Hard Lessons Learned the Hard Way

This blog is appearing on both my blog sites: My Prevailing Thoughts and My Prevailing Investments.

I usually take pride in myself for learning lessons the easy way. That is, someone tells me to do or not do something and I do or don’t do it. Lesson learned. Then there is the vicarious way to learn lessons. This involves witnessing someone else learning a hard lesson and learning enough not to try it myself. Then there is the good old-fashioned hard way. This is where I’ve been told to avoid something and I’ve seen others crash and burn, but I just can’t help myself until I experience it myself.

My trading portfolio completely crashed and burned this week. The crash started during the week ending September 26, 2008. I didn’t pull the eject lever because I figured it had gone down so far that I should just ride it out. Well, the value of my portfolio at the end of September would have been a nice amount to have on hand now as it turns out. I am not talking about unrealized losses. I am talking about honest to goodness actual losses of the kind that don’t come back.

I have a retirement portfolio and it has unrealized losses, but this portfolio will eventually find its way back to positive territory. My retirement portfolio has lost about 50% and has to double only once to put me back at even. That should happen in the next 5-10 years. I will start reporting on my retirement portfolio activity because, as I said, my trading portfolio has crashed and burned and as they say: “There’s nothing to see here.”

Back to my trading portfolio…it is toast, burnt toast to be exact. In fact, my trading portfolio has to double SEVEN times before it gets back to even. That’s nearly impossible in my lifetime. Maybe I’ll will it to my kids who will promptly sell everything, take the cash and say “Was dad crazy? He thought he could trade and make a profit.”

I have been blessed with a mindset and view of life that requires me to learn from the hard lessons of life. If I don’t learn from an experience and try to avoid its negative consequences the next time it comes around, I will have wasted an experience and caused myself and others unnecessary pain. So I’ve been thinking this week about what lessons I knew about trading, but have now learned – the hard way. Here they are:

1. Develop strict buy and sell rules to take emotion out of trading and investing. (I have spent much time researching and developing my rules. They are a work in progress. The trouble is I don’t really know how well they work.)
2. Follow your rules. (I didn’t follow my rules.)
3. Don’t put all your eggs in one basket. (Duh.)
4. Don’t trade with an amount that is more than you can afford to lose.
5. Be honest with yourself and another person about how much you can afford to lose. (See #9.)
6. If you are leveraging your positions by trading on margin, you are trading with more than you can afford to lose. (Because you are borrowing!)
7. If you manage money for your employer and wouldn’t manage “his” money in a risky way, don’t manage yours that way.
8. If you believe you are a steward of God’s resources, trade like you are trading God’s money for him.
9. Be accountable to someone for how you trade or invest: Your spouse, your friend, your trading club.
10. Be able to explain your rationale for why you would choose a particular stock. Does it sound consistent with your rules or make sense to you for other reasons? If not, it probably won’t make sense to your trading partner either.
11. Don’t bite on the hot stock pick unless it fits with your rules for buying and selling. (There are going to be exceptions. In that case see #9 and #10.)
12. Take the long and slow approach to portfolio appreciation. (“Get rich quick” is not a viable investment plan.)

We don’t learn lessons by quitting. We learn lessons by examining past behavior and taking different actions the next time we have the opportunity. That’s why I will continue to trade and invest money. I believe it can be a useful tool to add to one’s resources a little at a time over a long period time. Please continue reading my blogs. Maybe you’ll learn some lessons the easy way or the vicarious way and avoid having to learn them the hard way.

I still own GNK, but only a fraction of shares I used to own. I am hitting a reset button today. Sometimes you just have to start over. Effective December 5, 2008 I will begin reporting my trading portfolio weekly percentage changes along with my retirement portfolio percentage changes and compare them to the changes in the major indices.

Have a Happy Thanksgiving! I will.