A Cautionary Tale for Traders

03/04/2015 7:00 am EST


Joseph Fahmy

Managing Director, Zor Capital, LLC

Economist John Maynard Keynes famously said that markets can remain irrational longer than you can remain solvent, so Joe Fahmy of JoeFahmy.com counsels against inflexibility in your trading mind set.

Back in 1999, there was an Internet company called CMGI. For those of you who remember, the stock was INSANE! Split adjusted, it went from 0.30 cents to $120. After this happened, I spoke to a very sharp friend of mine who was managing a $2-billion hedge fund. His exact words were: "Joe, this stock is a piece of shit and it's going back to $1." He was dead right! The only problem is.the stock tripled and went from $120 to $360 before it went back to $1.

There are a few lessons here:

1) One thing I've learned is that moves in the stock market can go on for longer than we expect (in both directions). In other words, just when you think something can't go any higher.it usually does, and just when you think something can't go any lower.it usually does.

2) I bring this up today because I constantly hear money managers talking about shorting certain sectors due to valuation. They specifically talk about cloud computing, 3-D printing, and China because they're all "in a bubble." These managers may eventually be right, but I think they are way too early.

3) I'm not against shorting. I'm just against shorting in a liquidity-driven bull market. Why short for pennies when there are dollars to be made on the long side? Valuations get crushed in bear markets but expand in bull markets.

One last thing. Every time someone tells me they hate Amazon (AMZN) because "the company doesn't make any money," it immediately shows me how little they have studied stock market history. Very few things you learn in economics and business text books apply to the stock market. Explosive companies that revolutionize the way we do things ALWAYS trade at a premium because Wall Street will pay up for growth, especially strong growth. Keep in mind that the most-loved stock in the our current stock market Apple (AAPL) traded at 72 times earnings back in 2003. If you ignored it because of valuation, you missed out on one of the greatest growth stocks in history.

By Joe Fahmy, Trader and Blogger, JoeFahmy.com

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