For several months the price continued to move up, as larger samples processed with the new technique yielded consistently higher results. He bought 1500 more shares at $10.50. When the price rose over $11, Claude shocked the online bulls by selling most of his shares. "But Claude," Joe wrote, "if the extraction method is as cheap as most people think it will be, shares will go to $100, easy." ($450,000 to him.)
"Don't worry, mon ami," Claude answered. "I still have a position if that comes to be. I have my original investment returned with a profit. And my heart keeps the normal beat."
Joe thought about buying more but held back. One detail bothered him. The CEO, a thirty year mining pro, claimed to have a degree from an obscure college in the Northwest. Several investors had tried unsuccessfully to verify this. Joe e-mailed the company to inquire but received no answer. Kate had an academic friend in Seattle who checked and was unable to find a record of graduation. The closest any one could come was to determine that he had gone to school there for at least three years. The college had gone through many changes over the years. Degree requirements were different. Records had been moved many times. They failed to pin it down.
Joe didn't care whether or not someone had a degree. It is what one can do that matters. But he cared if someone lied about it; lying is a bad sign. SPM stock broke above $14 and began to correct. The short sellers piled on, selling borrowed stock, driving the price down in order to frighten investors into dumping their shares. The price held in the $10 range for a few weeks and then quickly fell to $8 and then $7. The short position grew larger by the day. The bulls argued that all those borrowed shares had to be bought back sooner or later and that the upcoming positive mining audit would trigger a massive short squeeze that would quickly put the price over $20. The company continued to release good news.
When the audit report was finally released, it verified only the original assay results, a year old, and made no mention of the extraction yields. The company made bland assurances about ongoing efforts to improve the extraction technique, but there were no hard numbers and they were running out of development capital.
Trading in SPM was suspended. When it resumed, the stock cratered to below $3 in seconds. Joe waited for a bounce, clamped his jaw, and sold out at $3.25, just below the high of the day. Over the next few months, the price dropped to a nickel and the company went bankrupt.
Joe was in shock. He had lost $17,160 plus commissions, half his savings. As he thought it over, he realized the mistakes he'd made. He'd broken the primary law of diversity. You should never have all your eggs in one basket. Secondly, he had wavered between the attitudes of the trader and the long term investor, ignoring the safeguards of each approach. If you are trading, you must wait for good entry points and you must exit immediately if the price moves against you. Gains more than compensate for losses, if the losses are strictly limited. Furthermore, Victor Sperandeo had cautioned never to give back more than half your profits—they are too hard to come by. At one point Joe had been $32,000 ahead. It hurt to remember.
If you are a long term investor, on the other hand, you must know that the company is sound. Joe failed to follow through on his investigation of the CEO. He had been too cheap to go to the annual shareholder's meeting where he would not have found the qualities he looked for in management.
He had been neither trader nor investor. He had been a loser. Not only that, he had spent months staring into his monitor, living on the Internet, reading the Wall St. Journal every day and Barrons every weekend, and dreaming about how he would invest $450,000. He asked himself how he could have been so stupid, so inept.
He went to a Korean bar. Gorgeous women paraded continuously past his table. When he tired of sitting with one, the next slid in against him and put her hand on his leg. "Buy me drink? You want pu-pu's?" The music was loud, hypnotic, non-stop. They danced. They accepted MasterCard. Joe staggered home with further losses.