Long-Term Investing

Dumb Decisions and Personal Risk Tolerance

I made a mistake: I bought a stock at the height of its most recent run-up. It was a very impulsive buy where I did it against my best judgment, that is – I knew with 100% certainty that the stock would go down tomorrow.

Why did I buy it? I had 1,000 shares that I bought that morning (day 3 of the run-up. Mistake #1). Then the stock went up a few % points. That was when I saw that it’s going down tomorrow according to the technical analysis, so I decided to sell. It struck me that I can still add a few thousand shares at the current ask and my average price wouldn’t be too high. Even with the current bid price I could make some money (the morning price was alright). It was a case of bad timing + bad decision. I added 3,000 shares and started chasing the bid price. When it went down to 2 or 3 cents above my cost, I was at my break-even point. I could get rid of the shares and walk out clean and free.

I didn’t do it! I don’t know why, that’s still up for analysis.

When the stock when down the next day just as I had seen on the chart it would, it was a gut-wrenching feeling. Then, when it kept going down for 3 more days, it got even worse. In 4 days the stock dropped about 9% from my “Buy” price. It’s not dramatic, and not even the biggest unrealized % loss I’ve ever experienced, but it’s my biggest investment chunk ever. $5,000+ is on the line here.

I lived through an extremely panicky 5-10 minutes on Friday, 4th losing day. I sweated like after a marathon and I couldn’t speak to my husband for a few minutes. I was paralyzed. Then the rigor passed after calculating that it’s only $550 of paper loss. I went out for a walk, and came back all hopeful and haven’t had a panicky thought since.

What’s comforting me at the moment is that I believe in the company fundamentals and, in fact, I believe I can double my money in less than a year with it. So here I am, holding it. A slimy attempted day-trader, I turned a respectable position holder.

The lessons I learned from this one trade? Oh, so many!

1. Believe my own stock technical analysis.

I have been right 6 out of 6 times so far. I used random company charts to predict their next movement. While that’s not Munehisa Homma’s 100 succesful consecutive trades, it’s a good start.

2. No day-trading for me without Level 2.

That’s like doing it blindfolded and wearing earplugs. I haven’t decided which software to buy yet, but it’s very clear to me that I need it if I plan to day trade at least semi-seriously.

3. Set a $dollar limit for each trade that I’m comfortable with – and don’t go over it, no matter what.

Like my friend says, ‘Overall, successful betting and investing is more about good money management than making the right decisions.’

4. Set a stop-loss

It’s emotionally hard to to do, but trading should not be emotional.

If I had set a stop-loss, I’d have available cash for the very next day, to trade a stock that I predicted correctly would go up. It went up 30%!

5. I have low risk tolerance

My very first impulse on the first losing day was to sell!! It took almost a physical effort to not do it. I can see how investors panic and sell-off when market drops. I was able to weather all the market storms previously only because the amounts at stake were so small. $5,000 is possibly my “panick” threshold, but maybe I crossed over that line already. De-sensitization has gotta be gradual for me!

I will finish with a quote and a link:

“And that’s the key: Just as is the case in investing, insurers produce outstanding long-term results primarily by avoiding dumb decisions, rather than by making brilliant ones.” – Warren Buffett, 2001 Chairman’s Letter

All Canada’s top small investors made mistakes early on

Now if I could only learn from my own mistakes 🙂

Have a great Monday!