One of the biggest Stock Market losers of recent
times came in the form of online casino operator PartyGaming.
Listed in June 2005, it was one of the
London Stock
Exchange’s (LSE) biggest offerings since 2000.
Investors splashed out $1.9 billion, all going to
PartyGaming's founders rather than the company itself.
Operating PartyPoker.com from computers in a Native
American territory in
Canada
, the company drew nearly 90% of its revenue from U.S.
residents, where online gambling has always been officially illegal.
PartyGaming made no attempt to physically hide these facts in its
prospectus, stating openly that its directors "take comfort...in an
apparent unwillingness or inability" of authorities to enforce the
available legislation.
That changed overnight on Oct. 13 of this year,
when the U.S. officially banned, outright, money transfers to offshore
gambling sites, stating in black and white its prohibition and intent
with regards to foreign online casinos flouting their
rules.
First news of the legislation hit the
UK
on Sept 29 and Shares of PartyGaming, 888 and Sportingbet all listed in London
during the past two years, plunged 56%, 34% and a shocking 63%
respectively.
A PartyGaming spokesman says the original owners
still hold 70% of the stock and have suffered, too, oh dear!
Too Risky for the US
Jeffrey R. Houle, a lawyer at Greenberg Traurig put the disaster
in perspective stating clearly that such companies wouldn’t even be
allowed to go public in the U.S.
“The Securities & Exchange Commission
wouldn't have been satisfied with the risk disclosure in the prospectus.
The threat of class actions would have been another obstacle.”
The
PartyGaming tale however sad is a great analogy to use in understanding
the essential relationships of Liquidity (cash) and Volatility (news) in
relation to horse race trading on the Betfair Betting Exchange.
Floating
on the London Exchange in 2005, the PartyGaming magnet proved an
irresistible pull for the world’s media; Exciting and glam, a pure
“gamblers” punt destined for huge and rapid expansion. They loved
it. High tech, high risk, the return of the dotcom stock destined for
global expansion. Sound familiar?
Indeed,
all too familiar to experienced traders who will still remember the
dotcom boom and bust between 1997-2001 with glee or despair depending on
their personal outcome.
Brokers
and the Herd Mentality
Papers,
magazines, tipster sheets all waded in with strong “buy”
recommendations. Online poker was all over the internet.
Within
weeks of flotation it’s a big player in the FTSE 100, the LSE’s
flagship index, worth over £9 billion.
Punters
piled in again, despite small print warnings about the illegality of
internet gambling being openly disclosed in black and white in the
prospectus.
Not
to mention the legislation being touted and drawn up by the US
senate.
The
share price rose like wildfire from a float of 116 to a high 176. Just
for the record that’s 66 % on your investment in a matter of weeks.
This
is indeed a classic example of the herd mentality moving market prices.
The
REAL point of my analogy is that the herd mentality is magnified 100 times on
Betfair and Betdaq.
Think
about it this way.
If
Stock Brokers, Pension Fund managers, Full time professional Day traders
can get it so wrong with so much information, experience, qualified up
to their eyeballs, what do you think is happening dozens of times a day
on the betting exchanges where the majority of people are just having a “fun
punt”?
For
experienced traders stories like Partygaming are manna from
heaven.
Ride
the bull up to 176, watch the technical charts for signs of a switch,
and sell out quick.
Inexperienced
traders sat and watched like rabbits frozen in the headlights. This is a
classic example that shows how only professional expertise and experience can assist in knowing
when to sell a stock.
Here
are a few key internal mental debates that always prevent an
inexperienced trader
buying or selling:
-
The
stock is going up! Surely I would be foolish to sell because it might go
up some more?
-
The
index won’t correct or crash will it? Surely it will just keep
going up. I’ll wait till it starts falling before I sell!
-
This
stock has just plummeted; Surely it is not a company worth buying
into.
-
The stock is soaring;
If I don’t buy in now
I’m going to have lost out?
|
All
4 statements may seem logical on first glance, but to an
experienced
trader all 4 statements are fundamentally incorrect for 3 reasons which
are just as simple as the statements are incorrect.
-
When
supply of a stock outweighs demand at any given price, the price
will fall and vice versa. It can be and still remains very difficult
to pinpoint exactly when this will happen. Hundreds of theories
abound, millions has been spent on research, and there are libraries
full of literature. Nobody has found an effective solution to
effectively predict market moves.
-
News
and events related or completely unrelated to your particular stock
can happen at any time and can directly affect the stock, or the
index that pertains to your particular stock. This can have a huge
effect on your stock price at any time. In the global economy, news
can come in at any time, day or night, and can affect your stock
price within minutes. Can you keep up with it all the time?
-
When
a stock crashes, the effect of the “herd mentality” can leave it
massively undervalued at which point although the stock may look
like it is in the doldrums it has actually become a “Value” buy.
This very much depends on the nature of the cause of the crash. If
the firm is going bust then it is never going to represent “Value”.
Similarly when it soars, it can end up massively overvalued and in
reality represents very poor value.
|
With
all this conflicting information stacked against you, it becomes obvious
why so many day traders fail and become disillusioned with the Stock
Market, and why the Betting Exchanges, Betfair and Betdaq
are taking off the way they are.
A
good knowledge of Technical Analysis (TA) and Fundamentals combined with
personal experience of both winning and losing trades are the only ways
to profit long term from liquidity and volatility.
For
people interested in short term hedging,
scalping, swing and momentum trading who do not want the
prolonged agony and uncertainty of having medium or long term trades
open in the Stock Market, Horse Race trading with Betfair is becoming
THE medium of choice.
 |
You
can pick your race and your horse.
|
|
You
know the exact time of the race.
|
|
You
can open your trade in the morning and close it in the afternoon.
|
|
You
can open it 15 minutes before the race and close out when the horses
are in the stalls.
|
|
You
can even wait till the race has started and take advantage of price
swings that would make a stock trader hide behind the sofa.
|
|
At
the end of each day you can log into your online Profit and Loss
account and sleep tight, or cry into your whisky, depending on the
outcome.
|
|
There
is no global economy. There are no hurricanes, earthquakes, interest
rates or profit warnings. There is no setting the alarm clock for
opening time and there is no watching a static stock for months
waiting for the quarterly accounts.
|
All
the Fundamentals are free online at
www.RacingPost.co.uk
www.OddsChecker.com
And there are
free tools that I will show you how to
use in order that you can do some basic
Betfair Technical Analysis.
There
are paid for tools for those who really want to take TA to another
level.
The
prices move so quickly that the absolute essentials are a real time
charting facility, and the ability to fire trades into the market within
microseconds, and I will show you a free tool that has these features.
Most
importantly you will need some cash you can afford to lose
(unless you don't mind getting divorced :-), an open mind, and a dash of
determination.
Anyway
just to finish off the sorry ol' Partygaming story:
Before
the inexperienced traders heard the news and had their sell order in for
the morning of Monday 2 October, the price had plummeted to 47p, a 56%
drop, one of the biggest single day drops in Stock Market history.
The
Moral: If you do not make liquidity and volatility your best friends as
a trader, they will become truly feared enemies.
You
have to identify a trend early, disseminate all the information and
fundamentals, identify the risks, use Technical Analysis to get your
trade timing correct, get in early before the herd stampedes and
get out
early before it peaks and they all run over the edge of the cliff.
If
you think the Stock market is volatile wait till you start trading
horses on Betfair.
Bet
Fair And Bet Well Folks
Mike
J Davies
