I am not young anymore, so am going to reveal mistakes I made in the first half of my investing lifetime; about 1972 – 1990. Sadly, I did not learn lessons quickly so repeated some of them. These are not in any particular order. A better title might be True Confessions.
1. Believing that I was right and the market was wrong. I don’t know whether this is ignorance, arrogance, or what. More than likely it is just lack of experience. I would spend hours looking at charts and convincing myself what was going to happen; place a small trade, and usually lose money. I was convinced that I was correct in my analysis, yet it often didn’t work out. So, who was correct? The market or me? Trust me; it is always the market.
2. Trading put and call options. Well I know why I did this; it was a small amount of money to do so; money that I didn’t have. It was a way to “play” the market when one didn’t have a lot of money to do so, but just had to be in the game. I remember spending hours looking at all the “Greeks” to find the best priced option, whether it be a put or a call. It was after a few years of no growth in my brokerage account that the light finally turned on. It doesn’t matter which call option you buy if the market goes up. It doesn’t matter which put option you buy if the market goes down. When I realized that, my option trading days ended and my focus was on which direction the market is going. I should note that there is nothing wrong with trading options; just make sure you understand them and have a process.
3. Trading commodities because the exceptional leverage was exciting. Here’s a simple true story. I had an Apple II computer and had written software to do moving averages. I created a really simple system and traded it. I went to a small commodity brokerage in a shopping center near my house. I spent time in the evening deciding what to trade the next day after downloading data at 1200 baud. I got to be pretty darn good at it. The broker gave me a small office in this building and a Bunker Ramo machine to use (quote machine). He did this not because I was a good trader, but because I was generating a lot of commissions for him. I doubt I realized that then. I started the account with $5,000. and in a few months, it was well into 6 figures. I was the king. I was the greatest! I became so cocky that I didn’t bother to analyze the markets on my computer the night before – I just thought I was gifted. The account stopped growing and my trading success seemed to end. In a couple of weeks, I ended up writing a check for about $6,000. to close the account. My commodity trading career (1983) of about 4-5 months cost me $11,000. Lesson Learned: Stick with your system (process) and remember that leverage works both ways. Or better yet: Dance with the One that Brung ya!
4. Subscribing to newsletters. Truthfully, I drove to the Dallas Public Library where they had many investment newsletter subscriptions you could read there. I think when you are starting out, you lack confidence and reading a well-written convincing newsletter helps. It helps you pull the trigger; rarely do they help make money. Why do newsletters even exist? The author is probably a more convincing writer than an investor. Many of them are exceptional in their analysis; they rarely are practitioners. See The Many Faces of Technical Analysis.
5 – Moving from strategy to strategy. This is not unlike chasing performance. Let’s say I was trading a moving average crossover system and after a few small losses, I would be thinking the system doesn’t work anymore. Yet, I had spent a great amount of time evaluating it. Lesson learned: If you have a system or a process that you have tested and are comfortable with, stick with it. It will never be perfect.
This feels like I’m writing in my diary. Passing on hard-earned lessons brings back a lot of memories. I think I “played” with the market for almost 20 years before I started to understand things and began making money. There is no greater joy than to pull money out of the equity market while sitting at your desk.
Dance with the Trend,