Some Random Thoughts
Trading Traders
Picking up on what I was putting down last week, you’re trading traders, not markets. Now, who are “those” traders? It varies. I believe in the man on the street as a microcosm. As mentioned recently, my 87-year-old gym buddy started day trading. He was also trying to buy SpaceX shares pre-IPO. Combine this with the recent market melt-up, and that implies that speculation has run rampant. This price action in and of itself is fomenting FOMO.
Greater Fool Theory
When you boil it all down, there are only two questions that you need to ask before EVERY trade:
1. Is there a greater fool?
2. Am I the greater fool?
When you buy a stock, as long as someone comes along who’s willing to buy it from you at a higher price, you make money. Without the “greater fool,” your trade will fail. And, yes, there will be times when you get the “high tick” award for being THE greater fool.
IPOs: Often Ripe With Greater Fools
When I was brainstorming the name of my IPO course, I settled upon “IPOs: The Promise Of The Future.” An IPO might cure cancer or some other horrid disease, create power-hungry data centers in space (where they belong?), or establish colonies on Mars. “Might” is the keyword in that sentence. IPOs often skyrocket on the “promise of the future,” but subsequently implode when that promise fails to materialize.
Trade Like A Sardine Trader
Inspired by the infamous sardine-trading story, I used the sardine as my IPO course logo. The story has taken on many variations, but the gist is as follows: The price of sardines began to skyrocket. Traders were gathered on a dock, frantically trading sardine tins. A bystander got caught up in the action and paid a ridiculous sum for a tin of sardines.
He opened the tin only to discover that they were rotten. Enraged, he tracked down the person who sold him the sardines. The seller explained, Silly fool, those sardines were for trading, not eating!
IPOs Are Like Sardines: They’re Made To Trade.
Is SpaceX worth the million trillion bazillion dollar valuation? Probably not, but like ANYTHING, it’s worth what someone else (i.e., the greater fool) is willing to pay you for it. Again, IPOs often pop on promise and then implode when that promise fails to materialize. This “fly and die” characteristic is the basis of some of my IPO strategies, which aim to get in as early as possible, provided the stocks prove themselves in the first week of trading.
Day One And Done?
Often, the excitement is so much that IPOs make a high on day one and never see that high again. This is why I have the “Day One” rule for trading IPOs. Essentially, the IPO must close above its day-one high before being considered. Plot a list of IPOs. You’ll be shocked by how many never take out their day-one high. This simple rule will keep you out of a lot of stinkers. You’re welcome! Also, many will find their ultimate high during the first week of trading. This is why I will only trade IPOs after they have been trading for at least 5 days (buying near the close on day 5 is okay if that's the highest close of the week).
Self-Regulating
One good thing about IPOs is that there are way fewer in bad conditions than in good. They tend to be self-regulating. Companies do the “market timing” for you. No one in their right mind would take a company public during crappy markets. They wait for good conditions. Quoting Linda Raschke (who named her excellent book “Trading Sardines”), they “feed the ducks while they’re quacking.”
What Exactly Do You Do?
As mentioned, ad nauseam, at dinners and cocktail parties, I’m often asked: “What exactly do you do?” I then proceed to tell them exactly what I do. I explain the merits of technical analysis, how fundamentals are essentially a farce, the importance of money management, and the crucial nature of trading psychology (I know! You want to party with me!). As their eyes glaze over, Marcy rolls hers. At the next gathering, inevitably, I was asked again. I glanced over at Marcy. She was giving me “the look.” So, I knew I needed to be direct and succinct. Nervously, I blurted out: “I just buy stuff that’s going up and sell stuff that’s going down.” Marcy looked at me and said, "Finally! You explained things without getting all weird!"
