I Lost US$37,000 in the Stock Market (How to Prepare for Crisis)
How I Got Started?
It was the crazy years of early 2007 and I was trading commodities like gold, forex, oil, etc. Oh the good ole day of 2007, the market was rising and everything was going up. As I traded in and out of the market (sometimes I was trading by the minute), my portfolio was growing…. I started with US$30,000 and by the end of 2007, my account was almost hitting US$100k!!! Damn! I was at the top of my “trading career”, I was exchanging tips with other traders and I even sat on the committee of an investment club in my college.
As most of you would realised by now, the good times didn’t last. As I tasted victory, I doubled down on my trading position. However, by June 2008, I had already lost US$12,000 and losing more every single day. But I was adamant that it was just a “phase” and I should trust my trading skill. Hence I traded even more frequently and with larger positions each time in order to recoup my past losses.
By the end of 2008, I was forced to stop trading because I had lost all my initial capital. I had lost US$37,000. Where did that extra $7,000 come from? I leveraged on margin for two months and lost it all. Yeah, you can lose more than what you have. The Global Financial Crisis continued for another two months before it started to recover. Had my broker not shut off my margin, I may have lost even more.
Why Am I Telling You This?
I lost US$37,000 in the stock market. Yeah, you are not reading this wrong. I LOST MONEY!
While I am more known for value investing now, I actually started off as a technical TRADER! (believe it or not?)
I always believe in learning from our past experience. It is never a true loss, just an expensive lesson. So I want to share my story with you and hopefully you don’t repeat the same mistake as I did.
The Crisis is COMING – Yes, make no mistake, the market will eventually correct downwards as the market operates in a cycle. We have been in a bull run for more than 9 years and it has reached a level of almost bubbly state. However, I won’t be so arrogant to give a date of the next crisis. While we cannot accurately predict the exact date, we can prepare for it.
What Type of Investor Are You? – While I lost a lot of money trading commodities during the GFC, the fact is there are other traders who made a lot of money too! So the question is not “Is trading or investing better?”, it is “Are you suited to be a Trader or Investor?” While trading is definitely a profitable venture for some, it requires a special breed of people to be successful in trading. Based on my experience, most people are not suitable to be trader. The amount of mental strength and market understanding is just way beyond the realm of common folks like myself. I found investing, especially value investing, much more doable. It is easier to be consistent with value investing and I always find profits when my investing is consistent. If you want to know more about trading mentality, read this book.
Know When You Might Be Wrong – In my experience, we tend to attribute our success as being competent, and our failure as bad luck, but attribute others’ success as them having good luck, and their failure as them being incompetent. Neither one is right but it is important to recognise it when there is a HIGH chance that your success is due to luck instead of skill. If it is due to luck, the success you are experiencing now is likely to be short-lived because no one is lucky for long. The biggest mistake I made as a trader was to mistake my beginner’s luck as great skills. I thought my trading was profitable because I was highly skilled (even though it is the first time I am trading).
Never Use Margins – I am going to be categorically extreme here. My view for most investors is that you should never use margins. The simple reason is that you never know when the music is going to stop. Margin is like a double-edged sword. During the good times of 2007, using margins made me even more profits than I can imagine. However, when it all came crashing down, I lost more money than my initial capital! So even till today, I avoid using margins because I am not sure when the crisis will descend upon us, but I don’t want to be caught with my pants down when it happens.
Own Good Businesses – During a crisis, all stock prices will fall regardless whether it is a good or bad business. However, owning a good business during the crisis will give you the confidence to hold on to it, so long it is profitable and cashflow positive. The most important thing is, after the crisis, great businesses tends to recover and grow even faster than before and their stock prices should follow closely behind.
We cannot predict the future but we sure as hell can prepare for it. -Anon
With the recent market downturn in India, Turkey, China and Europe, this just may be the beginning of the belated crisis. No matter what it maybe, start preparing!
See you soon!
Investing Always,
Pete
