a definite must read!!!!
Anatomy Of Greed
By George Chelekis
The man who hoards his money in a mattress or the refrigerator and won't spend it. The
woman who watches her high-risk
investment double and triple... but won't sell. Or the investor who freezes up as his or
her investment sinks deeper into the
toilet. They all have something in common, which can finally explain what that terrible
word, GREED, means in the investment
world.
After writing about the high-risk, high-reward and volatile Canadian penny stock market
for the past 16 months, I have finally
reached an axiomatic explanation for the phenomenon called GREED.
This overpowering emotion which has led many an investor to unnecessary ruin is quite
easily explained. Over the past few
months, I have witnessed investors chasing stock after stock while it is quickly rising and
lamenting when they are "stuck with
worthless paper" on the ride back down. I have read subscriber mail from those who
did not believe my forecast on a
particular stock when it traded for $1.33 (Cdn), but didn't stop themselves from
jumping into the fray after it doubled or tripled.
I have heard an all-too-often refrain: Why isn't my stock going higher?
That is GREED at work. It also explains HOW this ill-tempered emotion actually
works! This unfortunate sensation/emotion is
all too prevalent in the investment world and it alone is responsible for the high casualty
rate found in the small cap stock
markets around the world, particularly with the fast-moving Vancouver-listed
companies.
In an earlier essay, entitled "A Successful Approach to Small Cap Stock Investing," I
compared such investments to casino
gambling and warned about the attitude which an investor should have when entering
into such trading activity: (1) get in early,
(2) stay for a short while, (3) don't go for the grand-slam home run and (4) get out as
quickly as you can. What drives investors
into the small cap, high- risk stock is GREED. The notion of doubling or tripling one's
investment in a few days or weeks is
quite attractive. However, such "trading" (as it is not really investing) carries an
enormous amount of risk. It can be extremely
dangerous -- even deadly!
WHY ARE YOU AFRAID?
Hence, the FEAR and GREED cycle. I believe I have isolated what causes FEAR. One
fears jumping into any investment for
the single reason that he or she has been hurt in the past. Every single past
misrepresentation, falsehood and pie-in-the-sky
promise restrain the investor from quickly capitalizing upon the early stage of the stock's
runup. Each failure stacks up and
seems to congeal as "one voice" warning the investor to stay away. So, the investor
holds back and misses the first leg of the
race.
However, the investor does not stay away. He keeps an eye on that stock and watches
volume increase and the price spike
higher. He then "feels safe" and GREED overcomes him. He buys... all too often at or
near the peak of that stock's runup. He
has, thus, joined the herd. This is what the amateur retail investor is doing. He waits until
the herd sends the stock higher and
then gets caught holding the bag. What is the professional doing? The insider is too often
selling into the strength of the trading
volume and "blowing off his paper." The professional generally rides the stock up on the
volume, emptying out his inventory,
and then, once he observes the insider selling, goes short on that stock.
The end result is an amateur investor who has succumbed to the FEAR and GREED
cycle. A nice touch is even allowing the
amateur to "win a little." That could mean as much as a 20 percent gain. By the time he
is congratulating himself, the stock price
quickly tumbles lower. He then panics again.
FEAR has now clashed with GREED and the amateur is confused. He may be down,
first by 20 percent, then by 50 percent
and finally his small cap investment may be down so far that he simply "freezes up." He
is in shock. Occasionally, there are
small spikes upward, which offer him the false hope that this stock will again set a new
high. It often does not. Sometimes, the
investor tries to even out his losses by averaging down and ends up with twice as much
(or more) paper.
HOW STOCK IS DISTRIBUTED....
This is the sad tale of small cap stock investing. It is not a world for amateurs. Yet,
without the amateur, the insiders and
professionals have no one to whom they may unload their stock. Without the retail and
amateur investor, there is no game. It's
like having only one side show up for a football game or hockey match. More
accurately, it is like having a big department
store... but with no customers.
So, the insiders hire a "stock promoter" to get the word out about this company. The
stock promoter works his Rolodex of
brokers and excites them. The brokers phone their clients to get them "into" this stock.
Along the way, a newsletter editor or two is hired to feature the company and excite his
subscribers (read the fine print at the
bottom of their newsletters, if they bother to include any disclosure at all).
Advertisements touting the company and its
prospects are taken in numerous small and/or large financial journals. The company
hires a few babes and is off to the
investment conferences to drum up interest in their stock.
Thus, we have what is called DISTRIBUTION. Shares are distributed from the insiders
to the amateur. Continuing the
comparison to a department store, the inventory is sold off to the customers. What does
the company then do? It prints MORE
stock, thus diluting the value of the original stock. This is done through a series of private
placements. The PURPOSE of
promotion is to dump the "old inventory" on a new wave of EXCITED investors, who
are hoping to make a quick buck, and
then raise new money through one or more private placements. The retail investor
momentum drives up the stock's price,
allowing the insiders to dump their shares into the strength of the trading volume and
have some extra cash with which to do a
private placement at a higher price. Or buy a yacht with the profits... or a new house...
etc.
