First off, while I am by no means celebrating the fact that a former $21 billion company is now worth about $500 million (give or take), it is satisfying to see that when unnecessary, reckless, greedy risks are undertaken (in this case, deriving nearly all cash flows from mortgage-backed securities), and those risks are realized, there are consequences. Let there be no doubt that the market system is healthy and working in that regard.
I myself took on some unnecessary, reckless, greedy risk by investing in MF Global (MF) at $30, and again at the bad-news discount of $20. Seems I was half right: the arbitrage opportunity was that the stock traded above its fair value of $0, and should be sold (or shorted if you're into that).
So yesterday, I put in a trigger to sell all my shares at a limit of $16. That trade was unfortunately never executed today, and next thing I know, the stock is at $4. So using my best charting skills (desperate times call for desperate measures), I waited it out until finally selling at $8.25 - realizing a 69% loss over three lousy months, and earning a sure-fire induction into the next version of my worst stock buys ever list. I took the proceeds and bought some more Goldman Sachs (GS), the only financial stock I'd ever want to own at this point, at $145.
Lessons learned:
The one-third rule. No, really. Aside from high-dividend stocks, breaking this rule is asking to lose money.
Always use market orders, except for thinly-traded stocks. By scrimping on pennies per share, I lost dollars per share today. Not a good risk/reward proposition.
Diversification is a good thing. MF was just one of 18 stocks I owned going into today. If MF was somehow just one of 10 or 5 stocks I owned, like this guy recommends, I'd be feeling a lot worse.
