There were no good things in Pandonra's box
Warning: This is a long post.
You're probably familiar with the story of Pandora's box, where by
opening it, Pandora released all the miseries into the world except
for 'hope' which she kind of manage to keep in the box. Well my
friends, there was nothing good in that box (hope included). But
before we go any further, let me warn you by saying that in this
article I'll discuss the reasons why you should dump the TDFX shares.
Please do not flame me for this; I'm not short the stock and I've lost
more money on TDFX than I care to remember. The reason I'm writing
this is to point out some (IMO) misguided perpectives as far as
trading/investing is concerned.
HOPE: Hope is a terrible thing. Though it helps you survive
in your darkest moments, more often than not it helps your slide into
those dark moment by telling you that things will improve in the future
rather than making you seek remedy *here and now*. Once it goes back
to break even I'll sell it. It'll go up once there is positive
coverage, it will go up once the new product is announced. It'll go up
after the E3,SIGRAPH, COMDEX, ... conventions. It'll go up after the
earnings report and I'll be proven right. It'll go up after... These
are all the voices of 'hope' ever pushing you closer to that 'darkest
hour' at which point it will make you feel better and give you
strength. But isn't it better not to have made it to those gloomy days
in the firs place than to have made it through them?
THEY: They are also a terrible bunch! 'They' control the stock
price because 'they' want to buy it at these dirt cheap prices :^)
(though they certainly are a greedy bunch pushing it all the way from
35 to 16) 'They' also are the specialists (option MM) and 'they' are
not just satisfied with substantial spread premiums they collect or the
tremendous profits they make in delta hedging themselves and selling
options at over a 100% implied volatility (and over 300% volatility on
ocasions), but greed, inhumanity, and pure sadism pushes them to make
the stock price go to levels that will make the options expire
worthless :^)
INSIDERS: These guys are the worst of all. They issue this worthless
piece of paper to the public and then hide all the rott beneath the
surface except the selected few so that they can sell their shares at
todays overvalued prices.
The problem with all of above is that it prevents you from learning
from your mistakes and sets you up for disappointments. Here is a
question: how many of you bought the stock last quarter between 27~34
only to see a short lived hight of 35.25? Did you sell it when it
dropped 10% from its highs say at 31.5? what about when it fell another
10% to 28 and another 10% to 26? If not, why? Which of the above was
responsible for making you hold it all the way down to 16? I'm not trying
to poor salt over injury here. My point is simply that at each point we
all hoped for it to go back to the previous levels. If it was not for that
hope, we would not have held the stock (and I for one would not have
incured the losses that I did). The moral of the story, don't hope for
the stock to go higher, wait for the evidence. Secondly, how many
people here have blamed the insiders or market makers or some other
force for the stock decline rather than face the music and admit that
they have (at least from the capital appreciation point of view) made a
mistake. The moral here, the outcome of our actions is the best
teacher of all; if you don't like the outcome, then you probably should
not have done the deed.
What to do now. The best thing to do right now is to sell TDFX.
That's right sell your holdings. I know this is bitter medicine and
before someone flames me for being a short/stupid/short-sighted/naive/...
let me tell you that I think TDFX is an extremely undervalued stock.
Nothing would please me more to wake up tomorrow and hear that TDFX has
gapped up $5 (or even better $10), but chances of that happening are very
low and we have to deal with the reality. The reality is that TDFX is in
a downward spiral and as undervalued as it is, it can stay undervalued for
quite sometime or even worse, get even more under valued. Read any value
investor's guide you like and it will tell you this to be the 2nd biggest
draw back of value investing (the first is that you may be wrong and the
stock is cheap for a reason).
TDFX is unlikely to go much higher anytime soon say before
Sept). The reason is that for TDFX (or any other stock) to go up
there has to be more buyers than sellers. These buyers and sellers
come in two variety: retail (that's us and our friends) and
institutional. The retail side seems to be saturated with as much (fed
up?) buyers as possible, judging from this and other internet forums.
Many will sell at any uptick, limiting the upward gains. The
institutional side probably acknowledges that the stock is undervalued
but will not touch it until it sees it moving up and that is not going
to happen until most (say two thirds) of the retail investors/traders
are out of the stock. Why you say they will not buy it now even if
they think it is undervalued? Well put yourself in their shoes: your
career and pay cheque depend on if the stock you buy/recommend goes up
within the next 1~3 months of your move. Is this a likely senario for
a down-trend stock, given that the earnings is out already?
Why the institutions will not buy substantial amount TDFX even if
they think it is undervalued Let's look at what is likely going
through the analysts'/fund mangers' mind before investing in TDFX
(remember they want quarterly performance *not* 10yr over-all gain):
Given that the earnings is out already and the stock is in a downtrend,
what will move the stock higher? and to what extent? In the past two
quarter the company has handily beat the analysts' earning expectations
and in each case it has dropped by more than 25% within 3 days of the
report. What's more powerful than a positive earning surprise to move
the stock and how likely is it? Should I risk my career and go on limp
for such small company that is mostly unknown to the street? Won't I
look silly if it falls even further? Are there surer things to recommend
instead. Besides, what if by the time the true value of the company is
realized, the fundamental conditions for the company take a turn for the
worse due to say a new competing product, a production set back, or the
departure of some key staff (for a company with better stock performance
and hence better employee option plan). Should I still hold the stock
while it is making a base and risk all that just so that I can be there
when the uptrend starts? No I don't think so. I think I will wait for
the trend to establish itself before I jump on the band wagon. At the
very least I'm going to wait until all the retail investor who seem to
dominate the stock leave so that when I buy the stock it will move up
(as oppose to going down because the retail side is tired and wants to
get out).
So what should you do? You should sell TDFX. You should sell it
because there are other stocks that are going up and that the bull
market will not last forever, so you might as well make use of you
money in an up market while you can. You should also sell the stock so
that you can declare a capital loss in your tax report and offset the
gains elsewhere thereby recovering at least a part of your losses. But
if I sell, the stock may move up sharply tomorrow and I'll feel really
bad then, you say. Ask your self this question, how undervalued is
TDFX now and how undervalued is it if they execute the business plan as
I expect them to. For me, I think TDFX is 50% undervalued now and if
they earn as much as I expect them to, their fair value should be
$40~$60 range in about a year. But because it is not going to there
instantly, given all the above reasons, it is best to sell it now to
avoid the risks.
So when should I buy it back? Well, personally first I'd like to see
the average daily volume to drop to less than half of what it is now
say in 100,000~300,000 shares a day. This will indicate that most of
the short term retail traders are out. Second, I'd like to see a
considerable number of white candles when looking at candle-stick chart
for about a month. Then, if the fundamentals are still in place, I
will slowly get back in again. In the mean time, if I wake up one day
and see that due to some super great news the stock has moved up 5
points, without remorse, I will buy a whole bunch of in-money-out-money
bull spreads on FQ near options and make a killing. Even if I don't
want to buy the options, given that the fair value of the stock is so
much higher, I will still probably be able to double my money buying
the stock. In other words you give up the opportunity for the first $5
so that you'll have an easier time making the remaining $10~$20.
Please cross post this on Yahoo, Fool, and other related chat rooms.
The sooner people realize TDFX is not going to have explosive moves
anytime soon, the sooner it will stabilize and start to move up.
Regards,
Sun Tzu |
