Tuesday, January 26, 1999

First I should enlighten readers to the fact that not only did Trav and I meet through HSB&R and HSX, but strange co-incidence that it is, we were both highlighted long before we knew each other in the same article in Individual Investor magazine last year (a March issue). Now that Trav has become an astute Real World (RW) stock trader and I have joined Efil and Selat as Sissies & EFert, IPO gurus, the lines have blurred between the Real World and HSX (not for Trav, he insists:). We felt a column highlighting the similarities and differences would be appropriate and interesting.Talking about obsessive….this picture is one I took of Trav on our trip to California last November. After his Neuroscience Conference in L.A. and our meeting with HSXLand’s Les Buggs, Max Broker and MacDaddy, we took a little vacation to SF before returning to Chicago. Our RW stock portfolio took off to new heights due to a huge spike of one stock of which we were holding a large amount. Since we had to make our flight, but desperately wanted to keep up with the markets, Trav was sitting on the floor in LAX Airport (which was being re-carpeted), with his laptop attached to a telephone so that he could watch his port. Finger poised on the “SELL” button in case the spike turned and fell… In the Real World, thousands of dollars could hang on whether you were watching your port or not…! It reminded me soooooo much of his HSX trading practices that it spurred me to take the picture. Trav naturally wishes to remind all that he had his laptop connected to HSXLand in a Chicago bar, not the grubby floor of LAX (reserved for RW trading!!), when he traded movie stocks and bonds. He claims the best movie stock picks always came from half drunk computer nerds, lawyers and barmaids. Below we have commented independently on a range of topics in HSXLand and the RW stock exchange. For those of you who have not ventured into trading with real money yet, you might find this interesting. For those of you that have, we’re sure you’ll find something that seems uncomfortably familiar…..

IPO Madness (Trav) IPOs have some striking similarities in HSXLand and the RW, as well as notable differences. In HSXLand, there is only one broker and one bank (HSX), so all IPOs are readily available for purchase prior to release for public trading. You select your choices, then once released, stock up to the max on those you think will be the most popular. They then adjust and a mass sell-off begins. If you guess right, you make some money which you can use to buy more virtual stocks.In the RW, you struggle to find a broker who can actually provide you with shares of a juicy IPO scheduled for release. The price may still adjust prior to public trading due to widespread (or limited) interest. But once released for public trading, the price immediately floats with the market. If it’s a hot Internet IPO like the recent release of MKTW (www.cbsmarketwatch.com), it’s price skyrockets upon release (474%) and shares will trade hands many times over the course of the first day. You may have to wait to snatch it up on “the street” after release, and be satisfied with a 20% gain. If you put $300,000 into the IPO, you take the cash and buy a Porsche Boxster. If you’re less lucky, no one cares, and those who bought from a broker sell immediately. You may then have to hold it for months before you can get out with any profit. You may have to sell your Dodge Dart..:)

HSX has introduced changes to the way in which IPOs are adjusted to avoid traders jamming the server and causing massive ‘chucks’ in price. In the RW, this logjam is the norm – you may be forced to buy at market and get ‘chucked’ by ballistic changes in the bid and ask prices. Take the example of MKTW once again. Only 2.75M shares were issued, and the interest was so high (100 million shares requested) that it’s IPO date got delayed by days. Priced at $17, it opened at a whopping $92 and hit the $130-150 range within an hour. It then flopped back to the 90s, roared up to the 120-130 range once more, and then closed at 97.50.

Valuation (Trav)

Obviously the key to predicting the likely profit to be made from any HSX stock prior to release is the eventual box office it may make. In the RW, there are no C, D or P categories – all stocks are R! One can estimate the inherent value and thus the proper price of a stock from the earnings and capitalization of a company. At least in the old days prior to the advent of the Internet stocks this was the case. A price-to-earnings (P/E) ratio of 25 was considered solid, and a lessor P/E ratio great.

But now the Internets have P/Es that look more like Star Wars or AUST2. They have some of the historically highest prices ever, and valuation is impossible by any conventional criteria, since companies like Amazon.com have yet to turn in a profit! Wow, Amazon.com (AMZN) just reported earnings that showed a smaller LOSS than expected, and the shares roared up in afterhours trading. “HOORAY! AMZN didn’t lose as much money as we feared!!” Would you rush to buy an HSX stock that, while starring Will Smith, Meg Ryan, Tom Hanks and lots of flashy special effects and sex, will probably go straight to video? Not! Yet in the RW people spend a fortune to buy stock in Internet companies like AMZN that actually looses money, providing them with a market capitalization greater than Sony. So there are two sets of rules in the RW – an orderly set that relies upon sound valuation calculations that are applied to the Gillettes, Ford, General Motors and their like, and another set that is purely hype driven that apply to the Internets. Does this differ from HSX? Maybe not, if you look at the current price of AUST2….*Cheshire Cat grin*

Ticker Talk and Mindless Babble (Trav)

When I first entered the RW of stock trading from HSX, one the delights I looked forward to was entering the world of stock message boards. No more would I have to plough through lengthy threads on Ticker Talk decrying Frito Lewis for his sins, debates on who will win the SuperBowl (can you say Fox TV?), or any of the plethora of other topics that fill a typical TT board.

Oh no, this is the RW, and it’s REAL MONEY at stake. People will be more educated and concerned about their RW investments. Wrong!! RW message boards are every bit as jammed up with 12-year-old’s comments, trash talking, blatant lies to hype stocks, and gems of information that will make you good dollars. One spends just as much time sifting the sand for the golden nuggets as on TT, you develop your favorites amongst the frequent posters, and slam the same idiots. And the boards are just as addictive:) There are times when I get confused as to which board I’m on, and am about to discuss the likely effects on the stock price that CLPA’s new cancer cure will have, only to realize that I’m on TT! Conversely, people on the Yahoo! board might get puzzled by my critique of THINR, although they’ll probably still try and get some historical chart data on it…! The bottom line is that people are people and they post pretty much the same babble everywhere!

