c05 JWBK182-McDowell April 25, 2008 15:51 Printer: Yet to come
Not Every Trade Will be a Winner 41THE TECH BUST KNOCKED OUT MANY
NOVICE TRADERSAn example of having great success and then getting caught off guard happened
to so many during the technology sector disaster that started in 2001.
There were many novice investors and traders that had made lots of “easy
money” on the way up and then failed to realize when the market had changed.
It financially killed a lot people who felt they were invincible, and it was the hole
in their pocketbook that first made them realize that there is no such thing as
being invincible in the markets.
If it happened to you, there is no shame. You are by no means alone. Friends
of mine got hit by it, although I didn’t even find out about their devastation until
years later. To show you how having wins early on can be a bad thing, I want to
share this story.
My friends started with a relatively small account of $50,000 in the year- The husband was managing the account. By using leverage, he started
making very profitable trades in the technology sector. The wins began to accu-
mulate and the account grew quickly, doubled to $100,000, then doubled again
to $200,000.
He had no real prior experience in the markets (the $50,000 was inheri-
tance money), and the best investment this couple had made to that point was
probably buying their home, which was accumulating terrific equity. So there
was no real exit strategy in place for this $50,000 investment in the technology
sector. Also, there was no real sector diversification in the portfolio. Probably,
the thinking was, it can only go up, and if it goes down, we’ll just get out. Which
is certainly logical enough, right?
As the years went by, the exhilaration of generating such fantastic revenue
(in addition to his regular “day job”) was surely intoxicating, especially as the
account grew to $500,000 and then to more than $1,000,000. The wife wanted
to get her dream car, but the husband wanted to focus on building this “nest-
egg” for their retirement and the kid’s college fund. So he said, “Wait just a little
longer honey. We’ll get that car soon.”
The end of the story is the technology market started to tank in the year
2001, and my friend was not emotionally ready to get out quick enough. There’s
the thinking, it can’t go that much lower, I can’t afford to get out now, and so
on. So they lost the $1,000,000, plus the original $50,000. Now there is such
despair and sadness after winning it all, and then losing it all, that they both
are still feeling the agony of it seven years later.
The lesson to be learned is that your psychology is crucial, and sometimes
winning big can cloud your rational judgment. Of course, losing big doesn’t help
either, so the goal is to keep an even keel emotionally during both the gains
and the losses. Steady as she goes; don’t focus on making an instant killing in
your account, and work on consistent and steady growth in your equity curve.
Consistency is what counts in this business.