“Good Morning Genius!” – Lesson From My Worst Trade Ever

[Today’s guest post is by Daniel aka @MarketPlunger.  Daniel manages a small fund out of his home near Madison, WI. He started trading in college and has a been a student of the markets since he was a teenager. He’s had a passion for all things market related since he was a kid and credits his father with igniting that interest.]

I started doing this at a young age one, of the benefits of which is that I did some incredibly stupid trades early in my career. There’s nothing like being a college kid with $60,000 in an account, full of “brilliant” ideas, and loaded full of testosterone.  There I was trying to outfox others that had way more experience, a lot more capital, and a penchant for eating their young. I was convinced I’d be a millionaire by the time I was twenty-five, lounging on a beach somewhere surrounded by bikini-clad women like I was in a rap video.

At the time of this story I had been “trading” for a few years and had done pretty well.  But it was the latter stages of the tech bubble and even dart throwing chimps locked in a basement somewhere in Kansas were doing well. I had come to the conclusion though that I was good at this game because I knew what I was doing. Boy was I wrong and I was about to learn that the best way possible…by getting my teeth kicked in.

I had my methods of picking stocks but I was still searching for a better way. I looked at fundamentals. I flipped through hundreds of charts a day looking for the perfect set-ups. P/E ratios, moving average crosses, RSI extremes, it was like a damn Schwab commercial and I was that guy. But I was about to take my “technique” to whole new level.

One day I was looking thru a list of screened stocks and there it was: $THC. My young mind flooded with excitement. It couldn’t get any better. The chart looked good, the fundamentals looked okay (even though I hardly had a clue about them), but the ticker, oh the ticker. I had to get me some of that. I checked a few sites. Tenet Healthcare. Sounds good to me. So I fired up my TD Ameritrade account and bought some. A few clicks later and there it was. 20% of my portfolio in $THC. Now it was time to sit back and watch the money roll in.

I can’t remember what I did after that but it sure wasn’t attending a class. I was in Missoula, MT and there were plenty of other things to do besides go to school. I think I went fishing. It was September so I was probably worrying about getting in all I could before the winter and ski season hit.

For the first few weeks my $THC play was doing pretty good. The stock pushed over $50 and I thought I really had a winner. I had no idea how far I wanted to ride it or when I’d walk away but I was convinced this was going to make me a boat load of money. I had no clue the storm clouds were gathering.

Fast forward a few weeks. The stock dropped below $50 but I was still above water. No big deal. I continued doing what college kids do, oblivious to the fact I was about to get schooled.

Then it happened. It was late October 2002 and I woke up with a wicked hangover. I sat at my desk in a fog and logged into my account. There it was staring me in the face. The stock was getting hammered. Something about a downgrade or a possible scandal I believe, but the actual reason still eludes me today. All I knew is that I thought it was ridiculous so I bought more. Hell why not? I knew I was right and the ticker symbol was a winner.

Huge mistake. By the end of the day my original position was in the red and I had just bought more. It closed at $42.50. The next few days were ugly but I was convinced I’d be right in the end. So I bought more. Whoops.

Then came Halloween. The day started out well but that didn’t last. By the close the stock was ravaged. It finished at $28.75 with a loss of about 26% for the session. Ouch. A few more days went by and it looked like the damage was over. So what did I do? I bought more. Once again, a big mistake.

At this point my account was loaded with shares of $THC but I wasn’t going to give up. If I liked it in the 40’s I really was in love with it in the 20’s. I just told myself I was smarter than everyone else and my vindication was coming. I went to bed that night not worried a bit. Little did I know my baptism by fire was about to get a whole lot hotter.

I woke up the next morning to my mobile phone ringing off the hook. It was my dad and it was the first time he had called my cell.

“Hello?!” I said half asleep and a bit hung over. “Good morning, genius!” he said. “You should check $THC.” I told him I’d do it right away and hung up the phone.

