Income Seekers: 4 Mistakes to Avoid

With today’s ultra-low yields, it’s safe to say that every income-producing rock has already been turned over. If there were a foolproof way to generate extra income without additional risk, investors would already be all over it, pushing up the security’s price and pushing its yield down. Instead, higher yields are invariably a signal that a security type entails more risk than its lower-yielding counterparts.

Source: Income Seekers: 4 Mistakes to Avoid

Picking Up Pennies in Front of a Steamroller

Below is a very sad tale from a newbie trader who didn’t understand that taking asymmetric risk can be fatal.   The trader shorted a $2.00 stock thinking it was going to go to zero, but then a news release was put out saying a group of influential investors had taken a position in the stock and the stock immediately zoomed up 600% in the after hours market.

The lesson here is that taking a short position where you have only $2.00 of upside and unlimited downside (in his case much more than he even had to lose) is like picking up pennies in front of a steamroller.  You could make a little, but if you’re wrong you’re going to be flattened.

This story is an absolute worst case scenario, but even so the risk is not commensurate with the reward.

A 32-year-old small-business owner from Gilbert, Arizona, posted this page after a huge loss on KaloBios Pharmaceuticals.

Hello to all you traders out there. I’m starting this page out of the recommendation of other traders in the community.

I hesitated on doing this but I literally owe Etrade $106,445.56 as of this moment what would you do if you were in my situation? I’ll do whats needed and sell what I have to get them paid but if someone feels my pain and is willing to help out—who am I to say no?

If you don’t want to donate I understand, at least read my story of what happened today and protect yourself from the same happening to you! This is a terrible lesson for me but if this helps just one person than I’m happy I wrote this.

I’m a fairly new trader, been trading since about March of this year. I have learned alot about the community and trading…well not enough about trading as you will soon hear.

I have a fairly small account, but its over PDT. As of this morning it was $37,000. I keep it small because I wanted to manage risk, the most I can afford to lose is what I have in the account….$37,000. When I get some profits I take them out of the account because I wouldn’t want to lose more than $37k.

I was holding KBIO short overnight for what I thought was a nice $2.00 fade coming. At the close of the bell I saw the quote montage clear out and figured today there was no action after hours in the stock. So I went to my office for a long meeting. I got out of the meeting and saw a message from one of my buddys, he asked if I was ok since I was short KBIO….my heart dropped. “Shoot did I blow up my account, everything I worked for? I don’t want to lose all $37,000 that would be terrible.” —It was much worse.

The stock was at $16 and my account was negative over 100k. I figured it was a mistake, Etrade would never let that happen, they must have cut the position when my account got to $0….nope. I immediately called them and they confirmed I still owned all the shares. He says that it got out of hand too fast for them to cover me, he says that all he can do right now is cover. I was devistated. I asked him to cover at $16 and he waited trying to find me a good exit. I told him to do it asap and the fill was around $18.50 avg.

At the moment not only is my $37k gone, but I now owe ETrade the negative balance of over $106k. I always knew I could blow up an account and I was financially able to “afford” to lose the $37k. Never in my wildest dreams did I imagine that Etrade would NOT have some sort of stop or circuit breaker in place that would automatically cut a position if the account went to $0…..how could they ever let it get to -$144k loss on a account that small! Also, why did I have to call them to find out what was going on, why did they not alert me or call me when it went neg???

Source: Joe Campbell GoFundMe page for E-Trade – Business Insider

NYSE Kills ‘Land Mine’ Order Type Some Blame for August Mayhem – Bloomberg Business

The New York Stock Exchange is eliminating an order type that investors including BlackRock Inc. blame for exacerbating extreme share-price swings on Aug. 24.

Source: NYSE Kills ‘Land Mine’ Order Type Some Blame for August Mayhem – Bloomberg Business

I’ll Pay You to Hold My Money

Why would an investor pay a central bank to hold their money?  There are only two reasons I can think of.  One, you are speculating that another investor will come along and pay a higher price to buy the bonds from you (current European Union Central Bank scenario) or two, you are seeking safety in a very unstable environment where your only concern is the return of your principal.

Today’s negative yields are the manifestation of central bank policy pushed to an extreme.

Germany sold two-year government debt at a record low yield of minus 0.38 per cent on Wednesday, in a move reflecting expectations of further monetary easing for the eurozone next month. The policy-sensitive two-year bond offers a coupon of zero,

Source: Germany sells debt at record low yield – FT.com

Hedge fund industry still not doing well – Bill Ackman Edition

I have nothing against Bill Ackman, but he has fallen prey to his own hubris on his Valeant Pharmaceuticals investment and is in danger of having the rug pulled out from under him.  Watch for an avalanche of redemption requests  from his fund eventually forcing him to sell at an inopportune time.

More pain across the investment management industry: Bill Ackman’s Pershing Square Holdings portfolio has lost 24.5% YTD, extending its fall this week as its biggest holding, Valeant Pharmaceuticals, declined further.

Source: Hedge fund industry still not doing well – Seeking Alpha

LinkedIn’s Hoffman: Half of Tech ‘Unicorns’ May Not Succeed

As hedge funds, mutual funds and other investors vie to put money into hot startups, pre-IPO valuations have soared. As a result, companies are waiting longer to go public and collecting on this glut of funding that’s inflating their values beyond what they can reach in an initial public offering. The latest example is Square Inc., the payments startup that is set to go public this week at a valuation of as much as $4.2 billion. That’s well below the $6 billion the company sought in its last funding round in 2014.

Source: LinkedIn’s Hoffman: Half of Tech ‘Unicorns’ May Not Succeed – Bloomberg Business

This is a classic FOMO (fear of missing out) scenario.  The fastest growing, most buzzworthy tech companies have been raising money in the private markets through a strategy of limiting access to their shares.

By not going public as early in their growth cycle as companies have historically, they are playing on the emotion of fear of missing out in the next great investment.  This is driving up the valuations of private companies, and only now are we starting to see some of the companies come public with lower valuations than they had in the private market.

Jeremy Siegel’s Case for Equities • Novel Investor

Jeremy Siegel has done more work on historical stock returns than pretty much anyone. He literally wrote the book on it, pulling stock data going back to 1802 for Stocks for the Long Run.

Source: Jeremy Siegel’s Case for Equities • Novel Investor