Monday, May 3, 2010

They are Idiots.

Every now and then I talk to people who think that when you buy the stock of a publicly traded company, that you buy it from the company. Heck, it happened yesterday. So, the first thing I tell them is that a company only sells stock a few times in its existence...say 1/2 a dozen times or so...maybe more if it buys a lot of other companies. If it does this, by the way, you should be concerned. Read Jim Cramer's book: "You got screwed" about how Enron went down and you too can be worried about companies that endlessly acquire other companies (think Oracle...don't know if it's different in their case, but they are serial acquirers).

So, the bottom line of the above comments is that when you buy a stock, you buy it FROM another person or institution. That's right, you could be buying stock from someone on your very street that you live on...who just sold it to you. Now, why would someone sell you their stock if they thought it was going to keep going up? That's right, when you buy stock, you MUST assume that the person who sold it to you is an idiot. If you don't want to be that mean, you have to at least politely think that they are wrong, very wrong. Otherwise, the loser in the you. If you are wrong, and they are right, then the stock will go down and you'll lose money, and they'll laugh all the way to the bank.

This is where the title comes from. You have to believe that the people who sold you your stock are idiots or you're about to lose money. You're about to lose serious money if you don't have the guts to cut your losses and watch it go to zero. I know these are strong words, but I'm trying to help you avoid seeing your investments go to zero. It means that you have to do your homework. You have to listen to the conference calls. You have to watch CNBC, read books, and read company balance sheets and cash flow statements. You have to do all of that, or someone is going to make an idiot out of you.

Now that you understand how buying stocks works, you can understand how insane it is that everyone insists that Goldman Sachs should have disclosed to the buyer of the Abacus paper that John Paulson was on the other side of the trade. ARE YOU KIDDING ME? Name one time you bought a stock and didn't know who sold it to you. How about EVERY TIME! It happens every day in the market. The only one who knows who is who are the market makers who put the trade together and that's how it should be. Can you imagine if you knew every time who was selling and who was buying? You want to see some real manipulation, try requiring firms to disclose who is on what side of the trade. I have never heard of anything so stupid in my life! Look, everyone has the right to be angry when things are done wrong. Everyone should feel hurt when you're taken advantage of. But this Goldman Sachs case has gone too far. Do you even know what kind of money you MUST have before they'll even deal with you? This was not someone buying the Abacus paper on E*Trade from someone for $7.95 or whatever they charge. The group putting the security together got to toss ANY mortgage out of the SIV (Structured Investment Vehicle) they wanted to! Can you believe that part of it? So, who's really to blame that it went south? I don't see the millions of people who were stupid enough to buy GM stock before it was declared worthless coming out and filing a lawsuit against GM. Jim Cramer told people for months that the GM paper was worthless...but that didn't stop people from trading it.

Just because someone loses money in the stock market, or any other capital market like commodities, options, SIVs, CDOs, RMBS, CMBS, MBS doesn't mean something was wrong or criminal. No one is exempt from doing their homework, especially not people with money who can hire other people to do their homework for them. When this buyer asked Goldman Sachs for the product, they didn't ask their advice on it, they asked them to have someone make the product. John Paulson was willing to do that and go short the product. Who says the IBM you bought today wasn't someone who borrowed the shares and sold them short to you? Heck, you may be the person to sell it back to them when they cover since you have the exact amount of shares they'll need.

Sometimes investments are complicated. Sometimes people lose money. But you always have to do your homework, no matter who you are or what you're buying...and you'll never know who's on the other side of the least not in a world that's fair. You just have to hope that the person or institution that sold you the investment, is an idiot.

1 comment:

  1. I like it. When things don't go your way people almost always want to find someone to blame. If you're going to be investing your own money you better have you crap straight or you are going to get screwed...maybe not this time, but SOMEtime. Do your homework people!