OT, to some extent but pertinent to the issue of averaging down:
(the following is something I posted on another message board on another site - I got carried away)
Consider the downside of the OTCBB...
First off, let me say that I only wish the best for you investors in .... [a few comments about a particular company]
However, I have been watching the Nasdaq pretty closely and it seems like we could have a serious correction in the next few months taking the COMP down below 4000. I don't know if this will actually happen, since I am not clairvoyant, but the possibility certainly exists and nobody can deny that. I just wanted to relate to you folks some thoughts, regarding what might happen if Nasdaq crashed. Most of you have only been involved in the bull market since the early 1990's. I am young, and I admit that the same is the case with me. Therefore, we all have all been "trained" by the market's very action in the last 5 or 10 years to buy the dips. I find this tempting too. But I have studied a lot of market history. There are many times when buying the dips has not been rewarded with higher highs in a reasonable timeframe. As an example, the Dow hit 1000 for the first time in 1965. It did not rally significantly above 1000 until 1982, and that doesn't count the erosion in real value from inflation during that time. So that's 17 years where buying the dips would have been very frustrating.
Now, how does this relate to the OTCBB? Well, I am friends with a number of people who have worked as brokers/traders on the Vancouver Stock Exchange in Canada. (The VSE is now called the CDNX, having merged with the Alberta Exchange). The CDNX currently has a lot of Internet and other tech plays going, but historically the VSE was the place for junior resource stocks (eg gold mining, oil and gas exploration). Back in pre-October 1987 (as it was related to me by a good friend and fellow trader) when all the global equity markets were seriously pumped up by 80's exuberance, the VSE was also going full guns. This is easy to understand. Small investors had decided that since the big boys had been making money in the big caps for a few years, that the fastest way to play catch up was to buy the penny stocks, since if you buy a stock at $0.10 it "only" has to go up $0.90 and you make 10X your money. And there were indeed a number of good plays until October.
I am thinking that this may be the case now. Clearly, seeing that the OTCBB had volume of 24 *billion* shares last month, far in excess of anything seen previously, the small investors are trying to play catch up. And I admit, there are lots of penny stocks that have had nice runs (although they seem a bit weak of late). Anyway, apparently on the day of the 1987 crash, when the Dow/OEX/S&P lost 20-25% in value (I can't remember the exact #'s but I know it was 508 Dow points), the brokers and traders on the VSE walked in to see virtually everything *at least* cut in half. In fact, some of the stocks were actually - I kid you not - "no bid." That means that even if you wanted to sell the stock, there was nobody willing to buy it. This could happen on that exchange because on the VSE there were no market makers forced to put in bids at some price. So basically all you could do if you wanted out was to put in offer after offer at lower prices, and hope against hope that someone would come in and buy at the market, taking your stock from you.
Why did many of the penny stocks go "no bid" on that day? Because many were simply pieces of paper representing the dreams of investors that gold or oil would be found in a piece of ground somewhere, sometime in the future. The crash in the big names woke people up to reality. They didn't want dreams anymore. They just wanted their money back.
Now, you are probably thinking: well, they should have just been buying more, not panicking but instead acting "professional," and then they would have reduced their average cost. I'm sorry to report that later on, many of those stocks were delisted or faded away to nothing. Essentially the investors who averaged down just buried themselves some more. Many people never made more than a fraction of their money back (as one would expect of a so-called prudent "buy-the-dipper") because the stocks either went to 0.01 or less and stayed there, or the companies delisted, or whatever. Those investors are still waiting 13 years later; hopefully they have moved on and put the experience behind them, and gained in wisdom.
Therefore - if we have some of the big cap technology stocks sporting 100, 200 or more PEs seriously "correct" (nice euphemism) then I submit that the penny techs would get hit some more. Like, *really* some more. They might not go "no bid" but the MM's will not buy too much on the way down, let me tell you. "But wait," you say "my pennies are not boring old gold mining plays - they're in the [fill in some current cutting edge technology] sector. Therefore they will go up eventually as the whole world starts using the technology." Well, maybe a minority will. But let me tell you, this kind of market euphoria that we're seeing is a breeding ground for scam artists. Stock promoters use the public's greed to their advantage. They create dreams on pieces of paper and sell them. This has happened in the past many times (as a gross example, did anyone follow the Bre-X scandal back in 1996-97 in Canada? If not, look it up) and is happening now on the OTCBB and CDNX, to say nothing of the larger exchanges. Many of the OTCBB companies are just not going to stay in business for 5 or 10 years. That is not their raison d'etre.
If a Nasdaq crash happens, it is likely that prices and volume on the OTCBB will collapse. The speculative fever will end; the promoters and corporate management (who are only in the game to make some relatively fast dough on the paper) will know that it has ended; and they will not waste their time trying to get the stocks back up using PR.
I would therefore seriously consider taking a trader's attitude to your OTCBB stocks, rather than an investor's attitude. Don't let yourself get buried by trying to get a better average price. If you must take a risk, decide what you are willing to lose in advance, and stick to that.
I don't know when it's going to get really tough, but I'm pretty sure it will. Good luck. |
