TE AM FL Y Want to learn more? We hope you enjoy this McGraw-Hill , eBook! If you d like more information about this book, its author, or related books and websites, please click here When Buy Means Sell An Investor’s Guide to Investing When It Counts Eric Shkolnik McGraw-Hill New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto Copyright © 2003 by The McGraw-Hill Companies, Inc All rights reserved Manufactured in the United States of America Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher 0-07-141565-3 The material in this eBook also appears in the print version of this title: 0-07-138706-4 All trademarks are trademarks of their respective owners Rather than put a trademark symbol after every occurrence of a trademarked name, we use names in an editorial fashion only, and to the benefit of the trademark owner, with no intention of infringement of the trademark Where such designations appear in this book, they have been printed with initial caps McGraw-Hill eBooks are available at special quantity discounts to use as premiums and sales promotions, or for use in corporate training programs For more information, please contact George Hoare, Special Sales, at george_hoare@mcgraw-hill.com or (212) 904-4069 TERMS OF USE This is a copyrighted work and The McGraw-Hill Companies, Inc (“McGraw-Hill”) and its licensors reserve all rights in and to the work Use of this work is subject to these terms Except as permitted under the Copyright Act of 1976 and the right to store and retrieve one copy of the work, you may not decompile, disassemble, reverse engineer, reproduce, modify, create derivative works based upon, transmit, distribute, disseminate, sell, publish or sublicense the work or any part of it without McGrawHill’s prior consent You may use the work for your own noncommercial and personal use; any other use of the work is strictly prohibited Your right to use the work may be terminated if you fail to comply with these terms THE WORK IS PROVIDED “AS IS” McGRAW-HILL AND ITS LICENSORS MAKE NO GUARANTEES OR WARRANTIES AS TO THE ACCURACY, ADEQUACY OR COMPLETENESS OF OR RESULTS TO BE OBTAINED FROM USING THE WORK, INCLUDING ANY INFORMATION THAT CAN BE ACCESSED THROUGH THE WORK VIA HYPERLINK OR OTHERWISE, AND EXPRESSLY DISCLAIM ANY WARRANTY, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE McGraw-Hill and its licensors not warrant or guarantee that the functions contained in the work will meet your requirements or that its operation will be uninterrupted or error free Neither McGraw-Hill nor its licensors shall be liable to you or anyone else for any inaccuracy, error or omission, regardless of cause, in the work or for any damages resulting therefrom McGraw-Hill has no responsibility for the content of any information accessed through the work Under no circumstances shall McGraw-Hill and/or its licensors be liable for any indirect, incidental, special, punitive, consequential or similar damages that result from the use of or inability to use the work, even if any of them has been advised of the possibility of such damages This limitation of liability shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tort or otherwise DOI: 10.1036/0071415653 Dedicated to the memory of my cousin Victor Davidovich ACKNOWLEDGMENTS This book was truly a collaborative effort by people whose encouragement and support are invaluable I would like to thank my parents and my brother, who had the wisdom to leave the Soviet Union in the 1970s for a better future in America I can say with certainty, had we stayed there my life would have turned out entirely differently My wife and my two dear sons provide me with a happy home, love, and inner peace It is their continued support and overwhelming confidence in my undertakings that propel me to the success I enjoy today Thank you to the amazing people at MarketPerform.com, who contributed long hours and endless efforts in the development of my vision Phil Brin and Alex Rabinovich have made MarketPerform a reality To Boris Tiomkin, who took the time from his demanding schedule to offer advice and much needed criticism for the benefit of our product To my dear friends Katherine Dovlatov and Anthony Direnzo, who spent countless hours editing and revising the manuscript, offering ideas, encouragement, and valuable comments To my editor at McGraw-Hill, Kelli Christiansen, who not only had the timely vision for this book and its contents, but who also was involved in the editorial process chapter by chapter Thank you all This book is as much your book as it is mine v Copyright 2003 by The McGraw-Hill Companies, Inc Click Here for Terms of Use This page intentionally left blank INTRODUCTION My personal story of becoming an investor—if I could be called that back in the 1980s—in all probability is very ordinary The first stock I ever bought was on the advice of a friend who worked as a secretary for a successful financial adviser The advice was based on a rumor that a company, whose symbol I can no longer remember, was going to be bought out within a week or two by a much larger competitor at a very big premium That was the day that I finally decided to take the plunge I selected my broker, picked up the phone, opened my trading account, and threw my $10,000 into the abyss Later that same evening, just after sitting down for dinner with my family, I consciously acknowledged my actions I said to my wife, “Darling, today we bought $10,000 worth of stock, and please don’t worry because this is a sure thing.” To this day I remember her less than enthusiastic reaction “How come you didn’t consult with me?” she asked “Didn’t we agree to make major decisions together? What you know about this company? Have you even bothered to look around for a second opinion? The least you could have done is call me You will