NEWBIES ---> "Let the healing begin..."
almost four years to the day.
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June 18, 2000
Chat-Room Millions, Real-Life Misery
By DANNY HAKIM
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Steve Kagan for The New York Times
Douglas McCoy, front, with son, Kyle, and his brother, David, with
daughter Haley. The McCoys lost a paper fortune in Wave Systems stock.
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MARENGO, Ill. -- It is just after 9 one June evening in this rural
town, an hour's drive from Chicago in light traffic. David L. McCoy is
sitting with his laptop in an office nook of his house, tracing his
finger along a curve on the screen, heading down, down, down.
"That was Monday," he says, as his finger stops at the bottom of a
stock chart that resembles a ski slope. The point under his fingertip
represents a day almost two months earlier -- Monday, April 17. That
was the day that Mr. McCoy stopped being a millionaire, and that his
younger brother, Douglas R. McCoy, realized that he would have to sell
his 1996 Honda Prelude to cover margin debts. And it came during a
month when many investors suffered bracing losses that, overnight,
erased fortunes built during the bull market.
The elder brother is trying to be philosophical. The money he had on
paper for those brief shining moments, did not, for the most part,
have a tangible effect on his life. He likes to joke that his "$2
million truck," a Chevrolet Tahoe he bought by borrowing money from
his brokerage account, is all he has to show for his market bravado.
Still, the losses hurt. The McCoy brothers bet almost their entire
investment portfolios, as well as hundreds of thousands of dollars
borrowed from their brokerage firm, on just one stock: the Wave
Systems Corporation, a tiny company based in Lee, Mass., that designs
semiconductors for use in e-commerce.
This strategy might seem foolish, but Wave did go from $1 a share in
1998 to $50.75 on March 1. By then, Dave McCoy, 36, a high school
teacher of economics and psychology, held $2.34 million worth of the
stock, after investing about $90,000 over three years. Doug McCoy, 31,
a community college administrator, had $507,500 worth at Wave's peak,
on investments of $30,000 to $40,000. Not bad for two sons of a school
principal who came from solidly middle-class roots in the Chicago
suburbs.
Terrance Odean, a professor at the University of California at Davis
who researches investor behavior, calls a strategy like the McCoys'
"the correct formula to maximize the chance of a huge windfall.
"It's also the correct formula to maximize the chance of losing
everything," he added.
You could say the story of the McCoy brothers and others like them
makes a case for diversification. You could say it makes a case
against margin investing. You could say it, of course, but it wouldn't
matter, because the brothers' quest is as old as stock markets
themselves: to find the next Ma Bell or the next Microsoft before
anyone else does -- to pile in and get rich.
But the quest also has a new and increasingly popular dimension: the
Internet, with its chat rooms. The McCoys and hundreds of others who
think Wave Systems is that holy grail are prominent citizens of a
thriving message board devoted to the company at RagingBull.com.
Many of the Web's most popular financial chat subjects are tiny stocks
that most people have never heard about. Wave has attracted more than
200,000 messages in less than two years, more than the combined
chatter on RagingBull.com devoted to Yahoo, eBay and America Online.
The followers of the stock are a close-knit community; many of them
socialize off line -- a kind of e-Kiwanis Club devoted to what it sees
as careful consideration of a stock they intend to hold for the long
term. They have even given themselves a name, Wavoids, and often refer
to the company by its stock symbol, WAVX.
The McCoys and other Wavoids -- many of whom had more than half their
portfolios in the company -- rejoiced together on the ride up and then
suffered together as technology stocks took a pummeling. Wave fell
79.3 percent from its March peak to its April low. Pain, and gallows
humor, spread across the Wavoid community.
"Well that was fun" one chat-site Wavoid wrote during the turmoil.
"Just like a dental visit!"
Weeks later, Doug McCoy, married and the father of an 11-month-old
boy, Kyle, is resilient enough to chuckle as he recalls his quandary.
"How do you go home and tell your wife, 'Honey, I just lost a
quarter-million dollars?' " he said.
And how do you explain that you're not ready to change a strategy best
described as Wave-or-die?
Fantastic Voyage
The McCoy brothers first heard about Wave Systems in 1997 from another
online investor. Dave McCoy had dabbled in some small stocks, while
Doug McCoy, an associate dean at Waubonsee Community College, outside
Chicago, had invested in mutual funds and blue-chip stocks but had
never bought into a small company.
The brothers were excited about Wave's blend of technologies and its
management. The company's main product is a semiconductor intended to
safeguard and ease e-commerce transactions. Wave is also involved in a
venture to develop technology that would allow broadcasters to
transmit television shows and Internet content to home computers.
Wave has ties to some luminaries. The chairman and founder, Peter J.
Sprague, was chairman of National Semiconductor, a big chip maker, for
three decades.
Among Wave's board members are George Gilder, the technology guru, and
Nolan Bushnell, the founder of Atari, the pioneering video game
company.
Finding the company, Doug McCoy said, was "the modern equivalent of
finding gold."
