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Author: kpax1971 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 458  
Subject: foolish fools 1 : other fools 0 Date: 2/10/2004 6:14 PM
Recommendations: 6
It would seem to me that there are Fools and then there are fools.

Yesterday's Motley Fool article on LWAY appears to be the first news item on the company in more than a month. Considering this circumstance it becomes quite clear what probably happened to the stock this morning. One word, well, two words, really, should suffice:

Market Orders

Apparently there are quite a few people out there who keep a daily eye on news, commentaries and other articles released by Motley Fool and I applaud them for that. Almost everything foolish is at least worth a look and usually warrants further thought and investigation, the article in question being no exception. A lot of my own stock choices begin with a MF recommendation. However, some folks should also consider reading a few of the articles in the Fool's School section as well. Not that I'm an experienced investor myself, more of a beginner, actually, but even to me it's obvious that if I place market orders for a thinly traded small or micro cap stock, which has just been positively reviewed by a widely read source of news, that I'm probably going to get bit.

Towards the end of yesterday's after-hour trading LWAY sported a considerable spread. Bids were around 9, offers around 20 or higher, if I remember correctly. Average trading volume for the stock had been hovering around a mere 4,800 shares for quite some time. This morning, however, things went out of control. Today's volume jumped by a factor of 26(!) to 127,271 shares and prices went through the roof.
I'd guess that due to an initial lack of current sell offers a bunch of older GTC orders were being matched by freshly placed market orders. Maybe some clever traders holding the stock noticed what was going on and jumped on the bandwagon as well, selling LWAY at ridiculously high prices. Whichever is the case one thing is certain: a few people out there ended up paying through their nose, purchasing shares of LWAY for $22.54 within the first moments of trading after yesterday's close somewhere below $15. I'm having a hard time believing that anyone would do this on purpose, which is why my first thought was about market orders being involved here, specifically market orders placed BEFORE trading began. Well, whoever got stuck with LWAY at this price is probably having a bad day now that the stock has settled around $18.50.

I actually do want to own this stock myself. Looking at the numbers after reading the article I found that the case made for the company was convincing enough to warrant including it in the riskier portion of my portfolio. However, I do believe this stock will come down again to more reasonable price levels for two reasons. For one it's a small company and thinly traded which generally makes for rather volatile investments. But I also think that the potentially bright future hinted at in the MF article isn't likely to manifest itself on the balance sheets tomorrow or the day after tomorrow and I have a feeling that the same people who so easily shot from their hips with market orders this morning may loose their patience or even panic if the stock's price doesn't start climbing noticeably soon. At these low volumes a little bit of selling pressure might push the price down fairly quickly.

Well, either way, I'm hopefully going to be able to pick up some shares of LWAY at yesterday's or even lower price levels somewhere down the road. If not, I'm still glad I didn't just blindly join the stampede. For now I'm just thankful I was able to witness this bizarre episode live. It's one thing to rationally understand why certain things are risky and not at all foolish in the MF sense, but it sure is another thing altogether to actually see it happen in front of your own eyes.

The morale?
Limit orders are for Fools.
Market orders are for fools.

PS: don't get me wrong, I'm sure there's a place for market orders in the vast world of investing but this doesn't seem to be it. Certainly it seems that one would be all but guaranteed to get stuck with unpredictable trades when placing market orders before trading begins, even if one attempts to buy or sell shares of a large cap non-volatile stock this way. You tell me if I'm wrong here.
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