I wish I could say this shocked me... but it didn't.
I've worked in the investment world for several years now. And I've heard all kinds of harrowing stories.
Now, investors are at it again. They've found a new way to lose all their money. And you need to understand how this works to avoid it yourself.
My hope is that most of you will read this and think, "Duh, Vic, I knew that." But if I prevent just one investor from falling into this trap... it's worth it.
So, let's get into it. I want to make sure that you don't stumble into this exciting new way to lose all your money...
Just last week, Bloomberg ran this headline: "Amateur J.C. Penney Traders Beg Judge to Save Them From Wipeout."
If you're like me, you might have thought, "Some poor fool has been holding JC Penney's stock since the 1980s, waiting for it to go back up again."
Well, that's actually a pretty reasonable assumption. If you look at JC Penney's long-term chart, it's not hard to see why an investor might hope for another boom. Take a look...
JC Penney has gone through some major booms and busts. It used to be the king of department stores. And I'm willing to bet that there are still some shareholders from the glory days who thought another boom was just around the corner.
That's the kind of sad story we can all sympathize with. But that's not what happened in this case.
You see, folks bought shares of JC Penney, knowing it was in serious financial trouble...
They weren't betting that the problems would go away, either. After all, buying into a hated company before a surprise turnaround can be an incredible way to make big returns.
But this company is more than hated... JC Penney is going bankrupt.
Many of these traders knew that. That's what makes this so unbelievable. They believed that if the company got bought out, their shares would be part of the purchase. And some of these folks genuinely believed this was an opportunity to make money.
They looked at the recent crash and thought, "I'm going to strike it rich."
These folks made a fatal investment error... And it all but guarantees they will lose 100% of their money.
The reason is simple. It has to do with the typical capital structure. (That's finance lingo for "who gets paid, and in what order.")
You might not know this, but when it comes to bankruptcy, shareholders are usually near last place...
You read that right. If you hold shares of a company that's going bankrupt, it's darn likely that your investment will go to zero. You'll see a 100% loss.
The reason is, other people are going to get paid before you do... if they even get paid at all. And they're going to fight for every cent.
Bondholders and other creditors come first. And they often don't get paid in full. That means that in the process of liquidating the company, all the money gets paid out just settling part of its debts... leaving nothing for shareholders.
These amateur traders had no idea this would happen. Don't make the same mistake! Unless you are well-versed in bankruptcies, speculating on them is not for you.
Bankruptcies are complex legal dances. If you don't know all the rules... you're going to get stepped on. A lot of investors are finding this out the hard way now.
They bought up JC Penney shares expecting to earn big profits... even as the company went bankrupt. It seems too foolish to be real. But it happened. And as the COVID-19 crisis continues to play out, we'll see other companies go under. Don't focus on them.
There's still a lot of great opportunity in the markets today... But for you to take advantage of it, you first need to make sure you don't lose all your money.
Good investing,
Vic Lederman
Further Reading
"We're in the midst of a crisis... one that has sent investors hunting for opportunities," Vic writes. But all of this scrambling can lead to enormous mistakes. That's why it's important to know what you're investing in before you buy... Read more here: The 'Greatest Fools' Just Fell for This Investing Trap... Again.
"There's no question about it," Vic says. "Online shopping is still the dominant trend." With more and more consumer transactions taking place on the Internet, many brick-and-mortar stores are going to continue to suffer in the years ahead... Get the full story here: Black Friday: How I Knew Before the Headlines.
Market Notes
WHEN THE U.S. NEEDS COVID-19 TESTS... THIS COMPANY DELIVERS
Today, we’re checking in on a company that’s helping us combat the pandemic…
Coronavirus cases remain on the rise in the U.S., and tests are in high demand. The U.S. has now run nearly 50 million coronavirus tests, up from roughly 800,000 as of May 11. And today’s company is playing a huge part in this crucial work…
Quest Diagnostics (DGX) is a $17 billion medical-diagnostics giant. This company was already a “World Dominator,” serving 30% of all U.S. patients and half of the country’s hospitals and physicians. But now, the surge in demand for coronavirus test kits has strengthened Quest’s business… In its preliminary second-quarter results, Quest reported revenue of $1.83 billion, well above the Wall Street estimate. And three of its at-home coronavirus test kits just received emergency use authorization from the FDA.
As you can see in today’s chart, DGX has soared in recent months. Shares are up more than 70% from their April low, and they just hit a fresh all-time high. High demand for coronavirus testing should only boost shares of this World Dominator…
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