A few weeks ago I was in Online Trading Academy’s San Jose office teaching a Market Timing course. One prospective student I was talking to decided that the education we could provide to him would not be necessary since his “system” of trading and investing was working for him. I inquired as to what system he was using and he told me that he was watching what the stock gurus like Carl Icahn and others were doing and following them.
I cautioned this person that while that strategy may work in a bullish market, what was his risk management plan for bearish markets or what would he do when there was a correction to protect his capital? He replied that he had no plan and that if those gurus made lots of money, he should be able to do the same by following them.
I was once told not to confuse genius with a bull market. Everything seems great when all stocks are rising. Successful traders have plans for protecting their capital when the markets make adverse moves. The famous stock gurus are never right all of the time. You have to realize that Carl Icahn’s reasons for entering Apple’s stock and his plans for his investment will vary vastly from what yours will be.
Mr. Icahn first wrote a letter to the Apple shareholders on January 23. He was then a guest on CNBC on Monday January 27, where he talked about how buying AAPL stock was a “no brainer.” As you can see, if you as a retail investor bought with him on the 23 or 27, you would have paid approximately $550 a share.
Buying just before the earning release from a company is incredibly risky. There is no guaranty that the company will meet or exceed their earnings estimates. Trading in front of the unknown is extremely risky. When we trade we want high probability and low risk, not the other way around.
When AAPL’s earnings were released, the stock gapped down about $50 a share the following day. A billionaire like Mr. Icahn can hold onto that position in hopes that prices will eventually return but can you? Do you think that Mr. Icahn will be paying you back for your losses? Of course he will not. Even if you could hold on, you are now losing out on opportunity to earn on other opportunities because your capital is tied up in a loser.
Learning to invest like the institutions is imperative if you are going to survive in the financial markets. Get educated and do not blindly follow so called gurus on television. I even encourage my students to do their own independent research on Pro Picks or educational ideas presented in the Extended Learning Tracks to ensure that the trade fits their own trading philosophy and risk parameters. It is your money and no one cares more about it than you do. Take responsibility for your money and build the skills you need to succeed in trading.