Tuesday, August 16, 2011

Lincoln on Bank of America (BAC)

"I will prepare and some day my chance will come."
-A. Lincoln

Embrace your losses.
Booking your losses should be a joyful thing.
The first loss is the best....aw screw it. 

Tight stops give you the opportunity to look like a moron but if an individual or a firm is to survive, you must avoid the cat lady syndrome (you've heard it every time the guys in the biohazard suits are called in):
"It started with just three but then, well. it kind of got away from me" 

The only way to prevent losses from getting away from you is to close the trade one penny above the level you've given yourself. If you are indecisive or if your ego is so childish that it won't allow you to recognize a loss you have to ask yourself what the heck you're trying to accomplish.

On Monday we posted "Time to Bet on Bank of America (BAC)" and naturally the stock opened with a 27 cent gap up at $7.46:
The stock closed at $7.19 on Friday, down six cents in a generally up market.
As we've pointed out,* there is a gap on the chart dating to March 2009. Be careful.
If buying set stops at 25-30 cents below your entry price. If stopped out, the market is telling you that either the timing or the investment thesis is wrong....
Those aren't just fine words, you've gotta do it. With the stock closing at $7.76 yesterday you'd think it would be "Talkin' slick and smokin' fat cigars" time. 
Instead we posted "Bruce Berkowitz Added to His Bank of America Holding" (BAC):
Current bank balance sheets are basically opaque so you have no idea what is inside the black box. It might be treasure or it might be trash. All you can hope to do is admit you might be a fool and later try to find that greater fool.

Keep your stops tight and your sphincter tighter.
This is a risky little game and it would be a shame to add the price of underwear to your other transaction costs....
So when the stock got down 32 cents ($7.44) from the previous close, our trailing stop executes and Patty Smyth starts rocking:

He who fights and runs away pleases his banker and hopefully maintains that wonderful credit line for when you really, really need it.

Doing it this way you always get another chance. Maybe as soon as tomorrow.
And sticking with the "Let's quote mid-nineteenth century Americans" theme, here's one of my favorites, from William Tecumseh Sherman on his boss, loyalty, etc:

“Grant stood by me when I was crazy, 
and I stood by him when he was drunk, 
and now we stand by each other.”