People no longer fear public speaking more than death – they fear running out of money prior to death. When the stock market soars as it did in the late 1990’s, people become greedy. On December 9, 1999, VA Linux, a company that produced a new operating system that was offered within Intel hardware, went public at $30/share. Normally, underwriters create lots of hype around new companies in order to help raise more capital in the offering, which enables them to take a larger fee. In this case, the underwriter and selling group did not have to do very much to create a sizzling story to complete a solid capital raise for the company, because many techies felt that a company like VA Linux could replace the successful Microsoft Windows Operating System. Who doesn’t love a David versus Goliath story? We all want to believe.
What I remember most about that crazy day as a Manager on the Charles Schwab trading desk, was the female customer who berated one of my senior level employees because he would not accept a market order to buy 1,000 shares in her Individual Retirement Account. When an Initial Public Offering initiates trading, excess buy orders and virtually no sellers can cause the price to skyrocket. Reporting of executed trade prices becomes delayed in a high-volume stock, so real-time price executions can vary dramatically from recently reported prices. Per IRS rules, individuals can only make limited contributions into retirement accounts. The Schwab customer had more than the $30,000 in her IRA to cover a purchase for 1,000 shares at $30, but if the stock commenced trading at a much higher price per share, she would be unable to pay for the stock. The telephone call was escalated to me and I was shocked by how frenzied this customer had become. I was used to talking with people who were upset and very emotional, but I never imagined someone could become as frenzied as this customer. She refused to even consider placing a limit order because she wanted that stock no matter what the cost. She was wrought with greed and anger, and I would not accept her instructions to buy the stock in her IRA without a limit price, which made it even worse. She hung up on me after issuing several angry threats. The stock soared to $320, and ended the trading day at a close of $250/share. If we had accepted her instructions and submitted a trade and bought the stock at the high of $320/share, the trade would have cost her $320,000. Even if she could have raised the funds to pay for the trade in a regular brokerage account, she would have lost as much as $70,000 by the end of the day. After a 1:10 reverse stock split last year, the 1,000 shares from 1999 today would be worth about $1,600. If she held it for the past 12 years, she would have lost as much as $318,400. Many investors hold onto their bad decisions and ride them down thinking that they will come back. Denial of a bad decision only exacerbates losses. But I digress, the point is that emotionally charged investment decisions rarely pay off. I think of that customer from time to time, and wonder if she ever thinks of me.
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