There are plenty of lessons that could be learned from the
Bear Stearns madness starting last Thursday, but I will just focus on a
few. I also would not be trying to make
a quick buck on Bear right now. At this
point in the game, you would be really gambling with your money to do anything
with this stock. There is no doubt you COULD
make a lot of money in the short term but remember you could just as easily
lose it. This is something way to risky
for this guy.
One lesson would be to limit the amount of money you invest
in beaten down industries. The brokers
have been hurting in a big way for quite awhile now and to own them you are
certainly taking on additional risk.
There isn't anyone out there that can call a top and bottom and to try
and do it is foolish. You can certainly
dip your toes in the water to try and take advantage of a stock being
undervalued but is smarter to take your shot with the best of breed in the
industry.
Second is cost averaging on the way down is a dangerous game
and you could end up torching your own money by doing it. The Bear situation is obviously an extreme
case but the result can be similar with any stock on the way down. I can guarantee you plenty of investors that
held Bear on Thursday or way before that went in and bought more stock on
Friday because they thought the market over did it. Some I'm sure double or tripled their
position to try and get their money back.
Can you imagine reading an article Sunday evening that Bear Stearns was sold
for two stinking dollars? My friend that
is what I refer to as pain.
Third is statistics can be great tools for investors to use
to catch an edge but they are not the only thing you should be looking at. You have to look at many factors when doing
your homework to purchase stocks. For
example, the Book Value Per Share for Bear Stearns is sitting around $84, so
during last Friday's action you may have thought it would be a great time to
buy this stock since it was in the 30's.
However, I suspect that anyone that bought it on Friday is thinking it
was no bargain.
Fourth is if you purchase stock through your employer, then
you need to occasionally sell some of it to stay diversified. Even if you just happened to own a
disproportionate number of shares in any stock, you had better lighten your
load from time to time or your portfolio could suffer a massive beat down. The old saying, "don't have all your eggs in
one basket" is spot on in cases like this.
We should have learned this most recently from the Enron issues a few
years back. You need to stay diversified
to help minimize the damage in cases like this.
Last but not even close to the only lessons to be learned in
this collapse, is take what you hear from a CEO with a grain of salt. Last Wednesday the CEO of Bear, Alan
Schwartz, went on CNBC and said his firm was not having liquidity issues and
their earnings were in the range with Wall Street's expectations. Now maybe there was a "run on the bank"
between Wednesday and Friday, but the point is if you based your decision to
buy the stock on Schwartz's news then you paid a steep price. I do not know of to many CEO that are going
to speak the truth, the whole truth and nothing but the truth when on TV
talking about their company. I am not
saying they deliberately lie, but try to see if they are dodging questions that
are asked of them.
There are many painful lessons to be learned when dealing
with the stock market and God knows I have made plenty of them, but you have to
learn from your mistakes so they are not repeated. We can even learn to correct mistakes before
they happen and avoid losses in our portfolio.