A Sad Tale

I have a friend who I posted about before who bought some ATHM at $50.00 a share on margin. So far he's lost $25,000 trying to average down. His original investment was $5000 in cash and $5000 on margin. He's had to liquidate his entire albeit modest portfolio to meet the margin calls. It's ATHMQ since it filed for Chapter 11 protection and is going for $00.056 a share now. He told me today he is going to pump another $2000 into it to average down again. I've tried to get him to stop but he hasn't listened. He also asked me what a limit order was today. I explained it to him and I suggested that if he wanted to buy it and insisted on doing so at least try to get some near it's low at $00.015. I wish this stock would quit trading so my friend could accept his loss and move on.

It's indeed a sad tale, and I have seen it happen to friends of my own. I spent a few years in the telecommunications business and saw people I know invest heavily in IPOs from independent long distance carriers and prepaid calling card companies only to watch the stock tumble to pennies a few months later. And it was often same story, namely "Maybe if I keep averaging down it will come back."


Probably the best you can hope for is that your friend will learn some lessons from this and won't make the same mistakes in the future.

maybe explain what averaging down is to him as he doesnt understand it. just like when brokers were pushing dollar cost averaging as a better way of moving money. if he doesnt understand even a limit order he shouldnt even be in the market let alone speculating on stuff he doesnt understand. if he just wants to gamble his money away, well fools and their money soon part. sounds like he is getting his wish. too bad

It's very difficult seeing him pour money down this rathole. It was probably too late but I leveled with him around 2 months ago and gave him a possible scenario where investors were being bilked. I really don't know if they are but there are a lot of shareholder lawsuits on this one (which is typical) and he is pinning his hopes on those. In all fairness there were many warning signs that should have clued him in a long time ago. We all know if he would have just taken the $5000 loss he would have had $22,000 to use to invest and in the long run the $5000 loss although painful would have been manageable. At least today I gave him the idea that if he is hell bent on putting another $2000 into it he might try to get it at a much lower price. Hopefully he'll put in a bid that never gets hit.

I agree totally. I'm half tempted to tell him if he wants to gamble $2000 I can show him a lot of ways that have better odds than the odds of this stock price recovering. I probably should do this. I'm not sure I understand why an otherwise rational and intelligent person would do this. He doesn't gamble on anything else and he looked at his original purchase as an investment. He's one of the friends I made when I was spending a lot of time in Tulsa. I remember when he bought it in 1999. I never had any idea he was continually pumping money into this loser until he told me this summer he was down $20,000 grand on it and has proceeded to lose another $5000 since then. I do know if he wanted to gamble up $22,000 I could have shown him how to get a lot better run for his money than he's gotten so far.

1. dollar-cost averaging is silly if you have all the money up front. what is your assumption? if you assume the market will go up and down without going anywhere, you will make more money selling a call. if you assume it will go up, of course you will lose. if you assume it will go down, of course you should wait. but again, you can't make something out of nothing which is the mirage, and you can probably better leverage your "assumptions" - whatever they may be - using options.


2. limit orders? never use limit orders. the limit-order mirage is so complex and insidious, and dupes even multi-billion-dollar 70-year-old money managers, i can't even begin to explain it here. also, in a completely separate issue, i must say that the prediction that a stock will go down then up seems about twice as complex as the simple prediciton it will go up.


3. i write extensively about the "cheap" price mirage, or counter-trend trading in these threads:


http://www.twoplustwo.com/cgi-bin/newforums/genpok.pl/read/29015


http://www.twoplustwo.com/cgi-bin/newforums/genpok.pl/read/29217


4. how about my bond call below? tack on another three points.


http://www.twoplustwo.com/cgi-bin/newforums/stocks.pl/read/1446

I will say something about limit orders. I have never been able to predict the lowest selling point for a stock on daily, yearly, monthly, etc. basis. I'm probably grist for the mill, but when I wanted to buy a stock on a particular day I've always put in a bid at a lower price than the current market and gotten executed. It's never failed.

First of all, if every time you have predicted a stock would go lower, it did, maybe you should have sold short immediately:) Maybe you should be a day trader! (Or maybe we just had a bear market...)


That aside, the question is not whether a limit order was filled, but whether your ultimate fill (or not) was at a better price than it would have been had you simply waited and used a market order. Do you think whomever hit your bid lost money in the next three seconds?


The trick is that every time, you bought at a lower price than where you would have bought had you entered a market order at the same time as the limit order. Therefore, it looks "cheap." But that's silly.


And since every one of your limit orders has been filled, you have either A) left them in a loooong time, B) cancel-replaced them repeatedly until they hit, C) you haven't placed that many limit orders, D) your prices were always very close to the last tick, or E) you have gotten lucky - no matter how good you are!


