Wednesday, April 30, 2014

The Biggest Losers (personal stories)

The recent post about The Fly and his big trading losses has me thinking about some of the biggest losers that I've known personally. Because there are personal stories, these are small time losses compared to the stories in books or online, but for each person they were life shattering.

I'll obscure some of the details, because I don't have permission to retell these tales and my purpose is to educate and illuminate, not embarrass or make fun of.

First story: The first guy invested all his money in a tech company. The company had a new product that was expected to be a big seller. He went all in on their stock, fully margined. The new product flopped, the stock fell and there was a margin call. The guy borrowed money from his mom to meet the margin call. The stock kept falling. Eventually it was near a total loss. The guy lost most of his money, and owed his mom money as well.

Second story: This guy decided to try his hand at day trading. At the time I was communicating with him, I already had over 10 years experience in the markets and he was relatively new. He had some early successes and decided that the game was easy. He quit his stable high paying job. There were some wins and losses, then a streak of losses. He lost 80% of his stake in his first year, and changed tactics and strategy. He made almost all the money back, an incredible 400% up from the bottom. However, he kept rolling dice using plunger tactics, poor money management, poor risk management and eventually his account went back to the lows. This experience scarred him for life. He became depressed. He no longer wants to hear about the stock market, much less try to trade. One red flag to me, was that he wanted to give me advice, even though I had many more years experience than him. He was a very smart guy. All three guys I write about in this post were smart, not genius level, but well above average. What they all turned out to lack was financial wisdom.

Story three: this guy took what I consider to be a fly-by-night course on trading options. The firm charged a ton of money for lessons and private coaching. There was a paper-trading platform for them to learn on. I suspect that this platform didn't simulate live trading, and gave the beginners a false sense of the markets. I don't know it for a fact, but it would help their marketing, to make trading seem easier than it is in real life. There are subtle ways to do this that a beginner may not even notice, such as filling orders at favorable prices. All three stories are sad, but this might be the saddest because this third guy was the oldest of the three. He bet his life savings on the questionable tactics taught by the trading course. It only took a couple of months of live trading for the account to get near zero.

In summary, the first story, going all in on margin, then borrowing money from mom to meet the margin call. Second story, day trading with poor risk management, a big ego, and a plunger mentality. Third story: a fly-by-night trading course, teaching high risk option strategies to novice traders, likely an unrealistic paper trading platform to practice on, and terrible risk management. Again, all three were smart guys. Wisdom? Not so much. Risk management? Non-existent. The first guy eventually turned his financial life around, because he made his mistake while he was relatively young. The other two met sadder fates.

For new readers, trading may seem easy because so many on the Internet write about their winners. Heck, "trading" is easy if all a person ever does is paper trade on a fake platform, or hindsight trade after the fact. Yes, there are a few people that are exceptional traders, but I have never met any of them in person. I have only read about them in books. Or perhaps I have met a few, but they don't brag about their wizardry, so they appear to be just another average and humble trader. The wealthiest people I know personally got it through stock options, equity in businesses, and real estate (on margin).

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