Noel
Campbell |
The news of the restructure and capital raising efforts by AMP has led to one of the most dramatic stock stories for the Australian Market for some time, perhaps since the Ansett, One Tel and HIH days.
I will share a story this week from one Safety in the Market client who will admit he broke the rules, however there are a few things we can learn from his experience. This client had gone long AMP futures just a couple of days prior to the news from the company. Trading in the stock was frozen (along with the futures) and there was the uncertain period until trading was recommenced.
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After consulting with a couple of brokers the morning that the stock was going to reopen he had found some heart in that the share had opened down ‘only’ 25% in New Zealand as opposed to the suggested 37% ($5.50) by analysts (and Tom!). He was also told that the stock might rally quite sharply from the opening price. All this eased the pain of the situation; in fact it turned into potential greed! Greed you may say, how so? Well why not buy more when it opens this morning and take advantage of this ‘rally’ to make a profit.
Let’s introduce a term that everyone should be familiar with and never forget – Averaging a Loss. That’s where you add to a losing position in the belief that prices must go back up and you are improving your overall position.
Let’s say you entered at $8.00. Now you can buy the stock for $5.00. That gives you a break-even price of $6.50 as opposed to an original $8.00. However you have increased the leverage or size of your losing position. If the stock continues to slide you will be in more serious trouble than ever.
This strategy may work for you 2 or 3 out of 5 times, but it is the other times that it becomes a disaster. Remember the greatest asset you have, as a trader is your capital, without it you aren’t much of a trader!
Chart 1 shows the recent market action of AMP. The stock did rally for the first day and a half, but since then the slide has continued. We are in completely ‘uncharted territory’ (no pun intend) when it comes to AMP. The stock was only publicly listed in June 1998 and with that limited history we are dealing with a relatively unknown quantity. You could say that Telstra is in the same boat.
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