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Introduction

      Jim is struggling.

      He is the owner of JCB Superstores, and his competitor across town is beating him up; there is blood all over Jim's ledger. He decides it is time to take off the gloves: JCB goes public. He uses the money from the initial public offering to buy his competitor and add a few more stores around town.

      With a growing sales base, Jim's clout allows him to negotiate lower prices for the office supplies he sells. He passes on part of the savings to his customers, while watching his margins widen, and plows the profits back into building more stores and updating existing ones.

      Jim calls his friend, Tom, and tells him of his plans to expand the operation statewide. They chat for a while and exchange business tactics on how best to manage the expansion. When Tom gets off the phone, he decides to conduct his own research on JCB. He visits several stores and sees the same thing: packed parking lots, people pushing full shopping carts, and lines at the checkout counters.

      He questions a few customers to get a sense of the demographics. At a few stores, he even chats with suppliers as they unload their wares. Back at the office, he does a thorough analysis of the financials and looks at the competition. Everything checks out, so he orders his trading partners to buy the stock at no higher than $10 a share.

      When news of the expansion plan hits the wires, the Street panics. It is, after all, a soft economy, and expanding willy‐nilly when a recession looms is daft, maybe even criminal, according to some news outlets. The stock drops below 10 and Tom's crew makes its move. They buy as much as they can without raising suspicion. The stock rises anyway. It goes back up to 11, then 12, and rounds over at 13 before heading back down.

      Several months go by, and the economic outlook is as bleak as ever. The stock eases down below 10. After Tom checks in with Jim for the latest public news, Tom's team buys more. It is an easy score because investors are willing to dump the stock, especially as year‐end tax selling approaches.

Six weeks later the company releases the sales numbers for JCB; they are better than expected. The stock rises 15% in minutes and closes at 10.75. And that is just for starters. Six months later, it's clear the economy was never in danger of entering a recession and everyone sees boom times ahead.

      The stock hits 20.

      Years go by, the stock splits a few times, and the holiday season looms. Tom interviews a handful of customers leaving JCB Superstores and discovers that they are all complaining about the same thing: The advertised goods are not on the shelves.

      Tom investigates further and discovers a massive distribution problem, right at the height of the selling season. JCB has overextended itself; the infrastructure is simply not there to support the addition of one new store each week.

      Tom realizes it is time to sell. He tells his trading department to dump the stock immediately but for no less than 28.25. They liquidate about a third of their holdings before driving the stock down below the minimum.

      Since it is the holidays, everyone seems to be in a buying mood. Novice investors jump in at what they consider a bargain price. The major brokerage houses climb aboard and tout the stock, but Tom knows better. When the stock recovers to its old high, his trading partners sell the remainder of their holdings. The stock tops out and rounds over. During the next month and a half, the stock drifts down, slowly, casually. There is no rush for the exits—just a slow trickle as the smart money quietly folds up shop and moves on.

      Then news of poor holiday sales leaks out. There is a rumor about distribution problems, merchandising mistakes, and cash flow problems. Brokerage firms that only weeks before were touting the stock now advise their clients to sell.

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