It’s much safer to buy a rising stock than a stock that has reversed its course.
Case Study: Helios & Matheson Analytics [The company behind Moviepass]
Investing in a New idea can be extremely rewarding but it can destroy you too.
Launch of the idea:
In the US – a new monthly service has been launched called MoviePass – pay 9.99/month and watch unlimited movies (1/day) in cinema theatres https://t.co/hpjddabsOH
— Deepak Singh (@smarket) August 16, 2017
This started a bullish move in the stock HMNY the company behind movie pass in Aug-Sep 2017
The idea got market acceptance and the MoviePass Service which had just 20K subscribers in August 2017, jumped to 400K subscribers in 2 months. No wonder the stock price responded
But not exactly that…HMNY stock has moved up from $6 to $27 now based on MoviePass :))
— Deepak Singh (@smarket) October 11, 2017
The momentum continued and the stock price just went crazy
The Stock HMNY behind MoviePass Service has now moved up to 33. It was trading at $6 when I last shared with you 20 days back
— Deepak Singh (@smarket) October 12, 2017
The Gravity kicked in and once the momentum got over – investors started asking tough questions: Is this model for real? How will the company make money? Does the company have the cash to run its operations? Unfortunately, the reality was not rosy. The news started coming out on how the company does not have any answers to the above questions and the stock started coming down at a sharp speed. It is during the downslide – people make the worst mistakes. They start averaging. The justification – oh the stock was at $35 few months back and I am getting at $12.
Trading Rule: When a stock witnesses extreme momentum, then buying that stock on the decline is the most stupid thing to do
HMNY from levels of $35 decline to sub $1 levels
Every idea is not a good idea. Helios & Matheson Analytics, owner of Movie Pass from $35 stock to now near 45 cents in less than a year.
Two Lessons:
1. Never Average a stock on way down
2. Why Stop Loss matters? pic.twitter.com/0KpPqrEcki— Deepak Singh (@smarket) June 20, 2018
The Importance of Stop Loss
Never say – How Low it can go?
Helios and Matheson Analytics, the company behind MoviePass is running out of cash and stock is headed towards $0. It's right now trading at $0.79
— Deepak Singh (@smarket) May 10, 2018
Yes – Buying a stock at $0.79 looks attractive/compelling but you are just fighting against the trend. The stock is now worth $0.02.
Lessons you can learn from this stock
When a stock witnesses extreme momentum i.e. it rises 3x-4x in less than 6 months, then sell the stock.
Never buy such kind of stock on the way down
No matter how much you believe in the stock, have a stop loss
A stock can go down to $0. Never have this mindset – How Low it can go
Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers