Mr Market claimed yet another victim!

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Today I read a report in the newspaper that got me shaking my head, half in pity and half in weary resignation.

It seems that there are always such cases happening!

The report was about how a student lost $700 000 trading in shares during the recent market slump! In the process, he wiped out his dad’s life savings, lost his girlfriend, and possibly also his family’s house!

Imagine $700,000! That’s not very far off one million! More money that most of us can ever dream of!

I find such cases really sad. Tragic even. Seriously, such cases can be avoided, and I hope this story serves as a wake up call to investors/traders who are living dangerously on the edge.

Some important lessons we can learn here

1. Firstly, he wouldn’t have been in such a predicament had he invested money which he can afford to lose. That is to say, even in the worse case scenario of 100% loss (assuming he doesn’t leverage), there will be minimal disruption and adverse impact to his financial health. He will still be able to carry on the normal lifestyle that he is leading. Alas, this is not the case here.

This is one of the worst mistakes any investors could have made. All this could have been avoided!

2. In the article, I read that his father gave him his life savings to play shares, and commented to his son that there is no gain without risk. I find this deeply disturbing.

One thing I hate is the phrase ‘play shares’. When it comes to investing or trading, it shouldn’t be treated like a game. This is not the usual casual Sunday soccer we are talking about here. This is serious business!

I find that a lot of people go into the market with a devil-may-care gung-ho attitude, and they often don’t usually have a good story to tell afterwards.

I cannot understand the part about no gain without risk. Yes while I agree that there is risk involved in everything, we should always try to take calculated (not mindless) risk. When I talk about calculated risk, it means that you go in with the odds in your favor. Investment/trading/speculating is all about probabilities. If you can have them on your side, while you will lose on occasions, you will be in positive territory in the long run for sure.

This involves hard work. The usual careful evaluation of company, market conditions and market timing among other factors apply. With proper due diligence, it goes a long way to ensuring that you will effectively lower the risk that comes with investing.

I once read about an experienced investor arguing that contrary to conventional norm that investing/trading is high risk high returns, it can actually be low risk high returns, provided you do the necessary homework and be disciplined in the way you carry out your investing/trading plan. I’m inclined to agree

3. Speaking about having a investing/trading plan, a system is vitally important. One must know when he should enter and when he should exit. Whether is it to take profit or cut loss, a system with proper screenings in place will tell him when to do that. A system helps the person to think clearly and act accordingly should the market take any unexpected turn.

Can you imagine a general leading an army into war without a systematic plan? That will be suicidal.

The student panicked when the market took a nose dive, and it’s quite obvious to me he probably has no system in place.

Lets note that he made the loss doing contra trade, which is to me, a very very risky move. In such short term outlook, a stop loss is vitally crucial. Anything can happen within the 3 days period (after which you have to pay up if you don’t sell). If he had placed a stop loss, he would not have suffered such a crushing blow!

You know how deer reacts when an oncoming train is rushing towards it? It stays rooted to the spot, blinded by the glaring light from the train. It probably doesn’t even know what hit it afterwards, and by that time that happens, it should have met his maker!

If you have no system, you could end up like the poor deer! I don’t want to see your life and dreams shattered!

4. Invest time and money in education and knowledge. Spend a bit on books. Read and learn as much as you can. It could save you much more in ‘tuition fees’ later.

I’m also an advocate of paper trading. Go test your system first. See if it’s workable. Treat the paper trading like the real thing. Approach it like what you will do in a real situation. Yes, the psychological factor might not be that compelling, as there is nothing to lose, but the experience will help nevertheless.

I’ve joined the stock competitions before I got into the real thing. I felt all the range of emotions while going through the course of the competitions.

The jubilation of seeing the price rise. The doubt creeping in when things do not go according to plan. And of course, the low when I see a red negative mark. I was rather new then, made quite a few mistakes, but the overall experiences taught me a lot on how to control the emotional aspect of investment.

I shall just repeat it one more time. Treat paper trading like the real thing! Don’t just throw caution into the wind just because this is merely paper trading. Yes you might actually do well (in fact very well in the case of that student) in a simulation by taking all sorts of high risk gambles, but this is not what we want here.

This should be done by simulating how you will react in real life with a plan at hand. Execute the plan faithfully and resist the temptation to deviate from it. If it doesn’t work after some time, refine your plan and test somemore. Do it till you get consistently good results, and then that’s when you know you are reasonably ready to get into the real thing.

Much has been written, and I think I shall end here. I’ve friends who have been through such situations before, and it’s definitely not nice. I just hope the student gets back on his feet and treat this as a learning experience. Everyone deserves a second chance.

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[...] that kinda struck a chord with mine. It reminds me of the entry I wrote about a student who wiped out his family savings due to a crushing loss the stock market. It just reinforce to me the importance of a sound [...]

I think he would have been better off just buying some etfs or funds that invest in bonds and dividend paying stocks. This way even if the shares go down he has income coming in and will do well over time. Sounds like he did leveraging and options to risk that much and loose that fast.

Etf fundss last blog post..Bond etf.

I know they say invest what you can afford to loose. I just invest what i have extra. I do not want to loose it but will be ok if i do. If you borrow money to play the stock market it is a big risk.