Wave's financial history, however, was decidedly less glittery. From
its inception in 1988 through March 31 of this year, Wave has had
total revenue of just $284,676.
The McCoys started buying Wave in small amounts in 1997, but within a
year the stock accounted for most of their portfolios. Soon the McCoys
got dozens of Chicago-area friends to invest, convincing them that
Wave, as Doug McCoy said in one posting, would be "the industry
standard for metering and security on the Internet."
They corresponded on the chat board with other Wavoids: lawyers,
psychiatrists, a Coca-Cola bottler in Southern California, a
Massachusetts accountant who recently conceded that he had "broken
every rule of investing" and staked everything on Wave, and the last
beauty queen crowned Ms. U.S.S.R., who posted a picture of herself in
a bikini when Wave met a price target of $10.
About 200 Wavoids turned out for the company's shareholder meeting
last November in New York, including people from Massachusetts, New
York and California with license plates bearing the company's ticker
symbol. One retired General Dynamics engineer wore a 14-karat gold tie
pin bearing Wave's logo.
Wave was then trading around $16 a share. Many Wavoids had become
rich, at least on paper, and were understandably giddy about a company
that had, in some cases, brought returns of 300 percent.
Steven K. Sprague, Wave's chief executive and the chairman's son, has
spent hours mingling and meeting with Wavoids at various functions. In
an interview, he said that he was concerned about some of their
investing practices.
"Is it appropriate to diversify? Yes. We are not a sure thing," he
said. "I tell my employees that having 99 percent in Wave is not a
good idea."
Few Wavoids were as zealous as Doug McCoy, who compiled a 600-page
compendium of board postings and e-mail messages, called WAVX 101, for
fledgling investors. After the shareholder meeting, the McCoys, more
convinced than ever about the company's prospects, began to invest on
margin, using money borrowed from their broker, Web Street Securities,
to increase their position. By the end of March, such purchases
accounted for about a third of their positions.
For a short while, the strategy proved lucrative. Wave skyrocketed in
February, though there wasn't much company news driving the stock.
Then, in March, Wave hit its all-time high after reporting that it had
received $122 million in a round of private financing.
Suddenly, Dave McCoy was a millionaire twice over, and his younger
brother was a half-millionaire. Many other Wavoids were also margin
millionaires, and the mood on the Raging Bull board turned euphoric.
"Can I ask a stupid question?" one chat board message asked. "Why do
some people refer to WAVX as 'risky?' Am I missing something?"
Another Wavoid started a contest offering a 10-share prize for the
person who could guess when the stock would hit $187 a share. Of the
276 contestants, Doug McCoy was the second-most bullish: he guessed
March 15, or in about two weeks. His brother said April 9.
"The day it moved from $40 to $50, we made $500,000 in one day," Dave
McCoy said. He celebrated by going on a shopping spree with his wife,
Sharon, for some clothes for their two young daughters. In late March,
a co-worker and fellow Wavoid with a small plane offered to fly him
down to the Florida Keys for a fishing trip.
"It was kind of our 'Great Gatsby' trip," Mr. McCoy said. "We had our
Roaring 20's experience, then came home and came back to earth."
Down in a Flash
Indeed, the McCoys and some other Wavoids who bought on margin had a
sudden and rough landing.
On March 29, the brothers received e-mail messages from Web Street,
their online broker based in Deerfield, Ill. They were told that U.S.
Clearing, the New York-based intermediary that processes Web Street's
trades, needed cash to meet margin calls in the McCoys' accounts.
Unless they wired the money into the accounts by April 5, the messages
warned, shares might be liquidated for them.
David McCoy needed to produce $221,778, and his brother $43,000.
Initially, the McCoys, not understanding why the money was needed for
a margin call, assumed that it was a mistake. They had little reason
to suspect trouble. The Nasdaq composite index was still up 14 percent
for the year, and only the day before, Wave had again topped $50.
Left unsaid in the e-mail messages was that U.S. Clearing, a unit of
FleetBoston, had raised the margin requirement on Wave Systems from 50
percent to 75 percent. Clearing firms are allowed wide discretion to
raise margin requirements above the benchmarks set by the Federal
Reserve and market regulators, with little notification.
A spokesman for U.S. Clearing said the company sometimes raises its
margin requirements on speculative stocks that have had sharp spikes
in their prices, on the assumption that declines could be just as
pointed.
But to the McCoys and many other investors in April, the sudden
changes were baffling.
"Wave had just received $122 million in financing," Doug McCoy
recalled. "Why would it change?"
On April 4, Wave closed at $28.50, down 40.5 percent in just over a
week. "TIMBER!!!!!!!" exclaimed one chat board posting. "WAVX margin
investors . . . Get ready for the margin call from your broker . . .
Sorry guys, don't quit your day jobs just yet." Web Street granted the
brothers a temporary extension, during which they set about trying to
transfer their accounts to a different broker with a lower margin
requirement.