Anyway, without getting too deep into it...


...aaaah, I won't get too deep into it;)


Forget it!


Just let it stand that there IS an illusion.


That having been said, using limit orders, I once bought THE high tick and sold THE low tick in the elctronic S&P future two days in a row. And they were big range days. Odds of that were somewhere between 1:4,000,000 and 1:12,000,000 under the particular circumstances - meaning I got lucky, no matter how good I am.


loudmouth

I read it! I don't have a problem with what you say really. I'm just trying to learn something and I'm not being facetious when I say that. Maybe I should have gone short and bailed when it hit my limit. My prices are fairly close to the last tick but a 1/4 here, 3/8 there add up pretty fast.

I still am reluctant to try to explain it to you, but I can almost prove it to you, perhaps.


Put and call options have value. A buy limit order, in the time it takes you to cancel it, is a put option donated for free to the marketplace at large. It must have value to them and, therefore, could have negative value to you.


It definitely has negative value to you in the sense you are writing a free option without getting paid for it. But the limit order could offer you some unseen utility, to offset this, so that everyone wins. But the unseen utility is an illusion.


Can you quantify the value of the limit order to you, apart from the obvious fact that - when you do get filled later - you do get a better price than you could have gotten right away? Because I have just, sort of, quantified the cost. And, moreover, I can say that if other people's limit orders are free options, that the opportunity to use market orders must have value to you.


You could say that the option of using a market order to you has no value since it is apparently passed up by the entire rest of the marketplace, and thus the option has no buyer. But it has a buyer if you are the buyer, because your need is asymmetric.


Let's put it this way, if other people's limit orders have no value you can extract, it would seem like a tough stretch to think you could somehow squeeze any value out of their orders using a limit order.


leroy

by putting the limit order in which usually fills you get to save some money. but may lose out if it goes up from where you started it. but i like them because i dont want to sit in front of the screen and mwait for the best price. alot of times i am willing to buy at x but not at x+1/2, so i put in a limit order and walk away and do something i like. plus it makes you feel like you got a bargain if you get in a little lower than the ask.

If you bid 1% below the last trade of a stock with 5% daily volatility, there's about a 90% chance you'll fill by the end of a complete trading day. ... You have a 37% chance of trying this 10 times and filling every time; you have a 5% chance of trying this 30 times and filling every time. Is this in the ballpark of the number of trades you're talking about?


The reason the 1% you "saved" is an illusion is that in the long run, you will not fill 10% of the time, and those missed trades will outperform the ones you filled by about 9%.

Yes.


The key point is this:


When you believe you have an idea for a good trade,

are you more likely to win ( and win more when you're right )

when

the market comes to you ( a limit order )

or when

you go to the market ( a mkt order )?

Yes, but more often than not, when people say they are only willing to pay X, it is not because they have done a discounted-earnings model. Nor should it be!


It is not relevant that Company C is going to pay and N-dollar dividend five years from now. Because you cannot strip out or disaggregate that dividend and sell it in isolation. Rather, when you sell a stock five years from now, you will be selling the utility of discounted earnings going forward, say, ten years from that point.


Since the value of a stock - in years to come - will never be immediate earnings, but rather perpetually people's immediate utility for some future stream of earnings, it makes sense to buy it not based on your own utility for a future earnings stream, but based on your belief as to what other people's future utility for a future-future earnings stream will be.


So most people, when they decide they will only pay Price X is not because of anything internal, but perpetually pegged to the immediate price, or to the recent range. In other words, they look at what other peopel appear to want, and then calculate what is cheap relative to that. Of course the correct strategy, then, is to always attempt to buy below the immediate bid, not to attempt to buy below some past price.


There is ten times more, but I'll save it for another post.


eLROY

I think most people can accept and understand your math, Paul. But there is still something inside the "bid-ask" itself - something skirted by a random distribution of last ticks - that seems to get inside people's heads and give them all sorts of bad ideas.


Forunately, there are enough people trying to take the other side, and pick them off, that using indiviudal limit orders doesn't hurt them that much on 99.5% of trades. The main cost is in their own stress and hassle of pursuing an illusory profit.


But the larger illusion, which this bid-ask stressing is just one end of the spectrum of, can indeed cost people a noticeable amount of money in the long run. The use of limit orders is just the tip of the iceberg. It's representative of a whole wrong way of thinking, by people who are susceptible to think too much.


All that having been said, if Ray wants to pay 20 and a stock is at 21, and he doesn't have the time to bother, certainly he should use a limit order:)


lummy