#58 Big Players’ Calculations — Stock Trading Analysis
Big Players’ Calculations – Stock Trading Analysis (#58)
If you want to profit from the stock market, you must try to understand the behavior of the big players, your opponents. The big players are those who have the lethal weapon, that is, plenty of cash to buy and plenty of stocks to sell. With this power, they can move the price, obtain insider information, bribe public officials, and influence laws for their own benefits. You are too naïve if you believe that the laws automatically protect you rather than them. You have to protect yourself with your own smarts.
Strategy
Big players are like you and me, except with a lethal weapon. Their motives are the same as everybody else’s: profit maximization. What they do is always based on the age-old principle of buy low sell high. However, the way they do it is totally different. Big guys win by planning and organizing the market for a particular stock without you being aware of it. Their actions consist basically of the following:
• Conspire with other big players also owning the stock. Why? They don’t want to negate each other’s actions and invite retaliation.
• Determine the bottom for a stock during bad times, move in and accumulate as much as possible near the bottom.
• Continue to buy up the stock when times turn good, thereby also boosting their holding value.
• Seduce small players to buy by trumpeting the stock.
• Determine the peak to prepare for cashing out.
• Short sell near the peak to prepare for a price drop.
• Start gradual unloading while planning for the bottom.
• Cover the short sale and take additional profits.
• Repeat the same process all over, or move on to play another stock.
Let me illustrate with a simple model:
Company XYZ is determined to be a good candidate for investment.
Stock price: $5 down from a high of $30.
Outstanding shares: 200 million.
Average daily trading volume: 5 million shares.
It is obvious that a single player buying or selling 1 million shares a day can easily move the price. When two or more big players play in unison quietly and discretely, each one will spend less money to move the price.
Accumulation
The scheme involves accumulation near minimum cost. The big players have arrested the price plunge to a low of $5 by quietly buying 20 million shares. Owning this much automatically gets the attention of the Board of Directors as a major shareholder to be treated with all kinds of privileges.
Push Up
Owning 20 million shares does not get you anywhere if the price does not move up. The second phase is to push up the price by buying more shares, maybe 1 million shares a day. Is that worthwhile? Yes as shown below:
Day One: Buy 1 million shares to push price to $6. Cost: $5.5 million.
Day Two: Buy 1 million shares to push price to $7. Cost: $6.5 million.
Total holding value at cost: Mn$112 as shown below:
Mn$100 (20 million shares at average $5 per share)
Mn$5.5 (1 million shares at average $5.5 per share)
Mn$6.5 (1 million shares at average $6.5 per share)
Total holding value at new price of $7 = $7 x 22 million = Mn$154
So the portfolio appreciates by Mn$42 million in just two days! This is what we call snowballing your money when you have plenty.
You’ll be surprised that they may not need this push up for long if they do it noisily with their analysts trumpeting the stock. Why? The small guys will be seduced to come in around $10 onward after they’ve seen the price rise. This is analogous to flying a kite. You spend some energy up front and the wind will take care of the flying.
Cash Out
The big guys want you to “invest for the long term”. In fact, they want you to invest in the stock long enough for them to cash out. That’s why you have to be smart to see through their scheme.
Since they can move the price, they have the power to determine the peak and how soon to get there. Normally, it takes several months from the bottom depending on the economic circumstances and how the small players respond. After they totally cash out, they may return to the same stock again, or play another company depending on the opportunities at that time.
Do you think they take profit only after several months until the peak is reached? They take short-term profits whenever there is a chance, even on a daily basis, because the stock price fluctuates all the time. The scheme is to maintain two pipes: one to sell some shares when the price gets higher, another to buy some at lower. In this way, they have a constant stream of profits while maintaining a sizeable holding. This is how money generates money.
Shorting the Stock
Big players used to short the stocks to make additional profit. Shorting for them is a sure winner because they hold plenty of stocks. The scheme is to short the stock at a higher price, sell some of their holdings to force the price down, then buy back the shorts to take profit. They may buy more shares to replenish their original holdings, force the price up again, and repeat another short.
Company Size
The initial investments for big players vary with the size of the company. A big company with a large outstanding share of 1 billion and a large daily turnover of above 20 million shares requires more capital to play. It also requires more big players to coordinate their selling and buying to move the price. For a smaller company as illustrated in my model, one or two big players can control the whole game.
How to Respond?
You are very naïve if you think that people with money and power cannot do the things as I have just described. In fact, this is the essence of the stock game. As a small investor, you are being seduced all the time to buy and sell. The fluctuation of the stock price is a result of the game plan that big players execute. By no means the fluctuation depends totally on company performance, which is not observable on a daily or weekly basis. The only requirement is that the company does not die so that the game can continue. Therefore, you must try to be smarter and follow the big players closely and stay ahead of the herd of small players.
www.stockfessor.com
September 2009
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BUSINESS COSTS DROP BY 0.5%…
Another similar article – financial crisis can also be profitable for business….
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