How to lose €300 Euros in the stock market in record time

Being somewhat disciples of Robert and Kim Kiyosaki’s cash flow model for building wealth we haven’t looked much into the stock market, since most people invest there for capital gains. Nevertheless our mission is to raise our financial IQ and understand money better so we saw best fit to do some experimenting so we could learn something new.

I bought this great little book, The Little Book that Beats the Market, by Joel Greenblatt, that explains stock market investing (value investing) in very simple terms. I’ve also read up on some of Warren Buffett’s great investing advice.

Aside from doing some reading I signed up for a broker account with the Spanish company Renta4.com. Here I can do just about any investment trade or purchase. I was looking at companies here and there and I came across Trump Entertainment Resorts. Apparently the company was in dire straits financially, partially due to the crisis and probably poor management, and the stock had plunged to just 24 cents per share. I got all excited and turned to Sally and said, let’s buy!

First I should say, this is only the second stock I have ever bought. I am a big fan of Donald Trump’s motivational books, especially ‘Think Big and Kick Ass in Business and Life’ and ‘Never Give Up’. It fascinates me to wonder how one’s mind must be shaped to generate billions in personal wealth. Somehow, naively thinking that Trump would apply his ‘never give up’ attitude to keeping his casinos from going bankrupt (only 1% of his total wealth), we decided to take what we knew was a little gamble. We put €300 in and bought the stock and decided if we lose, well we don’t care, if we win, great!

Of course, we lost! The stock actually went up about 60% at one point, went back down and then the company promptly applied for bankruptcy protection as everyone thought they would. The good thing about blowing €300 was I learned a few things. I read up on what happens when a company files for Chapter 11 bankruptcy protection in the US.

The sum and substance of it is that the company will try to restructure its debt. If it comes out alive and recovers it will probably ditch the old stock and issue new stock. Banks, creditors, etc all receive theirs before shareholders. Shareholders are not really entitled to anything – just a share in profits, if and when there are profits.

I also learned about the ‘pink sheets’. After filing for chapter 11 the company was promptly delisted from the Nasdaq stock listings and is now listed on the ‘pink sheets’ bulletin board. Here the stock can still be bought and sold, but generally gets less attention and when removed from main indexes it usually loses most of its value, as it is in this case, the shares are now only trading for 3 cents. As I mentioned before, if the company emerges from bankruptcy these shares will probably be disregarded, although it is possible they may be further devalued and tradable for new shares – or something to that effect.

I think for future stocks I will follow Mr. Buffett’s advice: he doesn’t believe in company turnarounds, usually if a stock is dirt cheap, it’s for a reason. So there you go. That’s how we trashed 300 Euros and what we learned from it. That was a fairly cheap investing lesson!