Autopsy of a Trading Era

— A truck comes to your house. A man installs a line that makes your personal computer work better on the Net. He is presentable and busy. He’s got a million more homes to wire.

Today. You just got into the stock market in the last few years. You have read a lot of articles about how Peter Lynch picked his stocks by personal experience. You are busy opening all of your trading accounts — and we know how easy that is from all of those commercials — and you think, “Hmmm, busy installer, busy company, this digital subscriber line is one fast line, wait till everybody gets one of these!” Voila, next thing you know, you just bought 1,000 shares of Covad . On margin. Why not margin? We know that everything goes up in the end, so live a little, leverage a little.

Six months later, you are gone. Obliterated. Vaporized as surely as if you were the ex-CEO of Covad, who, a few days after a glowing L.A. Times piece about his reign, gets the boot! If this story doesn’t sound familiar to you, that means you are a survivor. Congratulations. You are going to make it to the next bull market. And you will be good at it when you get there. If it does sound familiar to you, I bet you’re are winding down your trading days, whipped by a market that’s as mean and as angry as a trapped and wounded Kodiak.

Same Sorry Endings

When the book on this era is written there will be a massive number of these Covad-to-Lynch-to-poorhouse stories and they will all pretty much have the same sorry endings. What happened here? How did things go so awry? I want to use this Covad metaphor as a quick lesson in what so many newbie investors did wrong in these gilded past couple of years.

First, let’s dispose of one thing. Peter Lynch would never have bought Covad. At least not the Peter Lynch who made me a ton of money when he was at the helm of Magellan. The Lynch style of investing, which has come to be personified by the unfortunate example he used of some school children buying stocks, was never to buy a stock after a good personal experience. That’s like saying that I practice Ted Williams’ style of T-Ball. It was to use the experience as a great starting point for research into an investment. What would you have found if you had looked into Covad? I think you would have found an indebted company that was losing money hand-over-fist. Then I think your research would have ended and you could have waited until the next man came to your house, well-dressed and doing a good job. If it was a UPS man, and you liked him, you could have saved a fortune! Hope it wasn’t the Webvan man. I can’t tell you how many people bought that one after a terrific experience and no research. And be glad Kozmo wasn’t public. You never got a chance to lose a fortune on that one!

Learn From the Past

Lesson No. 1: Research companies. Are they losing money hand-over-fist? If so, accept that you are buying an extremely speculative piece of paper, a lottery ticket, if you will. And where did I get that phrase? From the man who tried to warn us, Alan Greenspan, the Federal Reserve chairman.

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