for what it worth here we go!!
HOT STOCKS CONFIDENTIAL
SPECIAL ESSAY:
Why YOU Lose Money in the Stock Market ** Part 1
By George Chelekis * February 3, 1996
TEL: (813) 251-0030 * FAX: (813) 254-4677
NOTE: Please read this essay before speculating in any future Hot Stocks. Please read it and re-read it until you understand
how to buy and sell stocks. I am not an investment advisor so let's just call this "financial PHILOSOPHY." This essay is written
to prevent the small, inexperienced investor from getting burned in the high-risk, highly volatile, highly speculative small cap
stock markets, especially those in Vancouver and Alberta. It would be irresponsible of me to not inform you of what makes
these markets tick and how to avoid the traps they pose. IF you understand and apply the wisdom you will gain from this
essay, you are likely to minimize your losses in many of your speculations. This is a TWO PART ESSAY.
WHY YOU LOSE MONEY IN THE STOCK MARKET....
Judging from past email I have gotten, I continue to observe the SAME mistakes being made. I appreciate all of the
communications I receive from all of you as they direct my attention as to what you DO NOT KNOW. This helps me provide
you with data you MUST know. I have reviewed a large number of charts of previously featured companies and look for a
simple solution as to why the stocks behave in the way they do. There is one.
The solution is this: Stop Placing Market Orders. Also stop placing PRE-Market Orders. It is not enough to tell you: (a) Stop
chasing stocks up the charts AND (b) Be patient as there will be another bus coming along soon. Now, we are getting down to
the serious nitty-gritty.
This came to me during one of my lectures at the ISI Orlando Money Show. While explaining the
accumulation/markup/distribution cycle to US investors (primarily fixed income, mutual fund retirees), I realized that there was a
HUGE flaw in the above cycle. Unwittingly, I have been the one who has interfered with this logical cycle. Now, it is time to
repair this problem once and for all so that you don't continually get burned as a stock is being chased to the high heavens.
DEFINITION: A Market Order is the instruction one gives to their stockbroker to buy or sell a stock at "the market" or
"whatever it is going for."
DEFINITION: A Pre-Market Order is the instruction to one's stockbroker to buy a certain number of shares of that stock "at
whatever it is going for," which is given to the stockbroker BEFORE the market opens.
RULE #1: Do NOT place a market order.
RULE #2: Do NOT place an order with your stockbroker for a particular stock before the market opens.
These are fairly simple rules to follow.... and to break. One can get impatient with a stock, either to buy it or sell it, and place a
market order. One can be rushing off to work or vacation and place a market order. One can get greedy and buy up all the
stock they can get their hands on without regard to price. One can get panicked and dump all of their shares to get out of the
stock. THESE activities CREATE the terrible VOLATILITY of the small cap stock markets.
A huge number of market orders hitting a large number of brokerage firms ALL AT ONCE can create an overwhelming
volume and a quick runup in share price. Also, a BRIEF runup in price.
It is a quick runup in price because the pro traders can PLAY that stock, adding to the runup. It is a brief runup in price
because eventually people come to their senses... especially if they have seen it go up 50% in one day. Without a real good
reason as to why.
This can ALSO frighten the securities regulators and sometimes worries them, causing them to halt trading in a stock. A quick
hysterical runup is often followed by a rapid, equally hysterical, PANIC. The eager beaver who places market orders, chasing
the stock up the charts, at some point, PANICS. He or she just as fervently drives down the stock's price. The chart looks like
an inverted "V." In some cases, it can be two or more inverted "V's."
I have written much of this before, inside earlier essays or as commentary with regards to certain stocks. Now, I am trying to
DRIVE it home to you. If you continue in this practice, you will practically guarantee yourself a loss.
