The worst trades I’ve ever made all come down to one common element: I let my emotions get in the way.
I either bought a stock that I knew was garbage but got 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.
During the dot-com boom, I bought shares of Quokka, which provided video content of extreme sports. I knew no one was watching it. 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 wasn’t at risk.
She again suggested (more strongly this time) 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 – 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, if you let your emotions guide your trading decisions, you’ll have a similar tale of woe to the one I just told.
Have your emotions ever led you to a bad trade? Share your stories in the comments section below. Don’t worry, we’ve all been there.