I jumped out of bed and rushed to my desk and logged into my account as fast as I could. I was excited. I figured there was a massive upgrade or something that would sky rocket the price. Boy was I wrong. The stock was down and down big. It closed the day before around $28 and now it was trading at $16 plus change. I was pissed. I wanted to kill someone.

By the end of the day it was trading below $15 and I just couldn’t take any more pain. I sold the entire position. At this point my anger was directed at the company’s management. The company had been tied up in some sort of scandal and I refused to believe I did anything wrong. I felt ripped off, swindled, taken advantage of or whatever ridiculous feeling one could have. I had this brilliant idea which was going to make me rich. How dare they?!

(The culprit in its full puking glory)

Looking back at it now I laugh. I was young, full of pride and I could do no wrong. I thought I was smart enough to avoid this kind of beating. I was a moron. But there was definitely a silver lining. I learned a lot from that experience. The kind of thing you can only learn by living thru it.  Although the lesson of that trade wouldn’t be apparent for years it was one of the most effective lessons I’ve ever had.

There are many important things this taught me but by far the biggest ones are:

  1. Have an exit plan. Always know at what level you will get out of position if it goes against you. I didn’t even consider this at that time.
  2. Do not add to losers. Some disagree with this and that’s fine but I will not let myself get into another situation where I keep throwing money at a loser. It’s not worth it.
  3. Hope is not a valid strategy. I hoped the whole way down and got slaughtered.
  4. Don’t just buy/sell something because you like the name. What can say? I was young, dumb and full of THC. Yes this is a stupid rule but I did a stupid thing and I know others that have done the same. The market does not give a shit what you like or do in your spare time so trading based on the ticker symbol alone really is as stupid as it sounds.

There are a bunch more but these standout the most. Of course I have broken these rules countless times afterwards and even to this day I often struggle with the first three, but that fourth one has never been a problem since that experience. I may still be young but I’m not quite as stupid as I was back in 2002. At least I hope…..

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  • Sean

    Now you tell me about number four… I just bought $POT :)

    • Brian Lund

      D’oh :)

  • Dan

    I’m with you brother! You don’t know what risk is until you get taken out to the woodshed ;)

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  • Dave

    …”The kind of thing you can only learn by living thru it…” amen brother, A-F-U-C-K-I-N-G-M-E-N.

    Only thing uglier than hope is conviction :-)

  • http://kas.tumblr.com/ Jack Damn

    Excellent post. Thanks for sharing. I think many of us can relate to your experience.

    Do not add to losers.

    It depends on the time frame, your discipline, and whether you have an exit plan or not. You can successfully scale against a position (adding to a loser) on a swing time frame (1-5 days) as long as you’re willing to eat the trade when or if the time comes. An RSI(2) system such as Larry Connors TIPS systems, which scales into a losing position, comes to mind (though he doesn’t use stops).

    It also depends on how you add. If there is a method to your additions, such as buying 10% at first, then 20%, then 30%, and finally 40% of your position at laid out price levels as the trade moves against you, you can keep the bulk of the damage at the lowest spot (provided you have an exit plan).

    Two problems exists though:

    1.) One problem comes in when longer term position traders (3-9 months) begin adding to a loser and fight the developing broad trend. I would not add to a losing position trade unless I had a “fail safe” stop loss and the addition was within that parameter. There are, however, many profession traders, on Stocktwits and beyond, that do add because they trust their system and willing to eat the full risk if necessary (i.e., they’ve thought out the worst case outcome in advance).

    2.) Stop losses, for swing traders, are flawed, end up costing you by being in obvious psychological spots, and are a false sense of security (overnight gaps, etc..). However, if you’re an equity only trader with 0-5 years experience, they’re better than relying on your untrained emotions.

    /Keith (JD)

  • Narayan

    Reminds me of what I did…I did the same thing when the market was tumbling…bought EGLE around 27..went down… added more at 18.. add some more at 11 and finally sold all at 6.. lost around 15000 dollars but a lot wiser. Have never repeated that again…And why was I buying it.. oh these shipping companies are the best.. look at DRYS, DSX.. they moved pretty well, so invest in them to make a quick buck. got it handed to me really well !!