In this entry I would like to review the topic about speculation on a stock. As written there, the bet would have been on a stock, which price has been declining continuously.
Spec stock review
Example stock:
The Stock price of a company fell from well over 100$ to 6,78$. (This is a real stock as of 03-MAR-23)
What could we have done?
At the last Speculation entry it was considered to make a bet on this stock, because of the price decline. Betting on a “cheap” stock makes sense, because as an economically thinking mind, we want to make money by buying low – selling high and not the other way around. At the time of the last entry the stock price was trading at around 10$. So just imagine that we didn’t think much, just had a look at the chart and we have bought this stock for 10$ per share.
What happened?
As it is easy to see, some things happened to the price. The price decline went further, bubbled a little bit back to around 11,37$ and as of 10-MAR-23 the market closing price is 6,78$. If we have bought the stock at 10$ and did not sell, that makes it a paper loss of 3,22$. So what has happened in reality?
The company still has no product, works itself further losing and wasting money with doing whatever it feels like doing. Then the bubble came into play. Why did the price shoot up for short time from 5$ to 11,37$ ?
The company has a got new CEO in January. The old CEO left the company.
That made some investors think a cool a new era is emerging and the company would finally come to its senses and develop some great products. Now it is March and nothing else has happened. The stock price fell again and further. The optimism is gone.
What happens?
As of today, in our investors view, we could have bought the stock at 10$ and sold the stock at 11,37$, making a profit of 1,37$ or +13,7%. But we can also imagine that we would still sit on a paper loss of 3,22$ or -32,2%, didn’t sell any and we are still full of hope that the price will start climbing again. Now we must start to take into account, that we have made a mistake. We need to reconsider, why we invested in this company in the first place and what we can do now.
What will happen?
That is the biggest question. The company could come around the corner with a new product and sell it to everyone and his dog next week. The price of the company will start shooting up again. The real question is, is that scenario very probable?
The problem with any company is, that it is not just all products and money. People work there. All kinds of people work there. Smart and stupid, diligent and lazy. Work has to be done. Procedures have to be followed. Very complicated things need to happen, especially in the industry of that company (biotech). In my experience, people don’t like to change their working behavior much. And that leads me to the conclusion that with the current workforce and current internal hirarchy things are likely to stay the same as before. The new company CEO must make a tremendous job, sort out all the people that prevent the company from beeing successful, developing a saleable product and finally selling a product at a large scale (no to mention being profitable).
Outlook / recommendation
Just with this low amount of information I would recommend to sell this stock on next monday at whatever price. The new CEO could change some things, but nobody is a genius garbage man. I haven’t even started writing about the possible product and all the other circumstances that an investor needs to consider before investing. The best option is now to kill the switch and find better companies to invest. Soon there will be another checkup about this company, but then I might have to search if the company is still listed on any stock exchange at all.
On the other side, a recommendation could be a all rosy and optimistic that the new CEO will make everything happen and the stock price will start climbing again. These are the dreams of the stock speculators. I am not saying that it is not possible, but as I have mentioned before it is not probable at least in a short time and that is what a speculation is about.
Making much money in short time is all we want. Isn’t it?