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Now I'm going to talk about the 10 most dangerous things people say about stocks. Here's a good one: if it's already fallen this much, it ca n't fall any further. I remember Polaroid going from 140 to around 107. People were saying, "If it goes below 100, you have to buy. Just fill your cart and buy the stock." The stock reached 110, then 103, and they were saying, "If it falls below 100, buy Polaroid." Polaroid broke the 100 barrier.
People started buying, and in 9 months the stock was at 18. So when they say, "It's already fallen this much, how much more can it fall?" it's crazy, but you know, it can keep falling. Actually, I tested this with Kaiser Industries. I was a new analyst at Fidelity. We were going to buy a large block of Kaiser Industries shares.
The stock had fallen from 29 to 17. We were about to buy the largest block in the history of the American Stock Exchange. We bought, I don't know, 10 or 15 million shares at 15.75. I said, "My God, the stock fell from 29, how much more can it fall?" So we bought this huge block. About three months later I called my mother and said, "Kaiser Industries stock is at 10, you should buy it.
It fell from 29 to 10, how much more can it fall? Well, it went to nine, then to eight. Luckily, this happened very quickly, or I would be working at the supermarket packing bags instead of at Fidelity." It lasted a few months. I had to go to the fund manager and say, "I was a little premature in this." H 1575, we call this premature in the ram.
I said, "There was a correction, which is a euphemism for losing a lot of money quickly." So I said, "Let's check this again. Now the stock is at four. They own 45% of another business, Aluminum, they own 59% of Kaiser Steel, they own all of Kaiser Electronics, all of Kaiser Broadcasting, a bunch of other Kaisers, and they had no debt.
I believe nobody in this room has ever gone bankrupt without debt. We would have to give some kind of service bonus to someone who does this. I was wrong when I said it ca n't fall below 15, so we held on, and in three years they sold the Kaiser Steel shares, the Kaiser Cement shares, and..." They sold all the deals, and in the end we got 55 per share.
But if you didn't know the history, and the stock went from 15 to 11, and you said how much lower it could go when it went to 9 or 8, you would have given up. You can't just say it can't fall any lower because I saw Tacobell go from 14 to 1 in 1974, and they had no debt and were making 60 cents per share.
There's a stock split like that, which is even more dangerous. If it's already gone up that much, how can it possibly go up more? An example of this is Philip Morris. Considering adjustments due to stock splits over time, they were selling for only 12 cents in 1951, went to 60 cents, and then went up five times.
And you think to yourself, how much higher can it go? It's already gone up five times. Whoever said that didn't understand the power of Ma Boro cigarettes. They didn't realize there are 220 countries in the world. They didn't see the company's cash flow; they only looked at the price. This stock was multiplied by 100 times after going up five times, but people...
They sold saying only how much it could go, it couldn't go any higher. They did the same with Home Depot. I did the same thing with Toys R Us, just saying it couldn't go any higher. It's already gone so high, it's very dangerous. Don't think like that, it's a very bad thing to do. The stock will come back, they always do.
That's another thing they say is a lie. Lie is a technical term in the market to say it doesn't work. RCA almost returned to its average price, but before that it was bought by GE. Some never come back, others, even with the name changed and reorganized, still haven't fully recovered. Remember floppy disks, those technological marvels that promised so much?
Floppy disks were the height of innovation for saving a photo. Stocks don't need to come back, but they say they eventually always do, it's not true. Here's another good one: How much can I lose? This one is great. I don't have a computer, I don't know how to do complicated calculations. But let's say your neighbor bought $10,000 worth of stock at $50, now the stock is at $3 and you put in $ 25,000 at $ 3.
Who loses more if it reaches zero? Many people don't know. To answer that question, if you buy $1 billion at $3, you could lose $1 billion. Many companies go bankrupt every year and can go to zero. And here's another good one I learned: it always gets worse before it gets better. People say, "This business is terrible, you should buy the whole company." This is not a good way to make money, and I'll give you an example of a great opportunity to lose money: the energy services industry.
We had a great opportunity to fail in 1982. There were 11,000 of these oil rigs drilling holes all over Oklahoma, Texas, and Colorado. We had the rig count every week, and the count dropped from 11,000 in 1982 to 6,830. Then it dropped a little more in '84. Hundreds and hundreds of companies worked in the sector: slurry management, well services, metering companies, dubious service subcontractors, drilling companies—many opportunities to lose money.
The risk of significant losses is the same for everyone, and people said, "The business is terrible, it's time to buy these groups." The number of rigs in the sector went from 11,000 to... 6,000 and then to 5,000. Eight years later it was below 1,000. The industry really started to change. About two years ago, I was lucky enough to get into the metals industry.
When I started at Fidelity, I had the textile industry, which is a great group to follow because you get to see companies like JP Stevens, which was founded in the 16th century. Burlington Industries is another one in this sector, one of the newer companies founded in 1900. These people have already been through recessions, depressions, world wars.
They've seen it all. There's a classic expression in the textile industry: things always seem to get worse before they collapse completely. This is good to remember because when business is terrible, it can get much worse. You reach a level of terrible to the sixth power. When it returns to my purchase price, I sell.
Another great thing they say is: someone buys a stock for 10, it falls to 10, and the person says, "If it returns to 10, I'll sell." Doing a quick calculation of 40 to 10, that gives about a 66% return. In that case, you should buy it now if you really believe it will return to 10. 10 should buy more.
But instead, people think, "If it goes back to 10, I'll sell now." What you should do is never put an exact number. Imagine that in the next few years this stock will stay between 9.25 but will never reach 10, so maybe... Think of a range between 9 and 8, but always rethink this business of "if the stock reaches what I paid for it." This is a very important rule.
