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It's Not About the Stock, It's About You

Stocks in this article: CROX AAPL M

NEW YORK ( TheStreet) -- I was asked to pick my most foolish and most wise stock trades. Picking the most foolish stock trade is no easy task -- not because I don't have any, but because there are so many.

After 25 years of trying to beat the market I have made every mistake in the book, and invented a few new ones. In my mind I have made more foolish mistakes, but since Wall Street keeps score using dollars I will talk about one of my biggest losers.

Although it plays a significant role, the amount of money lost isn't the primary reason for feeling foolish. My initial and repeated lack of discipline, and how easily I could have avoided (or mitigated) the trade, forces my head lower in shame.

If you take anything away from this story, leave with a renewed sense of discipline, restraint and preparation in your investing. Because losing isn't about rotten luck, stock manipulators, the SEC, or anything/anyone else other than yourself.

Here's the shortened highlight version of events.

Worst of Times: Lehman

In 2008, I was actively trading and by September I was enjoying an outstanding year, but I was also setting myself up for failure. After years of working on market timing entries and exits I felt I "finally made it" and it wasn't uncommon for me to make several trades a day over a week's time and not have any losers.

I didn't know it at the time, but our brains begin to assess risk differently after repeated successes. It's the same reason why investors will string several successes in a row, only to lose all their gains (and maybe more) on their next idea. I began focusing on how much I could make, instead of how much I could lose. I also began ignoring my rules of entry.

I wasn't a discretionary trader. I had a significant edge by using exceedingly strict rules of entry and exiting. Ignoring any of my rules meant that my known edge was gone. When your focus shifts from "how much can I lose" to "how much can I make" you can quickly lose sight of how crucial it is to follow your trading plan.

When you begin cutting corners to find a reason to be in a trade, you know you're in trouble. One of my rules for a particular fading trade type was not to enter during the last hour of trading. During the last hour of trading, stocks that are hitting daily lows will often accelerate to the downside. If you're fading the move, you can lose a lot, fast.

In early September 2008, after trading Lehman Brothers successfully several times during the day, my Tradestation scanning computer alerted me to another buy setup from Lehman. Only this time, the alert was just after the one-hour minimum trading time cutoff. What I should have done was smile and be happy with my trading gains for the day.

What I did was ignore the rules and mentally "pretend" that it was "close enough." Lehman was crushed into the closing bell as smart money was liquidating as fast as they could. By the closing bell, I was underwater over $20,000 and proceeded to raise another red flag that I was on the wrong side of the trade.

Instead of exiting and acknowledging my mistake for what it was, I started reading news stories to find a justification for remaining long. In fairness, knowing the driving force behind a stock is worthwhile because short- and long-term problems can be treated differently. I dug my heels in and by the next day I was down $40,000. Instead of exiting, I started to hedge my position with options.

By this point, I thought Lehman may be bought out cheaply or at least dead-cat bounce, and I sure didn't think the Federal Reserve would allow Lehman to fail. Between Lehman's fixed-income book and overnight securities used by money market funds, there was considerable motivation by many parties to avoid a total liquidation.

It doesn't matter, though -- I wasn't supposed to be in the trade. That's foolish mistake number one. I shouldn't have stayed in the trade -- mistake number two. Using hedging strategies to continue the position was mistake number three, although arguably the least of my errors.

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