This week, we look at how investors can avoid get killedin "fiasco stocks."
Here’s the excerpt:
Let’s say someone was foolish enough to rely upon the sell-side analysts’
"strong buys" on Enron in 2000. Our hypothetical investor — let’s call him
Kenny Boy — got suckered into Enron at the worst possible time, buying 1000
shares at its peak price of $90.
When he bought the stock, Kenny employed the very simplest loss limitation —
a straight 15% stop loss. He placed a "good till canceled" 15% stop loss order
at $76.50. (Next week we’ll go over a variety of stop-loss techniques.)
Towards the end of the year, Enron had broken $80 and was sliding further
south. By mid-December 2000, the stock was flirting with Kenny Boy’s stop point.
Soon after, Kenny Boy was "stopped out" of Enron at $76.50.
Still, Kenny Boy’s a sucker. He read a few positive articles on the company
with titles like Enron’s Power
Play that got him excited again. As the broader market bottomed in April
2001, Enron appeared to stabilize. Just as Enron rallied to $60, poor Kenny Boy
went back for more punishment. He bought another 1000 shares, with the same 15%
stop in place.
A month later, the stop loss took Kenny Boy out again. This time, he was sold
out of at $51, for a $9,000 loss.
Meanwhile, as the stock price slid, institutions may have been forced to dump
shares in order to stay true to their investment style. For example, a large-cap
growth fund, by its own charter, may not be allowed to hold mid-cap stocks. As a
widely owned issue like Enron cratered, it created a self-fulfilling "death
There’s alot more where that came from.
Apprenticed Investor: Protect Your Backside
RealMoney.com, 10/28/2005 10:34 AM EDT