More Ancient History:Story Stocks

So now that I knew the difference between the bid and the ask (and in all fairness, I did take some time and read some more about the market) I headed once more into the fray confident that I was well prepared.

I'm afraid I can't remember exactly how I found my way to them, but I started reading stock message boards. I guess I believed them, because somehow I found my way to a Canadian gold mining company. No, I'm not kidding - I actually invested in a Canadian gold mining company. This really may have been the low point.

I don't remember the name of the company, but I remember I was on the phone with the Investor Relations (read:promoter) guy several times a week. I would ask him about 'assay results' - to this day I can't tell you what the hell an 'assay' is - and he would tell me everything was looking great. He'd tell me that they were organizing a 'short squeeze' and I should try to buy some more. I'd tell him I was already fully invested, which was true.

For those of you not familiar with the term 'short squeeze' - it refers to a level of buying that drives a stock's price up forcing those short (sold the stock without owning it) a stock to cover(buy the stock), creating more buying interest which forces more shorts to cover... It is a legitimate phenomenon, but was nothing more than a story to get a rube (me) to invest more money in this company in my case.

I remember watching the price of gold believing if it would move up the price of my stock would go with it. I don't remember if gold went up or not, but the price of my stock went down and eventually I sold for a substantial loss.

I went back to the forums and found a stock called Ecogen - the ticker symbol was ECGN. The company bio-engineered produce to be resistant to insects and disease. This sounded like a no-brainer to me, and I bought it.

I remember that some positive things seemed to happen for the company, parterships with Monsanto and the like, yet the stock price never improved. I don't remember how long I held it, but I believe I sold for a loss.

I don't know why early on I thought that message boards and forums were good prospecting ground for stocks. I don't know why I believed what someone I'd never met had written. Unfortunately, I don't think I'm uncommon in this mistake.

Even more common I believe is the desire to find a stock with a good 'story.' It's easier to understand why investors head down this road - it seems intuitive. Find a good story, check the fundamentals, maybe apply a value to the stock, and then buy if it's undervalued. I think this even works for some folks, but it didn't work for me.

Another pitfall many investors fall into is the 'mechanical trading system.' A little cold logic would lead one to realize that if any such system worked, everyone would use it, and then it would stop working. However, I did find such a system and though I never made use of it explicitly it did lead me to the methodology that I use today. I'll talk more about that in my next post.

-Geoff