The stock market is a lot of fun, but as with many endeavors there is a learning curve and a difference between understanding what you are doing and understanding what you are doing. In Spanish "saber" is to know (informally) and "conocer" is to know (intimately). I wish English was as descriptive. So we begin with the story...
I read Joel Greenblatt's "Little Book that Beats the Market" about formula investing, and while I still think that the system works, I thought I could do better than his mutual funds with less than an hour of research. I scanned the stocks on the list and came up with several I was interested in investing. The one that formed my learning curve is Jiangbo Pharmaceuticals (JGBO). All of the financials that I saw looked good, the idea of a pharmaceutical company in China, where everything is exploding, sounded great. The numbers did not seem too good to be true, but they seemed the best compared to the other companies on the list. I was hooked. I bought 105 shares at $4.58. Including the commission that was $490.85.
Mistake #1: I bought stock in a company that I did not understand. I know nothing about pharmaceuticals, especially pharmaceuticals in China. A few days ago I mentioned that I traded USO (Oklahoma oil futures contracts) this summer. Oil I understand. By looking at charts and graphs and listening to the news I knew that when USO was around $30 (52 week low of $29.10), a 52 week low and at the end of summer when oil is the least expensive and after 3% of the US reserve was announced to be released, chances are very strong it would go up (it's at $38.92 tonight). Oil futures contracts in Oklahoma I understand; pharmaceuticals in China are a total mystery to me.
A few weeks later the CFO resigned effective immediately. When it comes to a company's financials you want the CFO to be a stand up, honest, long term person. The kind of person who notifies the board of directors months in advance of leaving the company. When a CFO leaves abruptly chances are that person realized that there is a financial problem at the company.
Mistake #2: When the CFO leaves abruptly, sell everything immediately! Even if you take a loss on it, at least you will probably still have some left. CFOs are not the kind of people you want dropping off the face of the Earth. I've never seen this "rule" written anywhere else, but after this experience I will not soon forget it. I would have only lost about $100 had I sold then.
A few weeks later Jiangbo Pharmaceuticals was investigated by the SEC and trading shares on Nasdaq was stopped. Several weeks after that the results were that there were major problems at the company and the stock was delisted from Nasdaq. Now the shares are traded over the counter on the "pink sheets". I waited until 2012 to sell my stock so that I could use the loss as a tax deduction. I sold the stock last week for $0.15 per share. After commissions that means I lost $485.05.
Lessons to take away:
- Invest in what you understand.
- If the CFO leaves abruptly, sell everything!
- When investing in foreign companies that trade domestically, make sure you know what you are doing. As of now I am invested in nine stocks and ETFs. Only one is foreign and it is not in China.
- Market capitalization of 2/3 net assets + insider buying + 52 week or 104 week low = worth looking into as a buying opportunity (it's probably a bet-the-house situation if you understand the company). That has nothing to do with everything above but it's genius.
Lest people think I am throwing my money away, January 10th and 11th (yesterday and today) I "made" over $500 in unrealized gains. Particularly today I had a huge day. It was the first time I "made" more on the stock market than I did at work. I had four stocks that went up over 3.5% and one of them went up over 10%. By the way the markets were up about .9% Tuesday and about flat today. Which brings up the typical rich person problem, "should I quit my job to play the stock market full time?" No of course I won't, this year.