When a stock gets flushed down the toilet, shareholders love to vent their frustration at the companies in question. So they resort to mudslinging.

Of course, it is never their fault, so they take it out on the poor secretary who answers the phone at the company, they berate the investor relations rep and they spew venom on chatboards. This is the favourite pastime of investors.

Just once, I'd like to see the tables turned. I'd like to see a company stop rolling with the punches and fight back. I'd like to see a company's chief executive officer, black eyes and all, get up off the canvas, put up his dukes and provide a little wakeup call by popping the shareholder square in the mouth.

I mean, isn't it high time somebody trashed the bums who call themselves investors? After all, aren't they the ones who neglected to protect their investment with a stop-loss order? Aren't they the imbeciles who fiddled while Rome burned and the boneheads who didn't bother reading past the first paragraph of a press release that raised the first red flag?

Shareholders, by definition, are professional bitchers and moaners. They constantly point fingers but rarely have the guts to look in the mirror and identify the true culprit. If you're still holding shares of a stock that is down 90 per cent, you should be the one with your feet in the fire.

If you can read, then you can read a press release. And if can read past the opening line about the company being "pleased to announce," you have no right to complain. You were warned. By the company. And, yes, it came right from the horse's mouth - the CEO.

The stock market is more forgiving than you think, but shareholders struggle mightily when it comes to admitting they screwed up. The market is a lot like baseball. It will give you three strikes before calling you out.

The problem is that most shareholders, and even institutional investors, choose to ignore the critical first strike. (Don't believe it? Ask a Nortel shareholder.) This can be a fatal mistake, as it often means the difference between absorbing a loss in the 10-per-cent range or getting crushed for a devastating loss in the 50- to 90-per-cent range.

If investors paid attention to one stock market rule known as the cockroach theory, they could save themselves a lot of agony. It essentially says that there is seldom one cockroach and when you spot one cockroach (ie. earnings restatement, CEO or CFO resignation, regulatory investigation, etc.), you are very likely to see many, many more come out of the woodwork.

A classic example of the cockroach theory is Merge Technologies (Nasdaq:MRGE), one of the worst-performing stocks in North America this year with its shares down 69.3 per cent year to date.

Shares in Merge, a medical imaging software vendor, were trading in the $26 US range on Feb. 24 when the Milwaukee-based company formally introduced its shareholders to the first cockroach. The first cockroach is always the handsome one (relatively speaking).

The introduction of the cockroach came in an official press release in which Merge confessed to a filing delay on its fourth-quarter financial results. Johnny "Come Lately" Cockroach (not his real name) generally has a family bigger than the Brady Bunch.

Apparently, not all investors are chronic procrastinators. We know this because there were enough savvy ones to drive the stock from $26 to the $20 range on the filing delay. At the time, bailing at $20 may have seemed a steep price but, to the blind bums who didn't see the writing on the wall on Feb. 24, it looks awful good these days with the shares last seen at $7.68.

Not surprisingly, after the first cockroach showed up, the other cockroaches followed, each one uglier than the one before.

In March, Merge announced that it had received notification from Nasdaq concerning its late filing of financials and a warning that it was subject to delisting from the exchange. The stock was driven down from $18 to $15, but many shareholders still didn't catch the hint.

In early July, Merge exposed the ugliest cockroach, announcing that several executives, including company founder and interim CEO Bill Mortimer, had resigned and that an independent investigation showed that financial statements from 2002 to 2005 were no longer reliable. The stock tanked from $12.50 to the $7 range.

Of course, holding a dog isn't the worst of it. You could do a lot worse by averaging down each time a cockroach rears its ugly head.

Merge's fall from grace is a common theme in the markets in which bad news comes in bunches and gets progressively worse.

Another classic example of how one cockroach can turn into a small army is the story of Railpower Technologies (TSX:P). This company, which manufactures energy-efficient locomotives called Green Goats, became a favourite of social investors in recent years. However, that all began to change on Jan. 31 when Railpower announced that it was anticipating a provision of $23-$28 million on its fourth-quarter '05 financials for increased warrant reserves, locomotive development costs and losses on some contracts. The shares sold off from $5.75 to $4.20 on the day of the news.

But that was only the tip of the iceberg. Last seen, Railpower was trading in the $1.80 range after announcing escalating losses in March and warning in July that it didn't expect to meet its production and gross margin targets.

The pattern for income trust disasters has become all too predictable, unless you're one of those investors sporting blinders.

The biggest income trust disaster on the TSX this year has been Spinrite Income Fund (SNF.UN), which broadly hinted back in December that all was not well in the yarn manufacturing business. At the time, the units traded in the $8 range.

Spinrite CEO Dario Margve didn't exactly dance around the fact that the company had issues and the yarn business was not all that rosy. At the time, he stated: "We expect these factors (softening of the yarn market) to negatively impact sales through the first half of 2006 ..."

Investors didn't exactly stampede to the exits. The unit price was shaved by only about $1 on the company's revenue warning for the fourth quarter of '05, calling for a number in the $24- to $25.5-million range.

In the income trust sector, a sales warning is often a red flag signalling an upcoming cut of cash distributions and eventual suspension of distributions.True to form, Spinrite followed the script to a T.

In March, Spinrite said it expected to trim its cash distribution to shareholders by 55 per cent. Finally, in June, Spinrite gave unitholders a formal introduction to the trust investors' cockroach from hell - the one in which distributions are suspended. Recent concerns about the company's ability to comply with bank covenants has resulted in more panic selling and a unit price in the $1 range.

If you're still courting this disaster, give your head a shake. Go back and read the press release dated Dec. 21 on Spinrite's website. And you'll see the writing, courtesy of the CEO, was on the wall. Not to mention that cockroach in your soup.

* SAGE WORDS: "One, cutting losses, two, cutting losses, three, cutting losses."

- professional trader Ed Seykota, when asked for his trading rules.

(Gyle Konotopetz can be reached at gyle@businessedge.ca)