Another key rule is that the stock doesn't know you own it. Remember this: you could be a miserable person, you could have done many wrong things, never helped anyone, never done anything right, had 67 spouses, never done anything right. If you had Coca-Cola stock in the last 50 years, it would have gone up.
You could be the best person in the world, helping philanthropic causes, helping people with mental challenges, helping the poor, helping people with IDEs. If you own Bethlehem Steel stock, it's worth much less than it was 30 years ago. It's not your fault, don't take it personally, but people sometimes treat stocks like grandchildren or dogs, thinking the stock knows who you are.
It doesn't work. So, another good one is that they say, "I have traditional stocks, I don't need to worry, I have conservative stocks." I've seen it all with utility and energy companies, from tripling in value. This might seem paradoxical. We've had quality banks in Texas that went to zero, we've had quality banks in New England that went to zero.
These are companies that have been around for 150 years, 120 years. I've seen many people inherit stock from someone. They say they heard it from their mother on her deathbed. It doesn't come from Long Island Lighting. I think that mother is going to heaven. I hope she went to heaven. But you know, people talk about stocks in a game, or a vacation, or a card game.
Imagine talking on your deathbed about Long Island Lighting stock! But you hear these stories all the time, and I think your mother would have noticed. She wouldn't have sold at 29, but she would have noticed this small power plant that was approximately $6 billion over budget and wasn't operating, and Long Island stopped growing.
So maybe she would have sold at 22 or gotten out at 18, but she wouldn't have let it go at four. So just because you inherit some stocks... And they are supposedly conservative, like Kodak, which fell 75%. IBM fell 75%. You shouldn't hold a stock just because it's conservative; companies are very dynamic.
I don't accept that argument. Here's a very dangerous situation. Look at all the money I lost by not buying the stock. People do this all the time. I put it in one of my books, listed on two pages. In the 13 years I managed Magelan, I listed about 200 stocks on the stock exchange that rose 10 times or more and that I didn't own.
While I managed the fund, I owned many stocks. I listed 200 stocks from A to L, stopping at the letter L, and I didn't own any of those stocks. They rose a lot, and I managed to do well with my portfolio. But people are always worried about Microsoft, which they lost. They spend all their time worrying about stocks they couldn't buy.
You can't lose money on a stock you don't own. The only way to lose money is to sell after it falls; that's the only way. But people insist on looking at the newspaper in the morning, reading the market column, and analyzing. Then they look at Microsoft and think... Oh my God, Microsoft stock has tripled!
You know, I was going to buy 1000 Microsoft shares, I lost 3000 on Microsoft last night while I was sleeping. I was going to buy 7000 National Semiconductor shares at 10, now it's 17. I just lost 49,000 on National Semiconductor. They do this all the time, I say it's crazy, but people really do it. Another good one is saying "I lost this one, I'll recover next time," that usually doesn't work.
There are many business imitators who try to replicate the business model of buying the next one of something, it usually doesn't work, it's terrible, it's like buying on dips. I always thought it was better to buy after dips, it seems like a more sensible rule. Maybe you need to explain this to some people, this is another technical term that may need clarification after hours.
What is a dip? Another one where they say stocks went up, therefore I must be right, stocks went down, therefore I must be wrong. I've already convinced myself that people do this all the time, they buy a little bit of a stock for 10 and it goes to 13, now they forget everything they knew when... They bought it for 10, they have no idea what this company does, but it went to 13, then they mortgage the house and buy it for 13.
The best that could happen is the stock going directly from 10 to four for these people. Eventually it reaches four, but it goes to 13 first, and then they are convinced. They bought 100 shares at 10 and now they buy 20,000 at 13. And the fact is that the shares went from 10 to 13 because they went up.
The average movement of a stock on the New York Stock Exchange this century between its maximum and minimum was 50%. This is the average range of variation of a stock on the stock exchange. This means that a stock that started the year at 20, at some point in the year was sold at 16, at some point in the year was sold at 24, may have ended the year at 21, may have ended the year at 19.
The average range of a stock on the New York Stock Exchange is 50% in 12 months between its maximum and minimum. So stocks go up and down a lot within a... It's ridiculous to say that if stocks are going up, it means you 're right. No, that means absolutely nothing. So don't buy impulsively based on price certainties; that's not a good strategy to follow.
Avoid risky bets. These are the stocks that promise miracles: they 'll make your hair grow, improve your child's spelling, freshen your breath, and even eliminate the need for an iron. They 're always like that; they promise everything, but something's missing: they haven't made any sales yet. That's the missing element in the story.
The story is sensational, but there are no profits or sales yet. But my God, if this works, if this works, it will be the next risky bet and will revolutionize the world. It's a very, very good business. Now, this is not a safe bet. It's a no-chance bet. This is a lost bet. I've tried 30 of these and never broke even with a risky bet.
I've already made 25 or 30 times my money in some stocks in my portfolio. I never thought about FNY or some banks I had, or Stop & Shop, which I did 20 or 30 times the money invested. I had no idea before; I just followed the story. I had no idea. After 10 years you look back and say, "My God, I made so much money with this!" But when I went in thinking I could make four times my money, I never broke even.
So don't make risky bets predicting the future, folks, they don't work. And again, the stock is at TRS and has great potential. Write down the history and the stock code. If it reaches 300, it's okay to buy it. Check later, come back and see if it's still on the stock exchange. See if they've managed to sell anything yet.
See if there's any profit yet, but write down the history. Some work out, I have n't seen any yet, but maybe some will. It's worth checking if, months later, you don't buy it right away.
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