A celebrated trader once said, “The only reason I didn’t make more in less time was because I had so many winning trades.”
You learn the most from your mistakes.
At the end of each year I like to look back on what was my stupidest trade of the year and what I learned from it.
My stupidest trade has to be Motorola (MOT). I took a 6% loss on the trade. It wasn’t the loss that made it my stupidest trade. It was my lacking judgment profit thesis: my motive for buying in the first place.
On November 2nd, 2009, I bought the stock because Motorola was coming out with the Droid.
You see, I was too willing to take a tip that had no history behind it while ignoring more solid trades with a long history of reliability. All it took was a little bit of marketing hype to vanquish my disciplined trading strategy. I melted into a pool of emotion, abandoning my discipline and giving in to greed. I wasn’t the only trader who made this mistake. Check out the chart below.
I reacted impulsively to news, not knowing the odds of success, the risk involved, or the history behind such a strategy.
The truth turned out to be that the Droid may not have a positive impact on MOT if it fails to sell really well. Even if it does fly off the shelves, it won’t be until 2011 that the Droid will begin to have a positive impact on MOT’s bottom line because of cost to develop as well as Apple’s commanding lead over market share with the popular iPhone.
I was inconsistent in my trading. I engaged in a behavior that was clearly in violation of my own effective investing rules. I became an investor who could not follow my own rules.
Lessons Learned
1. Detachment. I learned that in order to invest successfully, I had to not care, to be detached from my work as a trader. At times, being human gets in the way of success by throwing emotional roadblocks in your path. Emotional roadblocks blur common sense and prevent victory. Just as a doctor of medicine ought to not become emotionally involved with a patient, an investor must not become emotionally involved with his or her trades, or for that matter, with the idea of victory. Keep yourself from caring too much, and you’ll facilitate success.
2. Discipline. The investor who is not disciplined and not able to stick to his unprejudiced trading system will never make it.
3. Realistic attitude. Investors should retain a pragmatic attitude in order to succeed in the game of high expectations. All too often, investors have grossly unrealistic expectations about what they can achieve in the markets. Dreams of striking it rich or of being in on that one stock that makes you spectacularly wealthy are self-destructive and redirect your attention from reality.
What was your stupidest trade of 2009 and what did you learn from it?
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