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ZIOP And The Dangers Of Following The Herd

|Includes: ZIOPHARM Oncology, Inc. (ZIOP)

Educators often talk about instances when students are actually receptive to learning, because a lot of the time they're not. On occasion students realize the wisdom of learning something new, or looking at things a different way, but it can be rare. Often its a stressful experience, or sometimes a big event that opens their ears and minds.

They call it a "teachable moment".

A major impediment to learning is the arrogant belief that one knows everything, or at least enough, and that anything additional has zero value. When it comes to matters of opinion we love seeking out info that supports and confirms our views, while trashing anyone who has the audacity to suggest we might be wrong.

That's what happened to me when I explained my reasons for being bearish on ZIOP at the start of March. I'm not going to re-hash all the points I made, the near $400 million in accumulated losses, the dilution and failed trial. If you missed those two posts here are the links.

seekingalpha.com/instablog/15663412-joe_retail/3802236-ziopharm-oncology-a-speculative-bubble-poised-to-collapse

seekingalpha.com/instablog/15663412-joe_retail/3806076-reasons-for-being-bearish-on-ziop-just-the-facts

Take note of the comments. I was an idiot, a moron, a short seller and any number of different things. My opinions were a waste of cyberspace and obviously not factually based. Even my syntax and writing skills were maligned, and I've done work as a professional writer.

Why the venom and anger? Two primary reasons. Firstly, for retail investors who've risked capital, its natural to fall in love with anyone or anything that supports the bullish view. And its equally natural to get one's back up over an article that is basically saying...."you made a mistake".

Very few people have the ability to take criticism constructively, they perceive any view contrary to their own as an attack on them personally. Hence they feel perfectly justified in retaliating, its simply fighting fire with fire as they see it.

The second reason is more insidious. There are industry hacks, email blasting chop shop scalping pumpers, and all manner of people engaged in the business of attracting retail investors into high flying stocks. Why? So that well connected "smart money" investors can sell the highs.

I will call this group 'the manipulators'...and they understand the psychology of the herd as well as anyone. They know the sheep will attack anyone who dares to express a contrarian view, and they're there to egg the sheep on.

And these individuals will use any port in a storm to keep retail shareholders holding and buying no matter how badly things turn.

In the case of ZIOP its already down about 25% from its highs but even now if you go to message boards like yahoo, investorvillage or a site like stocktwits these hacks are there to ensure retail longs have information that will cater to their preconceived view that they made a wise investment decision.

TA indicators are a favorite, if the daily chart looks ugly, switch to the weekly chart, talk of wedges or Fibonacci numbers, of solid support at constantly lower levels, or gap fills. They'll advocate buying into the downtrend, "taking advantage of the uninformed". Anything that will keep retail investors holding the bag.

And of course it works. It worked on MOBI in the fall when it was trading for $8, $9 and $10+ and that was a company reporting revenues and profits. ZIOP might turn into a long term winner of course, but it will be 2017 at least and more likely 2018 or later before even the possibility of a break through that could lead to a marketable and approved cancer treatment capable of generating revenue.

I don't want to belabor the point any more but I will add in this little scenario as an explanation of how greed blinds retail investors and keeps them from banking solid profits.

We'll say a guy named Bob is fortunate because he invested in ZIOP before the Anderson deal was announced. He was able to pick up 2,000 shares at $5 per.

After the deal is announced he sees his shares quickly double, up around $10. He's thrilled of course, thinking he's a genius investor, and that he'd make Warren Buffet jealous. He's also a little peeved that he didn't buy even more shares back when the PPS was around $5. "Damn, I have that $25,000 sitting in savings that's for the house we want to buy, I could have doubled that money too".

After the PPS pulls back Bob starts thinking about selling his shares and booking a solid profit, but then things start going crazy...the PPS keeps climbing, back to $10, then $11, $12, $13...over $14 per share. Bob is now reading everything he can on ZIOP, is visiting stocktwits and other sites. He starts following like minded "smart investors", and is jealous of those who talk of owning 10K, 30K...50K shares and more that they bought for $2 or $3.

At $14 per Bob's 2,000 shares are now worth $28,000 and he has almost completely forgotten that $14,000 is profit on an initial investment of $10,000. He views the entire $28,000 as "his money". Seeing targets up around $20 per share he's thinking of having $40,000 and is already making plans on what he'll do with the money. A new car, a nice vacation, that golf membership.

But then the PPS starts struggling....$14, $13, $11, $10....Bob is incensed, his $28,000 has dropped to just $20,000. He still has a big profit, but now he's not thinking of the $10,000 he's up but the $8,000 he's "lost" with the PPS falling.

Bobby sees guys on stocktwits and other sites posting bearish commentary, people who are daring to suggest that even $10 is overvalued. "Those bastids are shorting MY STOCK"....he sees an outfit with a website and they're citing all the solid reasons why ZIOP will soon be back to $14 and then eventually $16 and then $20...they're talking about gap fills and normal volatility, they remind Bobby about all the good reasons the stock went to $14+.

But it keeps moving down. "They're manipulating it", Bobby decides...and seeing all the messages exhorting him to buy the pain he dips into the "house purchase fund" to add to his position.

I'll leave it there, but suffice to say these situations usually don't end well.

Full disclosure, I eat my own cooking and have purchased put options on ZIOP, which means that I stand to profit if the further the PPS falls. Put options are not the same as going short however. With a short sale a trader borrows and then sells shares into the market based on the belief that he or she will be able to buy them back at a lower price, pocketing the difference in profits.

A put is a futures contract that gives the purchaser of the options the right to sell a fixed number of shares at an agreed upon price. If the PPS of the stock drops the puts increase in value. In my case the puts I purchased March 3rd 2015 expire this July at a strike price of $10. If ZIOP drops significantly below $10 I stand to profit. On the other hand if ZIOP rises or even holds its current value, then my options will be worth less and less as July approaches (time value of money). Who would want an option to sell a stock for $10 if the market is paying $12, $15 or higher?

Further disclosure. This is strictly an opinion piece, and my opinion could very well turn out to be wrong. This instablog post is intended strictly for informational and entertainment purposes and should not be used as a basis for any investment decisions. Investing in stocks or options involves significant risks. For investment advice you should seek the input of a professional investment advisor.

Additional disclosure: I own ZIOP put options.