How to lose a $2.5 million inheritance in 2 years
You may have heard the story about a Canadian gambling the last few hundred dollars of a $2.5 million surprise inheritance on Apple earnings. This story sadden, sickens and depresses me all at the same time so I have to put in my two cents so hopefully such a travesty never happens to anyone else.
It all started when this young man's uncle (who managed to amass this small fortune despite only working several different modest jobs) passed away and left it all to one of the few people who gave him much attention, his nephew. Many people would go on a small spending spree, but with that much money even someone with almost no financial knowledge and poor spending habits should be able to earn at least 3-4% a year and live comfortably off the interest. That is the goal I am working towards and you should be too. However, this young man wasn't content with a small fortune and never having to worry about money again for the rest of his life. He wanted to try day trading and make more.
Of course as with many things in life he had a bit of beginners luck and made a large amount of money ($30,000) on his first big trade. As he pointed out and many other traders will tell you, immediate success was the worst thing that could have happened. It was like a drug, he had a taste and wanted more. He though it would always be that easy and that he had some great gift for it. In reality some of the smartest people in the world with educational backgrounds in business or economics and many years of experience dedicate most of their waking hours to markets and still have difficulty gaining any substantial edge over the competition. Every trader has had wins, and every trader has had losses. No matter how good you think you are or how often you are right, sometimes you will be wrong. Also, no matter how bad you are, sometimes you will get lucky and be right. The problem here was that this young individual was the latter, and thought he was the former. A few lucky wins had him thinking he was a great investor, when all he really ever was is a gambler. Nobody knows what can happen, especially trying to play options on earnings. His justification shows his naivety. He broke down probability of possible post-earnings outcomes, yet not one of these potential outcomes included Apple actually rising after earnings, but instead allocated ridiculously high probabilities to Apple dropping as much as 30%. Anyone who knows anything about markets knows that the probability of him winning the lottery would be higher than this occurring.
So Apple beat on almost all metrics, the stock is up modestly and it looks as though he will lose almost all of his remaining funds. The point isn't the trade though, as bad as it was (he still has a couple weeks left until expiry so it could end up working out in the end). It's about risking everything on a hope and a prayer. His uncle worked an entire lifetime, making modest wages, living a modest life, and saving up a small fortune, only for his nephew to ungratefully wither it away in 2 years. The money didn't seem to give the uncle any happiness and it has devastated the nephew to the point that he mentally may never recover from this. Money earned is much better than money given. Earn $100 in the markets and you'll appreciate it more and be wiser for it than than someone being given $100 million. A lot of great traders lost their entire accounts or had massive losses before they realized the errors in their ways and rebuilt themselves mentally and financially from the ground up. Personally I have seen my account dwindle through the recent recession, oil price crash, and some bad streaks of option or day trades. You see the account going down but you hope the next one will turn it around, how far down can markets go right? Well I've had many stocks that have gone to $0 to prove that anything can happen. However, most of my portfolio was still in safe dividend paying stocks providing me stable income, so even when those went down and it seemed like the investing world was ending, I still had confidence and they helped me make all those losses back plus more.
Here are some of my investing rules that I live by:
1) Risk only what you are willing to lose. In theory any investment could go to $0 at any time, although the probabilities of such an outcome vary greatly with time and by individual asset. Nobody wants the worst case scenario, but be aware that it is possible.
2) To protect against the worst case scenario from #1 put more of your money in safe assets or trades, and less in riskier plays. This way if one or two speculative plays do turn out worthless they will only make up a small percentage of your overall portfolio.
3) Diversify so that no one trade or sector ever has a devastating effect on your overall account. If you had ten different positions but they were all bullish oil trades before the price crash you would still be suffering. I spread my assets across all different sectors, several different currencies and a few different asset types.
4) Accumulate income through dividend payers, fixed income, option strategies, property rental or anything else that will consistently bring in stable income. My goal is to bring in enough passive income where I don't have to do anything to have enough to live off, and everything after that is pure gravy.
5) For day or swing trades find what you know and what you do best, then repeat it over and over and over. It's nice to try all kinds of different stocks and strategies and always be actively trading, but if you're making money 90% of the time when you trade once a week or making money 50% of the time when you trade 50 times a week, you're often better off just taking the one trade you are most confident and generally most accurate with. As an example I have many different accounts where I use different strategies. For my retirement accounts I only take Canadian trades that I am most confident in with stocks that I know well. I make sure never to take a big loss and I make profits about 90% of the time with these trades, last year earning about 70% annualized returns.
In contrast my riskier accounts when I try all kinds of different assets and strategies in different markets (more just to learn what works and what doesn't than anything else) I am closer to about 50-50 winners versus losers and my annual returns as a percentage of the amount I trade is much smaller.
Know what you know, and know what you don't. You don't know what is going to happen tomorrow with markets, nobody does. All you can do is make an educated guess and hope that you are right more often and with greater financial benefit than when you are wrong. I do tons of market analysis, maintain many databases and read almost every market related news item I can get my hands on to give me a slightly better chance of making money. Sure sometimes I may make a few hundred, or a thousand dollars in a couple of minutes, but many hours were behind those few minutes. Everyone wants more money and the get rich quick tricks litter our world and our markets, but if it were that easy, well everyone would be multi-millionaires. I'm content building my small fortune one day, one trade at a time and I appreciate every gain, so you can bet I'm never going to gamble it all away. Day Trade Canada
Here is a link to the investor's reddit post: https://www.reddit.com/r/wallstreetbets/comments/5qhzcy/well_this_is_it_going_allin_my_last_stand_my/