Spin-offs and Splits (Trav)

Two RW phenomena which have no real counterparts at HSX are spinoffs and stock splits. Pity, as they can be great moneymakers. A spinoff occurs when a parent company spins off a division as a separate entity, like the spinoff of Lucent Technologies (LU) from AT&T, or the upcoming spinoff of Alta Vista from Compaq. While spinoffs are common on TV, their best analogy on film is the sequel, which isn’t quite the same.

Spinoffs in the RW can be very successful and profitable, such as the spinoff of LU, which has gained over 600% in price since it’s IPO in April 1996. In general though, they tend not to be successful, as companies often use a spinoff to shed a poorly performing division. Or the parent company may be hit hard by the spinoff, as it may be kicked out of the S&P 500 or similar index, and index mutual fund managers may cease to keep them in their portfolio. Stock splits, on the other hand, can be profitable for no terribly sane reason. When a stock makes, say, a 2:1 split, the excuse is that it is done to make the price more affordable to investors. Historically, stocks that split frequently rise faster in value than those that do not, even though the split makes no impact on the amount of $$ invested. Everyone knows that splits will encourage investors to buy. So investors buy splitting stocks – a self fulfilling prophesy.

Apart from this, the only real effect the split has is to increase the dividends a stock yields, rather like HSX bonds, as they are paid on a per share basis. To understand all this in HSX terms, just imagine if Max announced in The Journal that STRWR was going to have a 3:1 split on Feb 15th. So if you were holding 10,000 shares and it cost $H300 at midnight on Feb 14th, then you would wake up and be holding 30,000 shares at $H100 on the 15th. Of course, this would mean that you’d also have be able to hold a max of 150,000 shares now too! What would this do to the price? Well, the moment Max announced the split, people would start buying into the stock. So the news is a green light to buy in general.

Crashes (Txredd) This is one other matter which corresponds in the RW and HSXLand, trader-induced crashes. When Brazil devalues it’s currency, or Asia announces unheard-of trade deficits, the RW marketeers react in much the same way as HSXLand traders do when they feel that stocks are overpriced and the Twins are getting ready to “kick it up a notch”……SELL, SELL, SELL. And then, when the markets are reduced by incredible numbers and vacationing traders are ruined, they re-buy “on the dip” and refuel the bull market. Rumors and real news also fuel these “crashes” or “market corrections” in both. One of the oldest adages in the RW market is “buy on rumor, sell on news”….HSXLand is no different.

One of the common reactions to the crash is to preposition yourself with a balanced portfolio of bonds, cash and equity stocks. The other is simply to have your running shoes on and run into cash at the drop of a hat. The really nice thing in the RW is that, unlike HSX, you can call your broker and he and his assistant will sell off your portfolio for you. *vbg* My favorite reaction is to simply ascertain whether it is a *real* crash and then just sit out the corrections and do nothing. Do something you have been putting off like doing you tax return or paying your bills and in a few days, you can go on as nothing happened.

Dr. Zeroes vs. Alan Greenspan (Txredd/Trav) As with Dr. Zeroes and his cyberbabble, for similarities of HSX in comparision to the RW financial markets, we are treated to Alan Greenspan spouting his various theories to Congress and the RW markets on which way he feels they should sway. Both sets of brokers and traders react in much the same way. They laugh out loud and then prepare for the consequences of such nebulous theorizing by those market gurus. In both cases all our fearless trader is looking for in the ramblings of Dr. Z or A.G. is whether the interest rates will rise or fall. If they rise, you run for the hills and hide in cash and/or bonds. If they fall, you search in the closet for that rolled up bill in the clothes basket and the jar of loose change, and buy everything in sight. If there’s no change, you yawn and call your broker to see if they might care to wager on Atlanta in the Big Dance. Or maybe see if he’ll accept a Dodge Dart for 200 shares of AMZN!!!

In the RW, the markets react by enormous rises or descents, as in HSXLand, when a new column is posted by Dr. Zeroes. On the other hand, if neither Alan nor the enigmatic Dr. Zeroes has anything to say that has any bearing on the markets, they are largely ignored. Thank goodness Alan Greenspan doesn’t have to post a column with any frequency. And thank goodness we don’t get treated to Dr. Z’s rambling prose on the floor of Congress via CSpan!

WHOM DO YOU BELIEVE? (Txredd)

There are many, many financial advisors who are more than willing to give you endless views on what to buy and when to do it, and when to sell and why. I bet you can’t figure out whether I am talking about the RW or HSXLand. If you said either one you would be correct.

The ratio of analysts in the RW to investors would roughly be comparable to the number of *advisors* available through columns, the Journal and TT in HSXLand. You pick those you trust. You read them, debate them and miss them when they are gone. I bet you still can’t tell which I am talking about because it is no different in either world.

The bottom line is you must use your head, your eyes and your ears to be a successful trader in either system. The major difference is that the RW uses REAL MONEY. According to Trav, the RW makes enough money for us to be able to spend some of our time trading in the fantasy world of HSX.

Txredd: Now in closing this column, I have just one major question for MacDaddy. After reviewing all of the bond IPOs this week for our new Sissies and Efert IPO alert, when are we getting an Alan Smithee (ASMIT) bond, Mac??? LOL

Trav: Next time, traders!! [she brushes her hair, preparing for a hard day on the exchange tomorrow... but which one???]

Trav & Txredd

– Txredd