You know, I think I'm a pretty patient guy. I always try to put myself in your shoes, and give sound, reasonable advice that is as far from condescending as I can reasonably make it. And, usually, that's the best approach, because Lord knows, I've made just about every possible mistake a trader could make.
But, sometimes "reasonable" just doesn't feel right. No, what feels right is a little ride (with apologies to
Sen. John McCain
) on the Straight Talk express.
So, please read through the following emails I received from a couple of readers, grab your ticket and jump on board. (These are real letters, although I have disguised the writers' identities for their own protection.)
What to do?
Gary: I started trading last June with $50,000. I ended 1999 at $200,000. By the end of February this year, I had arrived at $400,000. Then I made some awful trades -- very high risk, low reward -- and rode them down for too long. I am now at $160,000. March has been very stressful, to say the least. In fact, I'm having trouble sleeping at night. I still have yet to withdraw the money I owe for taxes, which will probably be around $50,000 to $60,000. As you can see from the facts, despite the huge losses I've incurred recently, I will still have realized a gain on my initial amount. I'll be the first to admit that I need to exercise more control, more caution and more patience. But that's not why I write. I'd like to know how I can continue to live with myself after getting wiped out so badly, so quickly. We both know that this awesome market won't go on forever, and I feel like I've just squandered my opportunity. Is there anything you tell people like me in these situations? P.S. I should mention that I am 23 years old, rent, drive an 11-year-old Volvo and, except for a Roth IRA and cash to pay bills, everything I have is in the market. So the hit I've taken doesn't affect my current standard of living, but it sure dashes all hopes of a new car, buying a home, etc. John Doe
What to Do, Redux
Gary: I owned quite a lot of biotech and regular tech. I used liberal stops due to the volatility. In the past I had used 6% stops only to get stopped out then watch the stocks zoom 20 points to 30 points. So I never calculated the damage if the market corrected all at once (like it did). So, I am now gun-shy. Gary, how can a trader (me) rebuild confidence after losing 8% of my portfolio? Jane Doe
Make a New Plan, Stan
John and Jane, first let me say I feel badly for your respective plights. I've been there, and it's definitely not pleasant.
That said, let me also say this: You're both idiots. Now, sit down, and swallow this medicine, because it'll taste bitter, but in the end you'll thank me.
First you, John. One, what were you doing with all your money in the market, you moron? You're 23 years old and have absolutely nothing to your name! My God, you made $350,000 and raked zilch off the table? That is (and I'm being kind) ludicrous!
Look, my friend, I don't know you from Adam, but I do know this: I don't care how darn smart you are. I don't care how darn talented you are. I don't even care if you think you're the best darn trader since
. At 23, you don't know squat. You know how I know that? Because at 23 no one knows squat! What, you're a few years out of college and you think you could just roll along making 700% a year, and not incur any drawdown? That right there shows me you have a brain the size of a pea.
Furthermore, I can guarantee you two things: one, to go from $50,000 to $400,000, you were incurring a
of risk. Yeah, you don't even have to tell me. You were riding
, etc, etc., ad nauseum, straight up to the sky. And, boy, you thought you were darn talented. But, did you ever think those stocks could go down? Did it ever dawn on your simple little thimble brain that folks can lose $350,000 even faster than they made it?
No, no, not you. Oh, you thought you had it all figured out, just like the last gazillion "pros" who had it all figured out. Yeah, well, you didn't. No, what you had was a once-in-a-lifetime opportunity where the wind was directly at your back, and all you had to do was get in the way of a few highflying stocks. Yeah, brilliant plan you had.
And speaking of plans, let's talk about you, Jane. You "never calculated the damage if the market corrected all at once?" Hey lady, cry me a river. In fact, the market didn't correct "all at once." No, it was your highflying stuff that corrected all at once! If you were in the
of the world, they've been going
No, your mistake was to blame it on the market, when, in fact, you filled up with high-octane nutball stocks, and didn't think they could go down! You were so enamored with the "buy-on-the-dips" mantra, that you were shocked by something that happens all the time; namely that stocks do have a direction other than straight up.
And being totally honest, you were blindsided because you and your moron brother John had no freakin' plan!
That's right. You both had no plan. Oh, you can say you had a plan. You can think you had a plan. But, you had no plan. You know how I know? Because folks who have a plan think and know they could get absolutely hammered. It's part of the equation. There's no having to figure out "how they could live with themselves" and there's no "rebuilding confidence" because if you have a plan, all those dreadful days are baked into the equation. Sure, they're not fun to live through, but that's stuff you know and anticipate upfront.
And what if you think ahead and know that you darn well couldn't stand to lose 60% of your equity, like you did John? Well, then you don't take the risk to begin with! And, if you do take the risk, then you learn to live with it!
No, both of you suffer from the same darn hubris many traders I run across have, or are experiencing. It's the hubris of thinking you're bulletproof, of thinking you're just way smarter than every other trader out there.
Well, let me tell you this. If I'm on the opposite side of your trade, I have one goal in mind. I want to flatten you like a pancake. Hey, nothing personal, of course, but this is money we're talking about. And, if you think I'm bad, there are traders out there with tons more experience and resources than 1,000
combined who would like nothing more than to see you selling pencils on a sidewalk if you're trading against them.
OK, now that we have that out of the way, here's my advice: John, if you just went through a 60% drawdown, you have no idea what you're doing. Sorry, pal, but at your current course and speed -- and I'd bet a million bucks you're still averaging down your dogs -- you won't have enough money to pay your taxes, let alone trade. So stop right now, and work on a plan. Think about managing your risk. Come up with a methodology that will serve you through thick and thin. Frankly, I'll make no bones about it: You did squander your opportunity. Make sure you don't squander your next one.
As for you, Jane, you need a plan, too. Thankfully you're still in the game, but remember, it's not a game of rebuilding your confidence, because that's tough to do. No, the real trick is to not lose your confidence in the first place. And the only way to do that is to execute, execute, execute according to some kind of well-thought-out design. Yeah, you're going to face some rough patches, but if you know that ahead of time, you don't have to worry about being bold or being gun-shy because every day is just another day on the job. You gather your lunch pail, you put on your tool belt, and you go to work. You don't gather your confidence every day as much as try hard not to lose it.
You see, apart from not having a plan, the problem both of you have is that you only know how to play good offense. You confused a good market with good trading. Gosh, it's wonderful when they're in sync, but the wheat is quickly separated from the chaff when they're not. You guys were lucky in that you both escaped before you were steamrolled. If you don't follow some of my advice, next time you might not be so lucky.
Gary B. Smith is a freelance writer who trades for his own account from his Maryland home using technical analysis. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Smith writes five technical analysis columns for TheStreet.com each week, including Technician's Take, Charted Territory and TSC Technical Forum. While he cannot provide Investment advice or recommendations, he welcomes your feedback at