The overall slide in technology shares became severe, meanwhile,
spurred in part by higher-than-expected inflation numbers, interest
rate fears, Microsoft's antitrust woes and concerns about inflated
valuations. Investors of many types suffered, and the McCoys' margin
debt swelled. Their account transfers also stalled; ultimately, they
were unable to move their accounts until a couple of weeks after the
Nasdaq, and Wave, hit bottom.
The McCoys, along with two other Chicago-area Wave investors, say they
plan to file a claim against Web Street for arbitration by the
National Association of Securities Dealers. They contend that Web
Street misinformed them about the transfer process.
Web Street executives say that such transfers often take weeks and
that they acted appropriately. "We really bent over backwards for
these individuals," said D. Jonathan Rosenberg, chief operating
officer of Web Street. "The market went against these guys, and that's
the bottom line."
By Friday, April 14, when Wave was still dropping and after the
brothers realized that the transfer would not go through in time, the
McCoys received new e-mail messages warning that their stock would be
sold to cover margin debts at 11 a.m. on Monday.
That weekend, the two families pondered what would happen if Wave fell
even further before the debts could be covered. If the worst happened,
they decided, they would all move in together and make the best of it.
"Monday morning, I got up, kissed my wife and said I hope we have our
house when I get home," Dave McCoy recalled.
The day did not start auspiciously. Wave opened at $11 a share. Mr.
McCoy, who stayed home, had not slept for several days. Before the
market opened, he got a call through to Web Street's trading floor.
Hoping to avoid a fire sale of his stocks later in the day, he began
liquidating much of his position. For 45 minutes, he stayed on the
phone selling off blocks of shares into a seesawing market as many
individual investors unloaded their stocks.
By noon, he called his wife.
"Well, we made it," he told her. They had come out of the frenzy with
$64,000 left in their brokerage account. Sharon McCoy, who says she
never fully comprehended the stock gains in the first place, comforted
her husband, who had hoped to be able to retire early. "We have our
health and we have our work," she told him.
Doug McCoy, meanwhile, got to his office at 6 a.m. and started
crunching numbers. He figured that if he could sell at $17 a share, he
could walk away with nothing, but also without any debt. "If we
dropped back to $10 or $12," he said, "I would have had to file for
bankruptcy."
With the shades drawn in his glass-walled office, he started selling
as Wave fluctuated between $14 and $17. "At the end of the day, I owed
them $14,000," he said. "I had over $300,000 in profit I had built in
three years that I watched get flushed down the toilet. I walked
outside my office and sat in the quad of the college, sat there just
dazed. I'll never get that $300,000 back." To help pay for the
shortfall, he sold his car.
A Hope That Doesn't Die
A month and a half later, Dave McCoy sits in his home office nook,
pondering his whirlwind tour of Internet fortune. On his desk is a
neat pile of seven banana-yellow Wave T-shirts, a "Bob Seger: Greatest
Hits" CD, a row of mystery novels and a copy of "Parenting for
Dummies." His 3-year-old daughter, Kelsey, rummages through a basket
of toys.
While his brother is generally upbeat, Dave McCoy has taken the loss
harder. He has, after all, lost a lot more. Still, he says, it helps
that little about his lifestyle will change.
"I never had it," he said of his paper millions. "I never used it. I
looked at it. Has losing it changed the quality of my life? Not a bit.
Just my ability to realize some dreams."
Will he consider diversifying?
"Diversification is more or less an excuse for not being able to read
the future," he said. "If I had half in an index fund and half in
Wave, it would take me 10 years to get my capital back instead of
five."
Though each of the McCoy wives says she will pay more attention to her
husband's trading and use of margin, both seem less bothered by the
investment losses than their husbands are. But Patricia McCoy, Doug's
wife, did feel it when she lost something tangible.
"I lost my car," her husband says, starting a thought.
"Your car?" she asks, grinning at him as their son shifts in her lap.
Her husband reconsiders his comment.
"Your car," he acknowledges.
Later, his wife is more pointed in her appraisal. "WAVX was like a
drug for them," she said. " 'Oh, did you see it drop, did you see it
drop? Oh, did you see it go up? Did you see it go up? Let's go to the
auto show and pick out our Porsches.' The boys were way too close to
Wave."
The brothers would come home from work, head directly for their
computers and field an endless stream of phone calls from other
Wavoids, usually at dinner time.
"When it crashed, I was actually kind of relieved," Ms. McCoy
continues. "We were living in a fantasy world. We'd had our big blow,
and now we could get back to reality."
But true love can be hard to extinguish. Both brothers are back in
Wave.
Dave McCoy is trading in and out of the stock with the $64,000 he
salvaged, hoping to make quick gains that will enable him to rebuild
his position.
Doug McCoy bought back in after receiving, he says, hundreds of
checks, gifts from other Wavoids looking to help one of their most
devoted and likable brethren. As of last week, he had purchased 500
shares at $17 to $18, waiting for Wave to begin a new climb. He
announced his return in a recent note posted on the Wave board. "Let
the healing begin," it proclaimed.
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