As the first full trading week of the new year ends, Joshua Brown of The Reformed Broker shares the most important trading lessons he learned in 2012.
If I should die or lose my WordPress password tomorrow, I'd be satisfied with this post being the last thing you've ever read from me.Because what is the point of publishing 6,500 blog posts (as I have) if you can't crystallize and document the most important trading lessons learned on a regular basis? I think I've distilled everything I've chronicled this year into the six most important trading lessons for investors. Other years there are other lessons taught, but this is the knowledge you should be walking away with after 2012:
1. Sometimes There's No One Left to Buy
This is a very old lesson but a crucial one. When everyone's already in, where are the buyers going to come from? Over the summer, Apple (AAPL) became the Jesus stock; no one would ever sell it but, unfortunately, anyone who could buy it and wanted to buy it had already done so. It had become the greatest hedge fund hotel stock of all time, a massive weighting in all the large cap indexes and an institutional as well as a retail "darling," one of the most widely-held investments in the world. I was at the Ira Sohn conference when David Einhorn announced to a breathless audience of a few thousand asset managers that Apple was his next big pick. It was worth just over $500 billion and Einhorn explained how he had called both the NYSE and the Nasdaq and neither one of them had a restriction against it being worth a trillion. It was lights out ever since that moment…Apple has since lost more than $170 billion in market capitalization, a larger dollar amount than the total market caps of the 54 smallest companies in the S&P 500 (SPX) (SPY) combined. Without any Apple enthusiasts left to come in and buy, and absent a decent-sized short interest, there were no natural buyers and a whole host of tax-motivated sellers who'd ridden the stock for a decade, racking up 8,000% returns. Oh well.
2. Sometimes There's No One Left to Sell
Research in Motion (RIMM) this fall was the antithesis of what we saw with Apple. The stock hit six bucks a share, almost a complete and total wipeout of the company's value. But then the market spoke in early September. It said, "Maybe this company is not long-term viable and cannot compete with Apple and Android—but it will not die now. No sir, not on this day."RIMM more than doubled to 14 within a few weeks, a monster return from the depths that happened concurrently with the Apple bludgeoning from 705 to 500. Take everything you thought you knew about platforms and handsets and technology and throw it out the window, this was about supply and demand, not who had the better product. Just as there was no one left to buy Apple, below 10 dollars a share there wasn't a soul left who would sell their Research In Motion. Sear the memory of this into your hippocampus.
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