Subscribers used to ask me about when I buy stocks in the companies I feature. Quite honestly, it has gotten so crazy and
volatile that I have been avoiding most of these stocks. But, here is what I used to do: I would write about a company, wait for
each of you to run it up and down the flagpole, and THEN (when all the activity had died down), I would step in (during those
moments of silence) and buy up the shares. For example, last Spring and Summer, I was roundly lambasted on at least two
Internet newsgroups because two of the companies I had written about were dogs. They went UP and they came down. I
scratched my head, looked again at the fundamentals in these companies and got substantial positions in these companies.
Then, I waited. And waited. And waited. One of the stocks, Moneta Porcupine (TSE:ME) took its little time and climbed
steadily from 36 cents to 90 cents -- all in less than five months. Another company, MacDonald Mines (Alberta:MMP.A), took
even longer, but it ran from the high 20 cents level to a Friday close of C$1.90/share. There was even another, Trio Gold
(Alberta:TGK), which took is own time to come into play, running from around 60 cents to C$1.30/share. None of these
stocks took more than 10 months. None of them returned less than 100%.
It was funny, though, to read from "my Internet critic" about how I couldn't pick stocks and that I was just a stock promoter.
What silliness! About the same time as those plays, I had featured another company, Gold Canyon (VSE:GCU), when it traded
for 70 cents. This stock slowly climbed throughout the summer and recently took off. GCU closed on Friday at C$13.50. You
can easily pull down the May 24, 1995 article about Santa Fe Gold's Springpole Project. (It's on the website, at Market News
and on Bloomberg.) It was equally as interesting to note that I brought with me, to the ISI Orlando Money Show a year ago,
SEVEN companies. Of those companies, five are substantially up (50-300% up) a year later, a sixth also went up but now
trades lower and a seventh is now trading at 50% of last year's level.
This is what intelligent speculating is all about. The key word here is "intelligent." It is NOT intelligent to place market orders or
pre-market orders for either side of the fence (buying or selling). It is NOT intelligent to chase stocks. It is NOT intelligent to
get greedy. It is NOT intelligent to hit a home run with every stock. It is NOT intelligent to try to make your "rent money" with a
play, for the odds are greatly stacked against you. It is intelligent to diversify over a comfortable of stocks, accumulating at
lower levels, never chasing them up the chart and being PATIENT.
STRATEGY
With the above in mind, it is now time to provide you with a strategy. With this strategy, we can now FINALLY chase the
flippers and pro traders away from many of the featured companies. It is not going to be lot of fun for them. It may take a while
for them to catch on, but they will.
From now on, do NOT pay greater than 5% more of the stock's previous closing price. Example: If XYZ closed at C$1/share
on Monday, do not pay more than C$1.05/share on Tuesday. Be patient and wait. Last month, I wrote: "LET THE MARKET
COME TO YOU." This is exactly what you have to do. This requires PATIENCE and DISCIPLINE.
Inevitably, there will be those fools who will still chase the featured stocks. They will run it from 40 cents to 60 cents. Believe
me, in virtually all cases, that stock will come back down again. Wait for it to come to you. That stock WILL come to you.
And if it does not, there are many others to choose from.
Such buying, and selling (as there will still be flippers, but they'll just have to wait longer to flip), WILL create an orderly market
for that stock. Many suffer from becoming renegades, shooting up and retreating. Examples: Gallery Resources (Alberta:GYR)
and, moreso, First Western (VSE:FW).
Let the idiot, who is trying to make a fast buck, run up the featured stock ..... by himself. For surely, it will retreats when he
discovers the rest of you have not joined him. Such fools ALWAYS panic as it is going higher and, because they live in an
emotionally insane world of their own creation, they DRIVE the stock down again... with just as much vigor. Let them play
around, like a little brat hogging the sandbox. When he is done, then step into the market with the above strategy.
Obviously, the first ones in will get the lower price and have the least risk. However, these people should ALSO realize that this
privilege carries with it a great deal of responsibility. In one phrase: Do not be a PIG. Once you have substantially benefited
from this speculation (50-100% return), then move out and leave some food on the table for everyone else.
