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Vulture Capitalism in Trading Stocks

Everyone knows about Venture Capitalists. Well, when it comes to trading stocks in my Fidelity IRA, I am a “Vulture Capitalist.” When a stock takes a nosedive for some reason, I “swoop down ” and snap some of it up. There are various hazards associated with this strategy:

1) The company may be heading for bankruptcy ( eg Enron, K-Mart, WorldCom, Northwest), in which case the stock usually becomes worthless.
2) The stock may not have finished “tanking” ( eg Countrywide Financial, Bear Stearns), in which case I may have to do an, often costly, second iteration of my strategy.
3) My strategy hinges on the supposition that the stock will have a little “bounce”, but it may just go down and stay down ( eg Lucent, TimeWarner).

vulture-capitalism-in-trading-stocks

There are also hazards with my implementation of this strategy.

Loss of nerve: The stock starts to go back up, and I panic and start taking profits too soon. This was the case with American Airlines several years ago. I took a huge position when it was at around $2, but then I sold too quickly when its price started to increase, as it turned out.

Greed: The stock price starts to increase, but I hold off selling it, hoping that it will increase further.

There is a refinement of my strategy, Looking for Oscillators, in which I look for stocks whose prices go up and down with some regularity. The danger here is that the oscillations may damp down and flatline at some low value.

As an individual investor, I feel that there is no way I can gain access to “hot” information, as the big players do. So I sometimes rely on “black box” strategies as the ones above, which focus on the behavior of the stock price, while paying little attention to the underlying stock itself.

Of course, one can always “punt” and buy mutual funds. Mutual funds are usually considered a way of reducing risk through diversification, but the Fidelity Sector Funds are a different breed entirely. There you are betting on a specific sector. (I recently sold energy and gold, which I had held for quite a while.) I like buying these when I have decided on a sector to invest in, since the Fund managers are better able than I am to sort out which stocks in the sector to buy or sell. I used to subscribe to Fidelity Monitor, from which I obtained useful information. But I often felt I was hearing about “winners” rather than “sleepers”, and I wished there were some way for me to do the exact opposite of what they were recommending. For the past few years I have been “going it alone.” .

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