You Are The Worst Trader Of All-Time If You Made Money Off This Buyout

It’s every trader’s dream to wake up one morning and find out that the company they are holding long got an unexpected buyout offer, rocketing the stock’s shares higher. I’m trying to class-up this blog so you will notice that I didn’t say “wet dream.”

Damn….I just said it.

Anyway, I have been doing the “trader thing” for over 25 years now and I have NEVER had that scenario happen to me, and though it seems like it almost came close with the recent acquisition of $TEA by $SBUX, it really didn’t.

A little over a month ago I wrote a post about $TEA entitled, “A Speculative Stock For Young Punks” where I mentioned that I like both Teavanna’s product and chart/technicals.  Here is what I said about buying it….

$TEA is extremely thin and has a 75% short interest. Even a slight bit of good news could rocket this stock upwards. An aggressive buy is at $13.45, more conservative at $13.75. A tight stop is at $12.50 and a looser one is below the all-time lows.

So as I am getting off the plane for the Trader’s Expo in Las Vegas last Wednesday, my phone explodes with notes of congratulations on the just announced buyout of $TEA by $SBUX that sent the stock up about 50% in a flash.

But the problem is, I didn’t have any $TEA shares, and nobody that read that post should have either.  Why?

First off, $TEA never hit the buy price.  But even if it had, or if you had bought some shares in anticipation of a breakout, you should have been long gone by the time the $SBUX buyout was announced, as evidenced by the following chart.

At point “A” on the chart $TEA clearly broke down from its base as well as below the 100ma and that should have been your sell signal.

But even if you accidentally got smacked in the head by a frozen halibut, that your co-worker hucked at you when you weren’t looking, at your job as a fishmonger, and it had put you in a temporary coma, there is no way you should have been in $TEA at point “B” when it broke support and went to all-time lows.

So the only excuse you should have had to be in the stock at point “C” was that you were either dead or that it was a “long-term investment.”  Both ironically with about the same chance of having a full recovery.

And that’s why you shouldn’t  have been around at point “D”.

Trading is about risk/reward and more importantly “risk management.”  There was no risk management if you were still in $TEA at point “C” and thus if you were, you really weren’t trading (or trading really, REALLY badly).

I suppose that there is some hollow victory in identifying a stock that eventually got bought out, but my reasons for highlighting it were based on good technicals that no longer existed at the time of the buyout.

And we trade for money, not hollow victories.

But hey, I still like their tea.

A Speculative Stock For Young Punks

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  • Great post… and the ultimate message is that the money could have been more sensibly and effectively applied elsewhere… capital allocation. Thx for the reminder.

  • Jeff Watson

    I would never be a broker dealer. Too much hassle, and too much back office stuff keeps your eye off the ball. Just my own opinion, but I have trouble multitasking, something you obviously excel at:)

    • I multi-task badly, should focus more.

      Agree on the broker dealer thing, but wouldn’t be doing it if the upside potential wasn’t so big.

      • jeff watson

        I don’t know about the upside potential, but I was once a silent partner in a clearing firm that cleared local traders at the KCBOT. Owning a clearing firm is a lot like selling out of the money options. You pick up pennies until a big local goes belly up and the clearing firm takes the hit. Just standing in front of the steam roller. I knew a few IB’s who cleared through Peregrine and MF and now their customers are screwed and the IB’s reputations are shot. Sad thing is that the IB’s are claiming victimhood when they should be doing the honorable thing and liquidating their assets and making their customers whole.

  • Jeff Watson

    But this brings one question to mind……why would anyone go to a Trader’s Expo in the first place? To find losers to fade perhaps?

    • Hah…good point. However, when trying to grow a broker dealer like we are, these shows are a necessary evil.

  • Great post. This is a perfect example.

  • Ivan Boesky

    Sometimes there are other methods for developing buy points.

    • Those “other methods” didn’t work out very well for you Ivan 🙂

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  • Marko Graenitz

    Great post! Only way to get on board with a good RRR was the intraday pullback after volume came in.