Bigger investors and institutional funds LIKE an orderly market. They don't like to see the big jags (peaks and valleys) on a
chart. It turns them off. This does not help the company, does not help you and makes me feel like I should give all of this up
and just trade for my own account.
A final word on strategy. If you want to accumulate a SUBSTANTIAL investment in a company, after having done your own
due diligence in that company, do NOT do it all at once. Let's say you wish to accumulate 10,000 or 100,000 shares of a
particular company. Great! Please do it slowly, over a period of time, either averaging up or down, perhaps over a period of
weeks or (gasp) even months.
EXAMPLE: (You are going to love this one.) Let's pick Tradewinds (VSE:TDN). TDN sat, without much volume, for many
months. I remember a number of people disposing of it between 70 cents and C$0.95/share -- in a panic that the stock would
collapse, etc. It did. It fell out of bed... big time. I think the low was around 35 cents. WHO were the buyers at 35 to 45 cents?
It was the insiders. For TDN had gone back into an accumulation stage. The "screamers" were into the stock at C$1/share up
to C$1.86/share and then panicked during the collapse (and some insider selling), as it sunk (and stunk) its way back down to
the abyss. At the floor, while everyone was looking at dozens of other stocks, one could have averaged down or entered it for
the first time... if they had bothered reading my special report -- which was written as it was collapsing. TDN closed at
C$0.60/share on Friday. It is headed back up again.
EXAMPLE: Holmer Gold (Alberta:HGM). I wrote about HGM at 40 cents in November 1994. Around this time, a year ago,
I entered the stock when it had hardly any volume at 50-57 cents. I may have been the only one buying the stock. It ran to
C$4.75 (intra-day trading high). I rode it all the way up and all the way back down, never buying or selling. Today it is around
C$1.50/share -- still 300% higher than it was when I bought it! And, this is what I consider is STILL the accumulation stage.
If everyone follows the above strategy, I believe we can FINALLY see orderly markets in Hot Stocks Review featured stocks.
This will, as a side benefit, calm down the people at the stock exchanges, calm down the securities regulators and put a damper
on the rabid and insane pro trading which hits many of the companies I feature.
ACCUMULATION/MARKUP/DISTRIBUTION REDUX....
The markup and distribution stages are confusing to virtually all non-professionals. This is THE bug. A Canadian stock, if the
play is going to work, is STILL in the markup stage while it is trading among Canadians. Many western Canadian speculators,
many Chinese investors and the professionals do NOT place market orders. US investors using US brokers tend to place
market orders with a strong degree of insanity. The net effect of this is a stock which briefly spikes and then gets flipped or
shorted. Mostly, it gets flipped rather than shorted. After dozens of interviews, I am shocked at how many flippers are trifling
with stocks for a few dimes. You can see this on a chart (example: Look at Software Control [Alberta:XVN]). Flippers tend to
live a life of regret when they miss the big play. In fact, they often end up CHASING the stock to higher levels, trying to get
back into the play, when it really takes off. You can also see this on a chart (example: Look at Mattan Corporation
[Alberta:MTN]).
While there are many little spins of the bicycle tire in the accumulation/markup/distribution cycle, one does NOT see the FULL
impact of the distribution cycle in the life of a Canadian stock promotion UNTIL the paper ends up in the hands of US
investors. That IS really when the stock has reached its distribution -- when the company matures its way into the US market.
To understand THIS concept, one must understand what the stock market is TRULY all about.
(In the February 4th report, you will find out what the stock market is all about.)
COPYRIGHT (c) 1996 by George Chelekis. ALL RIGHTS RESERVED. The information presented in George Chelekis' Hot
Stocks Confidential is not an offer to buy or sell securities referred to herein. This is an irregular financial gossip column, strictly
for information purposes, which should be considered neither reliable nor complete. 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.
George Chelekis is not an investment advisor, money manager or stockbroker (past or present). Stocks featured in this column
are extremely speculative investments, laden with considerable risk, plenty of volatility and unsuitable for all but the most
aggressive speculators who may lose all or part of their investment.
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