Alexander Valtsev
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SunEdison Is Bankrupt: What Should You Do About It Now?

(Image courtesy of thecountrycaller.com)

The truth is, you cannot do anything about SunEdison's bankruptcy at this point in time. Even options cannot save you now. However, you can learn something from this example. A lot, in fact.

I cannot believe people did not see it coming. I am talking about SunEdison's (SUNE) bankruptcy. It was almost imminent: the only question was "when?". This why WhoTrades's analysts warned investors a while ago and concentrated mostly on options strategies around this stock thereon. One of them delivered a really good return. What lessons can we draw from this story? A few, actually:

(1) Accounting matters. Learn your financial ABCs (in fact, if you simply follow us here, on WhoTrades, you will learn a lot about financial analysis). Some of the resources include Investopedia, Accounting Coach, and Coursera, to name a few. To people that have even some basic knowledge of financial analysis it was evident that increasingly negative cash flows from operations was a very bad sign. Numbers do not lie, and you should do math a lot more often that you want to, especially when you invest your own hard-earned money.

(2) Don't buy volatile stocks. Don't sell them short, either. As economist J.M.Keynes, once said:

(Source: anirudhsethireport.com)

Hence, avoid volatility, if you are not an expert on options or you don`t have deep pockets.

(3) Learn options. Options are derivative instruments that allow specific exposure to the underlying asset (can be stock, futures, indexes, bonds, etc.) for a period of time. You can use options to profit or to hedge your existing positions in equities. Also, options are your best choice if you want to play volatile stock: you know your risks from the beginning and oftentimes also know your maximum return. With this information, your option trade simply becomes a game of probability, which is much easier to handle than the many uncertainties you have with stocks.

(4) Don't bet the farm. I am serious. People have heard this so many times before, yet they still make the same mistake all over again. The main cause of this mistake is greed. People must realize that they cannot become rich in one day without taking excessive risks. Investment return is a function of risk, not the other way around. A friend of mine on WhoTrades received a message from a person that lost $4,500 on his SUNE position and asked him what he could do to offset some of the losses. Unfortunately, at that point, there was nothing the investor could do about the loss except learning from it. I can only hope the SUNE position did not take a significant part of his total wealth. 

(5) Some stocks are cheap for a reason. In our age and time, it is increasingly hard to find mispriced stocks given all the technology and brains smart money (i.e. banks, funds, etc.) has. If a company is traded at a discount to peers or the market, chances are, it is traded like that for a reason. An exception for that is small cap companies with no-name brands. Oftentimes, they can be undervalued for very time. However, even if you are convinced that a company is undeservingly undervalued (you have done a thorough financial analysis, studied the market - or maybe you are the industry`s expert - , maybe even talked to the management), this does not mean you have to buy the stock right away. The problem with such companies is that they can stay undervalued for years (recall Carl Icahn`s Motorola story). Many times they do not pay dividends. This means that your alternative costs will not be compensated for a long period of time. Remember that your goal is to make money. If you can make money somewhere else (even if the other company is not undervalued), you should go for it. The truth is, financial analysis does not always go hand-in-hand with portfolio management. One of the goals of financial analysis is to identify undervalued stocks, while the goal of portfolio management is to maximize returns at a given level of risk. Portfolio management does not fall in love with the stock - it cares about overall returns and volatility of the portfolio. As you can guess, the latter is more important. 

I hope the above recommendations will make it easier for you to select investments wisely. What happened to SunEdison today is not extraordinary, nor was it unpredictable. SunEdison, like many other stocks, has long been an options play, not a buy-and-hold stock.

Your homework for today is to find more companies that fir SunEdison`s profile. Write them in the comments section below.