When veteran investors talk to novice investors like you and me, they always slip in a lecture on the importance of ‘risk management’, which essentially means that we must stay within our limit and not get carried away with the obsession to get rich overnight.
Joe Campbell, a novice investor, has learnt the hard way the perils of ignoring this advice. He short-sold the stock of a company called KaloBios Pharmaceuticals, Inc in the expectation that the prevalent hostility against Pharma companies (in the wake of the Valeant Pharma debacle) would send the stock tumbling and he would rake in mega bucks.
However, Joe forgot to specify a stop loss for the trade. He also forgot that when one is trading in stocks, one has to watch the position like a hawk and be prepared to do a somersault at short notice.
This was a fatal mistake because Martin Shkreli, the whiz-kid fund manager, who is (in) famous for buying Pharma companies and getting them to do “price gouging”, suddenly announced that he had bought 39% of KaloBios’ equity and would take control over it. This sent the stock price rocketing a mind-boggling 700% overnight.
The result is that everyone who had short-sold KaloBios was ripped apart. Joe Campbell, blissfully unaware of what was happening, suffered a loss of $1,44,405 (Rs. 93 lakh), until E-Trade, his broker, in an act of mercy, covered his position.
Joe Campbell has now approached the public with the desperate plea that they contribute and bail him out of the mess. At last count, generous people had contributed $5,310 (Rs. 345,150) to Joe’s kitty.
At this state, we must note that Indian brokerages appear to have better risk management techniques as compared to their foreign counterparts. Thanks to the stringent regulations imposed by SEBI, the brokerages insist that the investor deposit “margin money” in advance before executing a trade. Also, as soon as the margin money limits are exhausted, the system automatically cuts out access to the investor and prevents him from buying or selling any more stock until the margin money is replenished. So, if Joe Campbell had been trading in India, he might not have been in the soup that he is presently in!