Rule #1 Finance Blog

With Investor Phil Town

GETTING OUT OF GOOG: A REMINDER WHY THE ARROWS MATTER

Phil Town just posted this in the comments, in response to someone who wasn’t ready for the GOOG drop. Thought I’d put it here too so everyone can read it.

 

Oh man!  The arrows popped me out of Google at around $440 or so.  I posted about it a couple of weeks ago.  Sorry to hear you got nailed.

 

Let’s talk about that for a minute.  The big guys don’t invest like you and me.  They can’t.  They have too much money to jump out of the market in 8 seconds, so what they do instead is to try to get an edge on the other big guys with information that is not widely known.  To get that kind of information it helps to have friends in high places in these various businesses.  Not that the friend is going to violate SEC regulations or anything, but when you know people you can get a sense of how things are going at work.

 

Hey, the guy’s wife knows things aren’t going well just from looking at him when he comes home from work, right?  And besides, the big guys spend hours on the phone every day talking to other traders, talking to reporters, talking to sources inside the business trying to get some kind of edge … and you know what?  They don’t do it because it doesn’t work.  They do it because if they do it well, it can make them or save them a lot of money.  How do you think guys like Jim Cramer can know so much?  They have people digging for info all day long.

 

So here’s what happens as the quarter’s numbers start getting closer to being made public — a ‘whisper’ number starts going around….  That’s the number that rumor has it is going to be THE number.  And you know what happens if that number isn’t so good?  You will see the stock price start to slide and then head down.  How fast it heads down depends on how bad the news is.

 

I remember in October, 2000, Apple’s price started to drop day after day, which put red arrows on my screen which meant I had to bail, even if I didn’t want to … even if I thought the thing was going to go up… because those arrows only come on the screen when millions of dollars are sneaking out the back door.  And then about 5 days later, after trading hours (actually it was over the weekend) Apple announced it was having a really bad quarter and the rest of the year wasn’t looking so good either and CRASH went the stock on Monday morning – down 50%.  Without the arrows you’d have lost your rear end but because the big guys sniffed out something they started to sell and that is what saves us … we can see them getting out.

 

Same thing more recently with EBAY: Last January, about a week before the CEO, Meg Whitman, announced that Ebay was going to grow a lot slower than expected, the big guys were sneaking out.  And then came the announcement after hours and the next day … you guessed it … CRASH — down 30%.

 

And just a couple of weeks ago, GOOG started sliding and got red arrows and then dumped 10% over night.  So the lesson here is that I don’t care how great the business or how attractive the price, there isn’t a stock out there that can’t go down 50% overnight if the big guys pull out.  The good news is that they almost inevitably start sneaking before the bad news hits the market and that, if we watch it, keeps us from violating Phil Town Rule #1.

 

Now go play!

Phil Town