Margin Sells Are Your Worst Enemy, Always

牛经沧海
10/7/2008
This message is intended to new investors.

The market becomes a stranger now, at least for me. Do leave enough breath room to avoid margin squeezes in order to survive a bear market. Don't to try being a hero or taking chances. In 1998, I experienced several moments of a completely wipe-out of my positions, only to the see the portfolio recovered in days once the squeeze is done. Such thrilling survivals set me up an illusion. The luck ran out and the reality set in during 2001 and 2002, when I lost millions. That was the 沧海 I drifted over, sunk and crippled, and every investor should stay away from it by all means.

Here is the diagram of NASDAQ where the sharp drops later Aug and early Oct threw my portfolios into the hell, … and recovered.

Here is the diagram of NASDAQ where the sharp drops Apr ‘01, Sept ‘01

Only followed by extended downward grinding until Oct 02 that threw my portfolios into the hell, … and permanently.

Here is the diagram of SPX since it started its current downturn, … stay tuned.

When a margin squeeze occurs, the market usually rallies from 2:30PM when brokers finish their fire sells (without the slightest mercy since they did not pick the stocks). It then recovers without your participation because your broker already takes your chances out. By all means, never let a margin sell occurs to your investment account. It was depressing and destructive to your positions and capital.

Margin squeezes arise from surprises. We got a lot of them recently when all TA and FA become meaningless.

Margin requirement is enforced at the Fed, Exchange and Brokerage levels. Once called, you have three trading days to meet such a requirement. However, the brokerage has the privilege to sell your positions as soon as you are called. You margin call may or may not literally communicated via a phone call.

To be clear, I am not here to declare an end of the world or encourage you to sell now. On the contrary, I am expecting a significant bounce any moment. However, I hope that your positions are not brutally butchered by an indifferent stranger, your broker, before a turnaround disembarks from Java, or the ether.


Disclaim: The author is not a Registered Investment Advisor or a Broker/Dealer. The author’s discussions do not serve as recommendations or suggestions for buying or selling any stocks or other instruments. The information contained in the blog is provided as is without warranty of any kind, expressed or implied, including, but not limited to, any implied warranties of merchantability and fitness for a particular purpose.