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Market Wrap-up for Feb. 23 - Overreaction Theater

The following story is true, but the names and details have been changed to protect the innocent – and the guilty.

As they say, sometimes truth is stranger (and funnier) than fiction. We’ve all seen and heard things in our lives that made us shake our heads, and the story I have for you today is one of those unforgettable yarns that’s bound to cause more than a few chuckles. I’m telling this story not to poke fun at someone’s self-imposed misfortune, but instead to teach a lesson about how overreacting to market news can be dangerous. And as you’ll soon see, even market professionals aren’t immune to making silly mistakes.

Setting the Stage

A good friend of mine is a currencies trader at a prominent New York hedge fund. He’s been there for several years and is quite successful at what he does. Not everyone he works with is an “A” player, however.

One of my friend’s particular colleagues—let’s call him “Sammy”—has a talent for, shall we say, making himself look foolish at times. You see, this colleague is from the old school of investing. He’s worked on Wall Street for decades, and frankly, the game has mostly passed him by at this point. He’s often confused by the modern investing world, and he’s not very good with computers. But, his antics provide some good fodder around the office, which may be why the boss keeps him around.

The Comical Overreaction

One day, Sammy flung himself into the office in a panic. Huffing and puffing, Sammy ordered the person who handles the execution of his trades to sell all of his euro positions. Immediately.

You see, Sammy had just read an article in Barron’s magazine that spooked him. The article outlined some very good reasons why the euro was going to crash, and soon. Before making any moves, a colleague first demanded to see the Barron’s article. Sammy, without hesitation, presented the magazine to his colleague.

Quickly, his colleague responded: “Sammy, this issue of Barron’s is over two years old.

That’s right. Sammy was about to make a big-money trading decision based on two year-old information.

No one knew how or where Sammy found that dusty old copy of Barron’s. As the story goes, it was probably just sitting on someone’s desk in the office, and Sammy picked it up and read it, simply assuming it was the latest issue.

“Oh and by the way, you’re already shorting the euro, Sammy,” said the colleague.

Poor old Sammy didn’t even know what positions he had to begin with.

The Lessons

Obviously, Sammy overreacted about the Barron’s article. Even if it had been the latest issue, there was really no excuse for panicking out of his position. Even more egregious was the fact that Sammy didn’t even know what positions he had.

I’ll repeat it again: this guy is a Wall Street professional with several decades of experience. If pros are prone to these types of mistakes, you can bet that everyday individual investors can do the same.

So in a nutshell, don’t be like Sammy. Check your positions regularly so that you know exactly what you own. And for goodness sake, don’t let any single article or event spook you – especially if it’s two years old.