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Friday, January 4, 2008



More than 20 years ago, a time which I would like to forget, when I lost 3 million dollars in the stock market, I tried to investigate the so-called firewall which supposed to exist between the trading and analyst desks of banks and brokerage firms – something which really needs to be done.

I was prompted this morning when I read the RBC (and I had to look this up as Royal Bank of Canada for nowhere on the financial news services did they identify it more than RBC) had downgrade SLW (Silver Wheaton, a Canadian silver company). Parenthetically, being a medical doctor, I thought RBC meant red blood cell! Looking up the projected earnings, I discovered than the company is projecting record earnings in the next quarter, so, why the downgrade?

I was taken back some 20 years when I lost so much money. I was heavily invested in CDT, a company which made caller ID’S. A particular analyst was touting the company because they were about to sell their caller ID’S to Verizon, probably the largest of the baby bells. The stock went up initially and, stupid as I was, I kept buying into it. I kept buying a thinly traded stock not realizing what would happen if I ever had to unload the stock quickly. Boy! Was I soon to find out! What I did not know, which, I believe, the analyst should have was that Verizon was making caller ID’S in a sister company and why would they buy from CDT. Obviously they would not and they didn’t. As soon as this was found out by the market, the stock started to go down. As I tried to sell this thinly traded security, it plummeted even more. I just could not catch that falling hot buttered knife! I lost heavily. Stupid as I was at the time, I made several other equally idiotic trades which attributed to my losing so much money. Read my book: “How I Lost Three Million Dollars in the Stock Market – A Primer on Not What to Do” – available on the Order Online store of the web site as an Ebook.

I decided to track down the analyst who worked for a brokerage firm, I believe it was in California – I probably should have known better! I asked the man why he was not aware that Verizon was making the product in a sister company. His response was: “Listen it’s only a job.” He could not have cared less. How many others lost their shirts because the attitude of this jackass?

I observed many companies up and downgrading securities for no apparent reasons. At the time, I knew some individuals working for the Mercantile Trust Company, Baltimore, Maryland, both at the analyst and trading desks. After work these individual would go to the local bars. Now can you imagine what happened to that so-called firewall?

I decided to investigate. I tried to get information about what a particular brokerage firm traded, days and weeks before a published grade change. Are you kidding? I was beginning to feel I was in smucksville on my way to Oz!

I then called the SEC (Securities Exchange Commission). There I spoke with a man who told me such information was kept closely by the companies and that the SEC would investigate if they had a substantial complaint. One sees very rapidly that the “hooker” word is “substantial.” I asked how I could file a complaint. I was told to forget it. It was not possible coming from an individual trader. So there I was. I had arrived at Oz, but the wizard had been replaced by a bureaucrat!

Have you wondered why and how brokerage firms make so much money. It is not because they are any better than we in picking securities. It is because they know critical information BEFOREHAND because they create the next move by their grade changes.

The key to insulating yourself from experiencing a calamity from a grade change especially if it is a downgrade is to buy securities which ONLY make money. NEVER buy a company which is not profitable or a company some analyst says might make money. If you are not protected by a stop loss, eventually a profitable company will recover. If you own a profitable company, keeping it in your portfolio for the long haul is the only way to go. Forget about the dad-to-day garbage put forth by analysts. Remember to them “it is only a job!” The CEO’S are going to get their Christmas bonuses and their stock options whether the company makes money or not.

Pardon me if I appear skeptical about brokerage firms and the people who run them. But even after 15 years losing three million dollars is hard to forget. I have recovered and the added subtitle of the book I mentioned earlier “Recovery from Disaster” gives some very important advice on how to adapt to such a stressful experience – aided by the philosophy described in my earlier book: “How to Benefit from Stress” also available from the bookstore.

nicola michael c. Tauraso, M.D.
Director, Tauraso Medical Clinic

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