Posted in Trading on March 15th, 2017
The following article covers trading financial securities, such as stocks. The world of trading often comes with rises and declines of securities, and most things do not rise or fall in a straight line. By the time this article is published, circumstances involving what we mention may have changed. Often, changes in securities can be to the detriment to the traders – seldom is it beneficial. A person should only trade with money that they’re willing to lose because losses are guaranteed. By reading this post, you agree that you’ve read our disclosure.
Valeant Pharmaceuticals International used to be a high flying stock in 2015 before its eventual downfall. Even Pershing Square, a hedge fund led by Bill Ackman, has divested out of Valeant this past Monday. It is estimated they may have lost $2.8B dollars, yet only represents less than 3% of their assets under management (AUM). Yes, hindsight is 20/20. However, stories seem to repeat themselves of companies behaving badly. Amongst the exciting stories of profits and acquisitions, hidden are the financial manipulation, larger risk-taking, and scandalous behaviors. We are seeing these stories more often. We can read often how these public companies imploded, and some even had to be bailed out. With defunct companies like Enron, WorldCom, Lehman Brothers, and possibly Valeant, we can learn several lessons about investing in public companies.
I tend to follow trends (and sometimes I don’t, which teaches me expensive lessons). Looking at the weekly chart, again hindsight is 20/20. You can clearly see a break near the end of 2015, and eventual decline through 2016 until today. The stock price was flying above $240 per share, but now it is little above $12 per share. This would represent over 95% decline (or drawdown) from the stock highs. Those who were smart and lucky enough, they could have sold any shares owned around $200, near the 50 week moving average line (blue). Whatever the sell signal, it would have been fortuitous for them to sell in September. For those brave enough, they could have shorted the stock and skied down the slope through 2016 and gain more than 90% return on their short position, depending upon the shorted price. Of course there were other ways to make money using leverage and options, but the gist is that a lot of headaches could have been avoided for people owning shares of Valeant in 2015.
As the old adage goes, “but in this world nothing can be said to be certain, except death and taxes.” This may apply mainly to humans, but I also believe this applies to corporations. The Dow Jones Industrial Average originally contained 12 companies. Only one remain in the average, albeit GE was dropped and added again. Other companies became bankrupt, merged with other companies, split up to smaller companies, or have evolved into different companies. Competition will continue to be fierce. Evolution of technology and social trends will guide corporate profits and losses. A thousand years from now, it will be hard to see if there will be corporations existed from today.
It has been said that the stock market is a voting machine in the short term. My interpretation is that people will generally buy into a stock (vote) when the company seems favorable. People will not vote (sell shares), when the company seems unfavorable. No matter what headlines and marketing materials may say, the price will eventually tell the truth. One must be vote wisely, or be at risk to ruin.
There are lessons to be learned:
I hope you did not lose any money on Valeant. It is sometimes very tempting to invest in what the financial news cover, or follow along a popular fund manager. But, the best way to invest is to learn your style of investing and follow your own rules. Everyone’s situation is different, and individual psychology plays an important role in successful trading.