Tuesday, July 17, 2007

Ticking Time Bomb

(One of my relatives) had a huge fight with me two days ago. It was over the same issues. Since its an uncommon problem, I might as well mention it.

He wanted me to pay for one of his latest share trading purchases. It was a considerable sum. He had purchased the shares in EQ at 29- and now they were at 24. That's a 20% fall. One of the cardinal rules about share trading is that you must exercise great caution when buying stocks which are falling down.

In Singapore, the broking houses allow you T plus 5  meaning you can buy the shares on Monday and you don't have to pay for them until Friday or next Monday. Its great if the stock is going up- but when it goes down... :(

When I asked him where his stop loss was- he got angry at me and said he had none - he "believed in the stock". I asked what would happen if EQ fell by another 5 - 10%? He replied pollyanishly that it wouldn't.

Again, another cardinal rule broken. You always have a stop loss in place. Otherwise, you could very well be saddled with a non-performing stock for an indefinite time. Meanwhile, the capital is tied up when it could be earning interest or being profitably invested elsewhere.

I asked him when I could expect the money back. Then I got the money-crunching answer.

"You'll get back your money when I sell the stock - when it goes up."

It was bone chilling. Gut wrenching. he might as well have kicked in the stomach.

Stock going down, no stop loss, and no definite repayment plan. The horror.

Classic 101 share trading disaster just waiting to happen.

I had this sick feeling that he would be asking me for money each day, then the stock market would crash- and he would be back again demanding for more money - dragging me down to the depths like a drowning man.

This was a classic share trading horror story just waiting to happen and someone is offering me front row seats - no a role- in this horror.

Nightmare on SGX.
The Evil Dead Trade.
Zombie Investors.
Psycho-trade, and
Count Dracula's Investment Strategies Seminar 101.

So I refused. In fact I got so agitated that I walked around town for the whole day and didn't get back home til 8am.

My relative was livid. Because I refused to bankroll his trade- he was forced to sell his other shares that were doing ok- to buy into the one that had gone down. This is classic loser style share trading - selling your winners to pay for your losers. Guaranteed to destroy your capital eventually. Its like a gambler who sells his house to bet on black on the roulette table. Sheer madness.

So what did he sell? JadeTech, Baker etc.. And what happened immediately after he sold them? Jade went up by 100%.  He was screaming blue murder over the phone at me because he missed out on making a fortune. Meanwhile, EQ has slowly made its way up.

I have no pity. Absolutely none. No one in their right mind should bankroll such aggressive reckless players. Its like buying petrol for a drunk race car driver.

The sad thing is that he - and other novice traders- will totally learn the wrong lessons from this. He will continue to buy and hold shares which are falling- and sell shares which are going well. And so when the crash finally happens - he will be totally wiped out-  annihilated - devastated-  utterly devastated- bankupted - destroying his life and his dependents. He will lose all his money, his property, he will owe the banks and relatives thousands of dollars that he cannot repay, and eventually he will lose his sanity. Its just a awful tragedy waiting to happen. Totally avoidable. Its just sheer folly, hubris. Totally self-made. A self made time bomb.

I've seen it happen before. Its a descent into hell. (Or at least one of its chambers).

Meanwhile, China is still a worry. Price of petrol going up. I smell a correction. But who the hell knows? The market is still going strong. It will probably rise for another 2 years if the Bulls are to be believed. I need a holiday.


valerene chin said...

interesting. i know so little about shares, about time i learnt.

Yauming YMC said...

There are quite a lot of good books on share investments out there in the market. The library should have a number of them. I'll write up something on my blog about it.

valerene chin said...

i think reading what you write would definitely be more effective. small doses of knowledge else my single brain cell wouldn't be able to take it ;)

Althea Wong said...

argh... i feel for you. especially when the other party is a relative. tricky tricky issue, dealing with relatives when it's a money matter.
somehow, i never wanted to learn about stocks and shares, all coz i dun have time to check and keep track of the stock exchange rate, nor do i wanna start getting addicted to such things. think i'd rather earn money the old fashion way... work. :) however, don't mind if you share your knowledge with me on your blog... learning extra knowledge doesn't hurt.

Yauming YMC said...

Sure, I'll write something up. Mind you, I'm not a genius or a share trading expert. I'll share what I know.