We learned in A One Stock Tale that you can always become a better trader. Anyone that invests or trades financial instruments that exhibit volatility quickly experiences what I call the plight of the investor or better said the plight of the trader. I call this a plight because as a trader it seems that you are always wrong or at a minimum in hindsight you could have done better. Objective self-critique is the greatest tool that a trader possesses.
Most unsuccessful traders view a trading or investment mistake as buying a stock that goes down. Successful traders, especially the ones that think of trading as an investment style and an ongoing process see things differently. They view this trade as a poor trade selection but that poor trade selection is just part of the overall process. They accept that mistakes will happen and focus on their next trade. They see a bigger picture.
We all know that a stock can either go up or go down from the time you buy it. In my experience it’s rare that I buy something that at some point in the future isn’t profitable from my entry price. I’ll bet that most people that have ever bought a stock experience the same thing. I attribute this to chance. What a successful trader does that is different from the unsuccessful trader is learn to accept their limitations. The successful trader knows that if it goes down immediately, they are immediately wrong because it went down. They are also acutely aware of the times they are right in terms of price direction. But what if it goes up and you are right? What if you didn’t have enough of it? Why didn’t you buy more of this stock that went up? Lets say that you picked the right direction and you invested a disproportionate amount in other words it goes up and you have a big position and then it comes right back down to the price you paid for it? Why didn’t you sell it at its’ peak? If it went up and you had a lot of it and you sold it for a substantial profit and it keeps going up why didn’t you hold on for more profit? Finally we have the dreaded, if it went up and you had a lot of it and you sold it for a profit and it went down why didn’t you sell shares short at the top?
The point is that the list of trading errors is endless and subject to second-guessing not only by the trader but the trader’s clients. This second-guessing or perfect hindsight is the plight of the trader. All good traders learn to overcome these persistent self-doubts.
Let me give you an example of a trading plight that happened to me. I purchased shares in a company called Aspect Communications for about $7 a share in the late 1990’s. As many will recall we were in the midst of what people dubbed as the internet revolution and shares of technology stocks were going up based on speculation. We can now look back and say that we were in the midst of a technology bubble and that share prices were extremely overvalued. We were in what many call a technology bubble.
What happened after I purchased shares of Aspect? Within a few months the shares had gone up 4 fold to $28/share. I sold half the shares in every taxable and tax-deferred portfolio that owned this company. I was ecstatic. It was the single largest percentage gain I had ever made in a stock over that short of a time frame. A few days later the company issued a positive press release and the shares jumped to $45. I looked like an idiot for having sold at $28 but I nevertheless sold another half of the remaining shares on this good news. I now had trimmed my investment by 75% from the original purchase price and had made a considerable profit. A few months later the stock peaked at over $65 per share before crashing down to under $5 per share when the technology bubble burst. I kept the remaining 25% all the way down to the $5 level. A few years later the company was bought out and I sold the remaining shares for about $14 per share. It was quite a ride.
By any measure, I had done a good thing for my clients. But they didn’t think so. I got a number of calls when the stock went up to $45 asking why I sold prematurely at $28. When the stock went to $55, then $60 and finally $65, I got a number of calls asking why I had sold at $45. I’m thinking this is great and my clients are thinking I should have done better. I felt lousy. My clients and I had probably made more money in a shorter period of time than in any other similar period of time in our lives. Nevertheless, the conversations that followed surrounding this particular stock were astounding and taught me a lot about human nature and about myself.
I learned that it’s easy to second-guess a trade, even an incredibly profitable trade. I don’t know if it is greed that motivated some of my clients or perhaps they think that I or other advisors have a crystal ball but I wasn’t happy with the conversations I was having around the $45 to $65 price level. This is an example of the trader’s plight in a nutshell. No matter what happens you can feel bad about what you did. I suspect that if weren’t having the types of conversations I was having around the $45 to $65 level I also would have avoided riding the stock down to the $5 level. I can see today that the conversations I had with these people clouded my judgment and resulted in a worse result than had I not had these conversations. This type of experience, coupled with the 30-month bear market that ended in 2002 made me eliminate most of my trading clients. I now only trade stocks for myself, and those clients that I know will not influence my thinking or make me feel bad about myself.