The worst trades I’ve ever made all had one thing in common: I let my emotions get in the way.
I either bought a stock that I knew was garbage after getting swept up in what other people told me or held on to a stock that I should have sold because I was greedy.
Let me tell you about the worst trade I ever made.
After several years of making plenty of mistakes, I learned discipline. I used trailing stops. I took partial profits on the way up when I was in risky positions. I was patient and followed sound rules.
Until Quokka.
During the dot-com boom, I bought shares of Quokka, which provided video content of extreme sports. I knew no one was watching. Not because it wasn’t good content but because no one had broadband. We were still on dial-up internet back then. Watching streamed video was a painfully slow process.
But Quokka had landed a deal to cover certain sports at the 2000 Olympics. It wasn’t making any money, but I figured once the mainstream media started writing about Quokka’s Olympic coverage, the stock would surge – the “greater fool” theory.
I put a lot of money into it. More than I should have. The stock did surge. It went from $7 to $15. Following my discipline, I told my wife I was going to sell half of the position and take our risk capital back. We’d be playing with the house’s money.
She suggested I stay fully invested in the stock. She was caught up in dot-com fever – as were millions of others – and expected it to go higher forever. I protested, saying I’d sleep better if so much of our money weren’t at risk.
She again suggested (more strongly) that we stay invested in Quokka. “What if it goes to $40?” she asked. “That’s a down payment on a house.”
I repeated my reasons for sticking to my discipline. We went back and forth like this for a few minutes until she finally challenged my manhood.
Today, I’m secure enough in my manliness that I won’t budge. I’m confident that sticking to a discipline is the right thing to do. Back then, I let my emotions get the best of me and agreed to hold on to the stock.
I’m sure you know what happened next. The stock tanked to $10. “If it goes back to $12, I’ll sell it,” I said. It fell to my entry point at $7. “If it goes back to $10, I’ll sell it for a small profit,” I said. It dropped to $5. “If it goes back to my break-even point, I’ll sell it,” I said.
Then $5 became $3, which became $2. I was frozen and kept promising myself I’d sell the stock if it rose a few points. It never did. It went straight to zero, and I still own that damn Quokka stock certificate somewhere.
First, I let my wife’s emotions skew my judgment. Next, when things went badly, I ignored my own rules and common sense. Hope became my reason for staying in the stock. I would have saved myself thousands of dollars in losses had I set a trailing stop.
Whether your rules are based on fundamentals, value or technicals, you should have a valid reason for buying a stock and a system for exiting trades.
I paid tens of thousands of dollars in tuition (trading losses) in my early trading career so that you don’t have to.
But I promise you that if you let your emotions guide your trading decisions, you’ll have a tale of woe similar to the one I just told.
— Marc Lichtenfeld
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Source: Wealthy Retirement