From time to time, we here at HSB&R get e-mails asking for advice.  For some unaccountable reason, we get asked for real-world investment advice (buy low, sell high).  We do get some HSX-related questions that are intelligent and reasonable.  But every once in a while we get a badly spelled e-mail (they do have spell checks on most e-mail programs now, y’know) asking, plaintively, “I don’t know what stocks to buy, please help me.”  And as weird as that sounds to those of us who’ve been playing forever, there are some people who really and truly don’t know what stocks to buy.  Some of these people show up in #HSX while the veteran players are doing something constructive — discussing the home run race or why we should invade Canada — and start asking for tips… and then leave in a huff when they don’t get any concrete advice.  

Usually, the answer to these kinds of questions is simple:  Do some research.  Figure out what movies that are coming out that you would like to see (or that you think other people would like to see) and buy those stocks.  And that’s a perfectly good and accurate answer — but it isn’t really that helpful to those who honestly don’t have the first clue how to work the exchange.  

In that spirit, I hereby humbly offer BlueDuck’s Secret to HSX Greatness:  

Unlike the real-world exchanges, stocks on HSX get born and die all the time, and go through a predictable life-cycle.  If you understand the life cycle — and buy in at the right time — you can make money off the sorriest of dogs.  If you don’t, you’ll manage to lose money even if you’re holding stock in a blockbuster.  

There are five important stages to know in figuring out when to pick stocks:  

1.  IPOs.  

After a stock is introduced for the first time, it goes up.  Maybe not a lot, and sometimes not at all, but it’s a good general rule.  

Why?  A lot of it has to do with psychology.  IPOs go up because traders think IPOs will go up and buy them accordingly.  It’s usually a self-fulfilling prophecy.  It doesn’t always work, of course, and you have pay close attention to price fluctuations to be able to sell close to the top of the market.  But don’t hold IPOs too long — because the other half of that prophecy says that what goes up must come down.  

2.  The run-up.  

HSX is, ostensibly, about the “awareness economy”.  The price of any one stock is dependent, to some degree, on the awareness of the public.  The more people hear about the film on the street, see it in advertisements and trailers, and think about it, the more interest it attracts and the more money it makes.  As a result, this is the period (three to four months before a movie opens) where research counts a great deal.  

I’m going to use SVPRI as an example of all of the last four stages.  Here’s the graph for the summer’s #1 blockbuster…  

  

The run-up period is a great way to make long-term gains.  In fact, much of my current portfolio is invested in run-up stocks — BABE2, STEPM, ENEMY, EYESW and the like.  It takes some patience, but it’s the easiest way to make money.  

3.  The Gut-Check  

A phrase beloved of all veteran traders, popularized by the great Dan Krovich.  The “gut-check” is simple:  Do you hold a stock through its opening weekend or not?  If you’ve held it through the run-up phase, you’re risking all your profits — but if the movie promises to open strongly, then you stand to profit.  

SVPRI illustrates the difficulty of the gut-check.  SVPRI was the #1 movie of the week, a certain Best Picture contender, and still it adjusted downward.  The price of SVPRI went down faster than (insert Monica Lewinsky joke here).  The gut-check can produce startling profits — but it’s very risky and not for the faint-of-heart.  

4.  The Post-Weekend Drop  

SVPRI is the classic example of this principle at work.  When the stock took a huge nosedive, savvy traders immediately moved in for the buy.  There’s usually a massive sell-off after a weekend (so people can buy IPOs and bonds), and when a movie adjusts downward, it drops the price even more.  SVPRI became a screaming bargain at $89, mostly because it had great “legs” — meaning that it would do great business in the weeks to come, spurred on by word of mouth.  It only took a short time for the price to rebound.  

5.  Arb  

The trader’s best friend.  Arb occurs in the last week or so of a movie’s run on HSX, when the price of the stock actually dips below the movie’s actual box-office receipts.  Once that happens, you’re guaranteed a locked-in profit.  You can get arb from the sorriest of movies — especially when trader disgust with the movie propels the stock lower and lower.  

The HSX Circle of Life goes round and round every day.  If you stay on top of the circle, you’ll find the right stocks to buy — when the time comes.  

In the meantime, would it kill you to do some research?