For how long can you afford being wrong?

Response to the previous post warrants one more dip in the topic before I go back and finish Psychology 101 series. While the concept of "being right on the reasoning doesn't mean being right on the direction" is accepted by all who wrote back to me, one more issue has rise in discussion. The question is, since price is bound to go where it belongs sooner or later, why not just close one's eyes and let "them" play their games? Wait it out, however stomach-churning the process is, and greet the return of fairness and common sense with victorious throaty laughter?

It's surely tempting. Idea of closed eyes appeals to anyone who experienced the phenomenon of the market kicking one's butt for doing the most sensible well thought through and reasonable thing. The problem with this approach is this:

The market can stay irrational much longer than you can stay solvent.

I don't remember who said that but boy, was he right. I will go down the memory lane for one of the most remarkable examples, to illustrate just how powerful contra-obvious movement can be. I already talked about it as one of my prominent lessons (learned the hardest way, too) - those of you who got Techniques of Tape Reading (TTR) can open page 21. For those who for some incomprehensible reason still haven't read it, reminder of how the story went.

K-Tel, NASDAQ symbol at the time KTEL, little company with tiny float, announced that it was going to sell the albums with music of 60-70 over the Internet. Fine, who cares, right? Wrong. It was the beginning of Internet era. Netscape already went into stratosphere. K-Tel became a symbol of a new way of doing things. E-commerce was a new word. And a new world - as usual, brave one. Stock shot up from under 5 to over 20 in a couple days. Warranted? Heck no. Fundamentals were laughable. Perspectives were bleak. No one believed this move could mean much for the company's bottom line. So, every sensible trader on the planet, and I suspect some for Mars, went ahead and shorted it. Stock danced a bit around 20, then slowly moved closer to 30 (those were fractions times, they moved easier than under decimal system these days). Next morning it opened at 31 and proceeded higher. Then brokers called shorts in, to the horror or those who decided to close their eyes. If you don't remember those days or haven't read TTR, try to guess where the stock finally topped out? Eighty dollars!

Now, even if not for shorts being called in, would you be able to sit out such ride? I highly doubt it (unless you ARE from Mars that is). Chances are, you would have given up long before it was over, and the closer to the top your capitulation occured the more insulting it would have been. Worse yet: let's suppose blue-eyed miracle happened and against all odds you did manage to sit tight through this experience (nothing short of being made to watch Inconvinient Truth five times a day two weeks in a row). Do you think you would be able to profit from subsequent price drop? I wager Victoria, biggest crater on Mars , that as soon as KTEL dropped closer to $20 making you even, you would have covered your short with sigh of relief loud enough to be heard from that same crater. And if I am right about this, then all this horrible risk and gut-wrenching experience was for what, to get out about flat? Give or take couple millions nerve cells?

Oh, and for the irony... K-Tel's CEO, when interviewed those days, said he was not selling his shares because "he was told stock goes to 100". Now that KTEL is long gone, I wonder... if that's what happened and he never sold, was it an ultimate case of market killing both sides or what?