I was reading through Financial Samurai’s “Tough Love” post and thinking back to situations when I could have used a dose of reality…….. Unfortunately, I was given great advice by many individuals and crapped all over it.
It’s too bad, but “better late than never” doesn’t always apply and I can’t re-coup my losses. Time to throw my experience out here and see if I can save someone else.
Let’s walk through my “Cheap” trading lesson.
I was just starting to learn how the stock market worked and started reading books by the pros (Peter Lynch, John Bogle, Warren Buffet). They all were making similar recommendations that are best summed up in a few quotes:
“We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.” – Warren Buffet
“The worst thing you can do is invest in companies you know nothing about. Unfortunately, buying stocks on ignorance is still a popular American pastime.” – Peter Lynch
“We encourage investors to trade about $32 trillion a year. So the way I calculate it, 99% of what we do in this industry is people trading with one another, with a gain only to the middleman. It’s a waste of resources.” – John Bogle – Bloomberg Interview
So with the advice from investing icons – I started an E*trade account with a small amount of money and started watching stock prices. Two things I noticed right away:
- I was not able to buy a lot of shares unless I bought cheap stocks
- Day to day stock price fluctuations are insane
Armed with my new knowledge and being the genius that I am, I decided to buy a bunch of cheap stocks and try to capitalize on the price fluctuations.
In other terms, I blocked out all of that sage knowledge I acquired reading about investing and replaced it with: “I can make a bunch of money fast, then follow their advice”
I will skip all the small details and go straight to the facts
- Made 25 buy/sells over a 6 month span in 6 different companies
- Started with $300 and added to the account until I was playing with about $3000 over 6 months
- Primarily invested in micro-cap stocks that were under $15 a share
- Held stocks for 1 day up to a month in a few cases
- I used a social media stock trading site to watch the stocks that were “trending”
For awhile I was actually making great returns (the market being on fire helped) and I thought it might be a legitimate way to earn extra money. Then I started gambling on some earnings reports.
“Gambling” because I knew nothing about how the company actually handled its business. Then placed bets that they would continue their streak of beating expectations.
At one point I owned stock in a Chinese company that made edible alcohol……. Since I am not from China, nor eat alcohol (only drink). It’s safe to say I “invested in a company I know nothing about.”
I am not going to go through all my trades/companies – but was up over $1000 (which did not last). Then saw some crazy stuff happen – including a 50% 1 day drop (if anyone is curious reach out and I can share some details).
- Time consuming – Not only did I check tickers multiple times an hour, but the amount of time I wasted “researching” my next trade could have been used to start this blog 3 years earlier
- Trading Costs – When you are playing with small amounts of money, $20 is a huge percentage of your capital ($10 for buy, $10 for sell)
- Stress – Caring about 10 cent swings every hour is extremely stressful and I was on the edge of being obsessed with trading.
- Danger – Micro-cap is very volatile and high risk – I got caught a few times and lost 60% of my investment because I didn’t cut losses
A few positive notes
You can gain all of this knowledge without day/swing trading, but I did learn some valuable information.
- Earnings Reports – Learned what makes up an earnings reports and how they connect to market expectations
- General knowledge – I found that having real money on the table pushed me to learn a lot more about the stock market. Including EPS, Revenue, Filing Dates, IPOs, Institutional Ownership, etc.
- Fear – Seeing your investments fly all over the board forces you to accept market swings. I think my short lived swing trading stint made me more comfortable with the investing I do now.
I no longer day trade (or buy individual stocks for that matter). But do have one big red number still sitting in my E*Trade account that I will eventually sell for tax losses. In the meantime it serves as a “don’t ever do this again” flag.
If you are looking to get into this arena, be prepared to spend a ton of time doing research and be willing to take some losses. One other downfall is you are competing against highly skilled investors and computers. It’s a tough way to make a living.
Do your research, find long term value, and don’t be swayed by short term market fluctuations. Most importantly, if you are a new investor, stick to broad market funds that track major indices.
Losing a few thousand dollars is nothing compared to the path this experience set me on. It was one of my first “Take Action” moments. The action was misguided, but it shows that doing something is better than doing nothing as long as you learn from your mistakes.
I am curious if any readers have done (or continue to) do something similar? Any horror/success stories?
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Personal Capital: Personal Capital has a ton of great Free features, you can track your spending, net worth and even analyze your portfolio. It has top notch security and I am able to connect all of my accounts. Saves a ton of time!
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