Liquidity, Cash, News, Volatility And The Herd Mentality

One of the biggest Stock Market losers of recent times came in the form of a UK owned online casino operator

Listed in June 2005, it was one of the London Stock Exchange’s (LSE) biggest offerings since 2000.

Investors splashed out $1.9 billion, all going to the founders rather than the company itself.

Operating from computers in a Native American territory in Canada, the company drew nearly 90% of its revenue from U.S. residents, where online gambling has always been officially illegal.

The company made no attempt to physically hide these facts in its prospectus, stating openly that its directors “take comfort…in an apparent unwillingness or inability” of authorities to enforce the available legislation.

That changed overnight on Oct. 13 of this year, when the U.S. officially banned, outright, money transfers to offshore gambling sites, stating in black and white its prohibition and intent with regards to foreign online casinos flouting their rules.

First news of the legislation hit the UK on Sept 29 and Shares of the company plunged 56% on the LSE.

A spokesman for the company said “the original owners still hold 70% of the stock and have suffered too”, oh dear!

Too Risky for the US

Jeffrey R. Houle, a lawyer at Greenberg Traurig put the disaster in perspective stating clearly that such companies wouldn’t even be allowed to go public in the U.S.

“The Securities & Exchange Commission wouldn’t have been satisfied with the risk disclosure in the prospectus. The threat of class actions would have been another obstacle.”

The tale however sad is a great analogy to use in understanding the essential relationships of Liquidity (cash) and Volatility (news) in relation to trading on horse races.

Floating on the London Exchange in 2005, the online casino magnet proved an irresistible pull for the world’s media; Exciting and glam, a great “gamblers” punt destined for huge and rapid expansion. They loved it. High tech, high risk, the return of the dotcom stock destined for global expansion. Sound familiar?

Indeed, all too familiar to experienced traders who will still remember the dotcom boom and bust between 1997-2001 with glee or despair depending on their personal outcome.

Brokers and the Herd Mentality

Papers, magazines, tipster sheets all waded in with strong “buy” recommendations. Online poker was all over the internet.

Within weeks of flotation it’s a big player in the FTSE 100, the LSE’s flagship index, worth over £9 billion.

Punters piled in again, despite small print warnings about the illegality of internet gambling being openly disclosed in black and white in the prospectus.

Not to mention the legislation being touted around and drawn up by the US senate.

The share price rose like wildfire from a float of 116p to a high of 176p. Just for the record that’s 66 % on your investment in a matter of weeks.

This is indeed a classic example of the herd mentality moving market prices.

The REAL point here is that the herd mentality is magnified 100 times on Betfair.

Think about it this way.

If Stock Brokers, Pension Fund managers, Full time professional Day Traders can get it so wrong with so much information, experience, qualifications up to their eyeballs, what do you think is happening dozens of times a day on Betfair where the majority of people are just having a “fun punt”?

For experienced traders events like the online casino debacle are manna from heaven. Ride the bull up to 176, watch the technical charts for signs of a switch, and sell out quick.

Inexperienced traders sat and watched like rabbits frozen in the headlights. This is classic example that shows how only experience can assist in knowing when to sell a stock.

Here are a few mental debates that always prevent an inexperienced trader buying or selling:

1. The stock price is rising so I would be foolish to sell because it might go up some more?

2. The index won’t correct or crash will it; surely it will just keep going up. I’ll wait till it starts falling before I sell?

3. This stock has just plummeted; surely it is not a company worth buying into. Or conversely, the stock is soaring if I don’t buy in now I’m going to have lost out?

All 3 statements may seem logical on first glance, but to an experienced trader all 3 statements are fundamentally incorrect for 3 reasons which are just as simple as the statements are incorrect.

1. When supply of a stock outweighs demand at any given price, the price will fall and vice versa. It can be and still remains very difficult to pinpoint exactly when this will happen. Hundreds of theories abound, millions has been spent on research, and there are libraries full of literature. Nobody has found an effective solution to effectively predict the market.

2. News and events related or completely unrelated to your particular stock can happen at any time and can directly affect the stock or the index that pertains to your particular stock. This can have a huge effect on your stock price at any time. In the global economy, news can come in at any time, day or night, and can affect your stock price within minutes. Can you keep up with it all the time?

3. When a stock crashes, the effect of the “herd mentality” can leave it massively undervalued at which point although the stock may look like it is in the doldrums it has actually become a “Value” buy. This very much depends on the nature of the cause for the crash. If the firm is going bust then it is never going to be “Value”. Similarly when it soars, it can end up massively overvalued and in reality represents very poor value.

With all this conflicting information stacked against you, it becomes obvious why so many day traders fail and become disillusioned with the Stock Market, and why the Betting Exchanges are taking off the way they are.

A good knowledge of Technical Analysis (TA) and Fundamentals combined with personal experience of both winning and losing trades are the only ways to profit long term from liquidity and volatility.

For people interested in short term hedging and scalping who do not want the prolonged agony and uncertainty of having medium or long term trades open in the Stock Market, Horse Race trading with Betfair is becoming THE medium of choice.

• You can pick your race, your horse.

• You know the exact time of the race.

• You can open your trade in the morning and close it in the afternoon.

• You can open it 15 minutes before the race and close out when the horses are in the stalls.

• You can even wait till the race has started and take advantage of price swings that would make a day trader hide behind the sofa.

• At the end of each day you can log into your online Profit and Loss account and sleep tight, or cry into your whisky, depending on the outcome.

• There is no global economy. There are no hurricanes, earthquakes, interest rates or profit warnings. There is no setting the alarm clock for opening time and there is no watching a static stock for months waiting for the quarterly accounts.

All the Fundamentals are free online at http://www.RacingPost.co.uk and http://www.OddsChecker.com.

There are free tools that I will show you how to use in order that you can do some basic Technical Analysis.

There are paid for tools for those who really want to take TA to another level.

The prices move so quickly that the absolute essentials are a real time charting facility, and the ability to fire trades into the market within microseconds, and I will show you a free tool that has these features.

Most importantly you will need some cash, an open mind, and some bottle.

Anyway just to finish off the hapless tale of the online casino operator.

Before the inexperienced trader heard the news and had their sell order in for the morning of Monday 2 October, the price had plummeted to 47p, a 56% drop, one of the biggest drops in Stock Market history.

The Moral: If you do not make liquidity and volatility your best friends as a trader, they will become truly feared enemies.

You have to identify a trend early, disseminate all the information and fundamentals, identify the risks, use Technical Analysis to get your trade timing correct, get in early before the herd stampedes and get out early before it peaks and they all run over the edge of the cliff.

If you think the Stock Market is volatile wait till you start trading horses.

Liquidity, Cash, News, Volatility And The Herd Mentality

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