging Markets Report