Posted by Frugal on 30th June 2006
When I just started investing in 1998, I started out by day trading stocks. I didn’t have much. Majority of my investing capital came from my parents. I had about $30,000 which was also the majority of my entire networth. Life was in the fast lane, day trading stocks in and out.
Since day trading relies on making money on a very small percentage spread, I splitted my $30,000 to roughly only two transactions, each transaction worthed about $15,000 so that even on a 0.5% gain, I could net about $75 – about $25 round-trip commission = $50, a decent profit for me. If I was able to day trade two stocks in two transactions successfully, that would be $50 x 2 = $100. I figured in the most optimal case, $100 per day x 52 weeks x 5 days = $26,000 annual profit. That would be a really decent gain per year.
But it was obviously not that easy. There were days that I could get $100, but there were days that I would lose $100. Overall however, I was making forward progress by small steps. Since my “day trades” were more like days trades every now and then to take advantage of special closing/opening prices, one night I placed a low-ball limit order for next-day morning (like I often did because I couldn’t wake up that early for east coast). The next morning, I woke up with my limit order filled, but just to discover that the stock that I bought had just tanked right through my limit order price. Although I put my limit order at some 3% to 4% lower from previous closing price, the stock tanked some 15% right at the market open. So the stocks that I bought was immediately in red for about 10% loss. I couldn’t close out my trade with a 10% loss, and so, I did what most people do, held on to my losing position. And the stock just kept going lower and lower.
Eventually, after making several other big mistakes, I closed out at the end of the year with a big 40% loss. Obviously I was quite depressed about how much I had lost. What made it doubly depressing was that I was losing the money that my parents gave me as gifts. That was a substantial amount to me, especially when you compound that amount at some 4% or 5% for maybe 50 to 60 years ahead of me. I sat down long and hard, reviewed all of my mistakes, and tried to learn my trading and investing lessons. My wife asked why I was doing it at all, waking up at 6:00am PST for so many mornings for trading stocks, and had nothing to show for it, but a big hole in the pocket. It was a good question, and I had an uncommon answer.
My answer was “I prefer to lose 40% now at my twenties, rather than losing 40% at my sixties. If I learn my lessons early, I would not make the same big mistakes much later. Today, I’m managing and investing some $30,000. One day, I will be managing and investing one million dollar. I can afford to lose 40% of $30,000 now, but I won’t be able to afford to lose even 20% of a million dollar.” Yeah, I was in pain from my deep loss. But I was so determined in continuing my stock trading & investing, and I was confident that one day I would be managing a much bigger amount. Since I knew I would be investing for the next 50 years or more, so I was just going to learn how to do it the earlier the better.
Today, my stock portfolio is not a million yet. But my networth has increased dramatically. I definitely did not expect things to happen this soon. Fortunately, each of my past investing and trading mistakes has continued to help me to become a better investor and keener trader. My big loss of 40% in the first year has made me a much more cautious and knowledgeable investor. I think some of the lessons you can never learn it from books. Those lessons just need to be learned from painful mistakes. I believe that investing and trading are those kinds of lessons. And I continue to learn and re-learn my lessons as a forever student of the markets. My only modest goal is not to be stupid enough to lose some 30% of my networth when I’m least affordable for a big loss, such in my old age and in retirement.