Every June, the tiny town of Sinnemahoning, Pennsylvania (population 132), hosts a rattlesnake hunt.
Surprisingly (or perhaps not), this annual event attracts thousands of people, and awards are given for the heaviest rattlesnakes captured. (Last year, the biggest timber rattlesnake was 54 inches long and weighed 4 pounds, 10 ounces.)
My dad, who grew up just a few towns over, used to tell me stories about how competitors would inject themselves with rattlesnake venom to build up a tolerance in preparation for the big hunt.
But this year, the hunt was called off.
COVID-19 made it too risky for thousands to crowd the streets of Sinnemahoning (which is saying something considering they were heading there for a venomous snake roundup).
But while this legendary hunt may be canceled for 2020, the strategy used there can still be applied today.
Particularly as it relates to investing…
Investors Dive Into the Snake Pit
The “Great Shutdown” has caused a surge in investing activity.
Charles Schwab, TD Ameritrade, E-Trade and Robinhood saw the number of new accounts jump around 170% in the first quarter of 2020.
These days, young investors are the most engaged. E-Trade discovered that 54% of investors under the age of 30 check their portfolios at least once a day.
On one hand, it’s great to see so many youngsters showing an interest in stocks – especially at a time when so many are railing against the “evils” of capitalism.
But what’s troubling is how few of them are taking the steps needed to learn how to invest correctly.
Basically, they’re playing with rattlesnakes. And many of them have no idea what they’re doing.
Take the sad story of the 20-year-old University of Nebraska student who took his own life after a sideways options trade led his Robinhood account to list a balance of negative $730,000.
According to Forbes, the negative balance likely represented a “temporary balance until the stocks underlying his assigned options actually settled into his account.”
In a final note left by the young man, he admitted to having “no idea” what he was doing.
It’s a tragic tale that should not be taken lightly. And it’s an extreme example of how investing without the right tools can lead to absolute disaster.
That’s why it’s so crucial that every investor – regardless of experience level – stick to a simple checklist…
5 Steps for Building Your Tolerance
As Chief Income Strategist Marc Lichtenfeld outlined in a recent Wealthy Retirement article, there are five simple ways to prepare yourself before you go “rattlesnake hunting.”
- Understand what you’re buying. Investors love to chase big gains, so they’ll buy speculative stocks, options, cryptocurrency or other speculative assets without understanding what they are or how they trade.
Study potential investments for a little while and paper trade them so you get a feel for how they move before putting your money on the line.
(Marc reveals several great investing books in his short video here.)
- Use trailing stops. A trailing stop is a sell order that automatically gets you out of your position if the stock falls to a certain price point or by a certain percentage. This takes the emotion out of the decision to sell, which is very important to do.
This way, you don’t rationalize that the stock is going to bounce as it keeps going lower and lower and lower…
- Get small. Now that most brokers don’t charge commissions, there is nothing wrong with trading with just a few hundred dollars in order to get your feet wet and get a feeling for trading with real money.
Heck, you could buy just one share of stock or one option contract. You’ll see what it’s like to have money in the market without having to risk very much.
- Limit losses. No one likes losing a trade. But if you’re an active trader or investor, it’s part of the game. Get used to it.
Certainly find ways to minimize losses by setting stops, practicing careful position sizing, studying the markets, etc. – but get used to them.
Losses happen to everyone, and even the best traders can lose more trades than they win. The key is to keep losses small and wins large.
If you had a win rate of only 40% but made an average of 30% per trade and lost an average of 10%, even though you’d have more losing trades, you’d come out very well ahead.
- Ask yourself what you can afford to lose. No one likes to lose. Even losing a small amount of money feels rotten. But what amount could you lose and not be stressed about? Figure out that number, and don’t risk a penny more than that.
The spirit of the Sinnemahoning Rattlesnake Hunt can’t be canceled…
Before you try to wrangle yourself a big win, it may be worth building up a tolerance first.