Stock promoters are paid in stock options. As the stock "races to the moon," and the
promoter is telling YOU what a great
company this is, he is cashing in on his options. Small companies can't afford to pay an
investor relations person in cash so a
good one is paid in stock options. Both the promoter and the company believe that if
the promotional guy is any good, he'll
jack up the price and both will end up making a few bucks.... unfortunately, that is at
YOUR EXPENSE!
Later, when the stock heads lower, that same promoter is massaging you with grief,
whining about how shortsellers are driving
the share values down. Of course, he has dumped his shares by now, as have the
insiders and often your own brokerage
house, and YES, shorts are active, but ONLY after they are certain that it is safe to
short the stock. That means that NO new
wave of buying is coming in and you are the one stuck holding the bag.
This is called distribution. Ask your broker about it and watch him turn red, green or
ashen!
How To Become A Professional...
Most investors shun the small cap stock market. However, when a Dow Jones average
trades at an unbearable level, the
amateur investor's eye begins wandering to "better deals. The first mistake the amateur
makes is in thinking that he is investing in
real companies, i.e. Blue Chip stocks. He has not changed gears into the "mindset" of a
professional trader. The amateur's
definition of "short- term" may be three years, while the professional's definition may be
three weeks, if that.
So, does one just ignore the incredible promise of high returns? Or is it better to
understand how the small cap market
works..... After all, there are fantastic profits to be made if one knows when to get in
and when to take profits.
WHAT CAUSES GREED?
The key is getting into the play EARLY. Now, ironically, that is how I accidentally
discovered what causes GREED. Many
miss the early moves of the play and subsequently chase the stock at a higher level.
GREED causes that phenomenon. If one
completely understood GREED, he or she would no longer succumb to it. Imagine no
longer being the victim of your own
GREED.
So let me define GREED in a new way for you. GREED comes about because the
investor believes there exists a SCARCITY
OF OPPORTUNITIES. The driving force which compels an investor to chase an
investment as it is running higher comes
entirely from his or her conviction that "this is it!" What is likely going on in that investor's
mind is this: "I had better do well with
this one because another one like it is certainly not going to come along for a long, long
time... if ever again!" The investor
actually convinces himself that THIS opportunity is the only crack he or she is ever
going to get at making a fast (and painless)
buck. WRONG!
GREED CAN BE OVERCOME! All it really takes is being able to SEE an abundance
of opportunities. If you had the
opportunity to invest (for the short-term) in ten new investments between now and the
end of the year, and you were also
convinced that at least 5 or 6 of them were going to increase by 50 to 100 percent, then
I'll bet that you would be more rational
in your investment pattern. Logic, instead of emotion, would rule your investment world.
I'll bet that, as soon as you were
completely convinced that this was so, you might even settle for a routine 30-50 percent
gain... instead of going for a grand-
slam home run every time you stepped to the plate.
There are THAT MANY OPPORTUNITIES available to you. Not everyone goes up.
Very few go up and stay up, as that is
the nature of this type of investing. However, it is now possible to get into a stock's play
early on and capitalize upon the
OPPORTUNITY.
COPYRIGHT (c) 1995 by George Chelekis. ALL RIGHTS RESERVED. The
information presented in George Chelekis'
Hot Stocks Review is not an offer to buy or sell securities referred to herein. This is an
irregular financial gossip
column, strictly for information purposes, possibly reliable but not guaranteed as to
accuracy or completeness.
Investors are urged to obtain complete financial and other information directly from the
company as George Chelekis
is not liable for any investment decision made. While he is not an investment advisor,
George Chelekis, from time to
time, invests in North American securities, and provides information about selected
companies which catch his eye.
Stocks featured in this column are extremely speculative investments, laden with
considerable risk (tantamount to
casino gambling) and with plenty of volatility. Past performance does not guarantee
future results. Investors should
take profits to cover their initial investments because these stocks are extremely volatile.
George Chelekis is not
responsible for the timing on these investments should information be delayed between
the time it is written and when
it is actually received and/or acted upon.
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TOTAL ENTERTAINMENT INC (OTC: TTLN)
Time: 4:00PM
Last Trade
0.906
Change
+ 0.656 (+262.40%)
Bid
0.875
Ask
0.937
Volume
02,546,9000
Prev.Close
0.250
Open
0.625
Day Range
0.437 - 1 5/8
Last Tick
0-0
Avg.Volume
0134,6000
52-week range: 0.055 - 1 5/8
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