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August 19, 2016

My Good Friend: The Fool. The Uneducated Investor.

“Michelle, what is a stop limit order? What is a stop market order? What is a trailing stop order? What is, blah blah blah, and the list goes on for a number of these trading features the brokers provide for “investors”, or “day traders”.  After trying to explain a few of them (to be honest, I’m still confused as to what some of these do, so I’ll leave these to the trading pros) I finally ask, “What are you trying to do?”, and our conversation went on like this:

Foolish Friend: “I bought an oil stock, XYZ shares @ $0.32, it’s at $0.45 now. I am up about $200. This stock used to trade at $32, I bought it because $0.32 is so cheap! I want to put in a floor just in case it goes below what I paid for, but I also don’t want to lose out on gains if it goes to $1.00, let’s say.

Me: “What makes you think it’s going to $1.00? I think you should sell it now while you’re up.”

Foolish Friend: “People on these forums are saying the company can be bought out at $4.00 – what if it goes up that much and I miss out? And what is $200 to me in the grand scheme of things?

Me: “When did you buy this?”

Foolish Friend: “2 days ago”

Me: “Wow, you made a 41% return in 2 days! Sounds pretty damn good to me!

He then proceeds to go on about how he does not want to miss out on gains.  So I finally lay it out for him.

  • Firstly, those people on those forums, are just like you – they have no idea what they are talking about. Don’t listen to them.
  • What makes you think a company will pay 9x what they are trading at right now? If toilet paper is going for $10/ pack, would you pay $90 for it (and I’m talking about the no-name, 1-ply, will cut your ass kind of shit)?  Absolutely not! Same goes for businesses. If a company is currently trading at $0.45, and I’m a big monster oil giant – I certainly would not be so generous as to offer an 800% premium for a struggling company– that is unheard of!
  • How would you feel, if you lost $100 tomorrow – would you be devastated? He goes, “of course I would be!” Then I ask, “Then why would you not be thrilled to make $200? Do you understand how that makes no sense?” He then laughs, because he realized how foolish and illogical he sounds.
  • Stocks like these are more likely to go to $0.05 and wipe out all of the money you have invested. I’ve been there. Stay away from these stocks.

Our dialogue continues to go something like this:

Foolish Friend: “I think I want to hang on to it. You know, since it’s in my RRSPs, it could be a long term hold, like 10 years.”

Me: “Well if you’re looking at a long-term hold, why are you looking at this every minute of the day?”

Foolish friend laughs again, knowing how that contradicts what he is doing – trading on a daily basis. Speculating. Gambling.

Finally, he goes “I’m going to hang on to it and see.”

Me: “Suit yourself! Let me know how it works out for you!”

2 days later…

Foolish Friend: “Nooooooooo! Michelle, I lost everything!”

I check the price of that stock and couldn’t help but to laugh at his misery.

Me: “ahahahaha it’s at $0.24!”

(he didn’t exactly lose everything, he’s just down, because stock markets are volatile, but EXTREMELY volatile for stocks like these)

Foolish Friend: “Yup. And I think there’s still room for more drops.”

Me: “Why do you say that?”

Foolish Friend: “Because it has been $0.08 all year.”

I shake my head, again, thinking about the illogical reasoning my foolish friend has.

Me: “Again, you make no sense. Remember how you were thinking it could go to $4? Now you think it could go to $0.08? What made you change your mind in a span of two days? You are bipolar. How do you feel about losing $200?”

Foolish Friend: “It sucks.”

Me: “versus you could have gained $200 two days ago!”

Foolish Friend: “Yup, greed is a bitch.”

Indeed, greed is a bitch, however, like the great Warren Buffett says “Be fearful when others are greedy, and greedy when others are fearful.” I still wouldn’t touch this stock with a 10 foot pole.  Don’t be like my foolish friend, educate yourself if you’re going to invest on your own!”

 

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