lose all our money!” Her voice was rising and she became visibly upset Even though I had arrived home famished after a long day and had not yet had a chance to touch my food, my hunger was gone My wife was right And I would soon discover exactly how right she was During the next weeks, I would call the automated phone system at Citibank every hour on the hour to get the latest delayed Copyright 2003 by The McGraw-Hill Companies, Inc Click Here for Terms of Use Introduction quote on my stock It was exciting during the first few days as the stock price climbed a bit But when it started to fall, I felt at once both ashamed and dismayed Not only had we dipped below our original $10,000 investment, but my wife’s voice was now ringing in my ears as well I was now asking myself the same questions, and a few more: Why didn’t I consult with her? What does this company make? Did I get a second opinion? Did I look at its financial statements? And then the inevitable: How could I have been so stupid? My patience finally ran out weeks later, and I sold the stock for about $6,000 and closed the account My wife was triumphant and she gave me hell—that was well deserved, I must admit I was determined not to repeat the same mistake again I had learned my lesson I embarked on my next investment journey approximately months later The seas were even rougher the second time around, but it’s not as if I had learned nothing from my first ordeal Lesson 1: Investing is a family affair I opened an account with Merrill Lynch and invested about $30,000 This time I had spoken with my wife in advance, and we had agreed that it was the right move (Losing money is painful enough by itself, and I surely did not need to heap marital discord on top of it.) Anyway, it all started out well I even made money on the first stock purchase I bought a stock, whose symbol again I can no longer remember, for approximately $2,000 and sold it for $3,200 within couple of weeks I remember the excitement of telling all my friends about this wonderful experience and about my newfound investment prowess I immediately bought shares in the next few companies that my broker recommended I had tasted the appetizer, and now I wanted to move on to the main course Lesson 2: Don’t confuse appetizer with bait Within the next year, and culminating in the unfortunate purchase of options in Micron Technology and Sybase, I lost the whole account, even exceeding my $30,000 by the interest my account “earned.” After this second investment fiasco, I was out of the market for approximately a year and a half It is interesting to note that a $4,000 loss the first time around made me take a leave of absence from the market for roughly months; losing $30,000 kept me out of action for more than a year Introduction These first investment steps (or missteps) reminded me of some of my other, more informed financial experiences such as gambling excursions to Atlantic City, where I’ve played roughly 10 times in my life I consider these trips more informed because I knew exactly what I was getting myself into: odds stacked against me, house winnings nearly assured, but always the possibility of getting lucky On seven of the ten trips I lost money, and on three of them I won a bit Not a great average, but that is not the parallel I’m drawing The salient point is that my average wait time for returning to the casinos after a winning trip is about weeks On the other hand, my average hiatus after a losing visit is usually at least a year I also noticed that the more money I lost, the longer was the break between that trip and the next one Although the specific parameters vary, this is a frequently found pattern, albeit somewhat counterintuitive Perhaps there is a Ph.D dissertation in the timeouts people take after receiving a financial battering But the occasional win often results in greater vulnerability A streak of good luck often makes one become more cavalier, with the false sense of skill and security that comes with convincing oneself that it wasn’t luck at all You drop your guard, are less careful, and make more slips And sooner or later you get nailed These tendencies are not mine alone Many others share the feelings of immunity and invulnerability to loss after winning as well as the converse, the anxiety and despair after the inevitable loss Later in the book, we will touch briefly on a paper written by William Sharpe, who shared the 1990 Nobel Prize in economics for his research describing patterns of aversion to risk and how they increase with wins and decrease with losses Sharpe describes how these tendencies are responsible for extended and exaggerated bull and bear markets So where did I go wrong? What were the main reasons for my poor investment decisions, and how could I improve my track record in the future? Further on we will discuss this in detail, but for now suffice it to say that I made many classic mistakes in my drive to time the market Diversification took a backseat Planning and strategy went out the window And informed decision making wasn’t even in the travel plans We’ll discuss the more reasoned approaches to investing later, but first let’s set the stage with some other “brilliant” strategies ... this McGraw- Hill , eBook! If you d like more information about this book, its author, or related books and websites, please click here When Buy Means Sell An Investor’s Guide to Investing When. .. today’s investor decipher the language of Wall Street? What is an investor to when Buy means Sell or Sell means Buy? Our journey for the rest of the book will cover a number of subjects As a... Hoare, Special Sales, at george_hoare @mcgraw- hill. com or (212) 904-4069 TERMS OF USE This is a copyrighted work and The McGraw- Hill Companies, Inc ( McGraw- Hill ) and its licensors reserve all