What I Learned Losing A Million Dollars
What I learned…That’s the title of a book I just finished. It’s a true story of Jim Paul who lived the jet-setting life of a commodities trader.
But he lost the lot – $1.6m to be exact, in very quick fashion. From just one bad trade.
It reminds me of a guy, Paul, whom I met in a roundabout way during the glory days circa 2006. He’d had an accident at work, was on compo and trying to support a wife, a few kids and the usual mortgage.
He walks into a bar (no, it’s not one of those jokes) and overhears a conversation between two blokes discussing a company called Compass Resources. These two chaps were very animated and talking it up big time. Paul listens in intently and decides to introduce himself and get the lowdown on ‘the wunderstock’.
Many beers later all 3 have talked themselves into a big bullish frothy lather.
The following day Paul rings his broker and buys $25,000 worth of said wunderstock around the $0.25 level.
The three wunderkinds continue to meet weekly at the boardroom, errrr pub, to talk up said wunderstock.
And it complies. Unlike the airline, Compass Resources really does fly.
So when I met Paul the stock was around $4.50. His shareholding is now worth $425,000 – apparently about 1/10th of what it will be worth by the end of the evening.
I suggested that he may consider taking some off the table. Pay off the mortgage and some other debts perhaps? Of course, I am but a mere outsider in all things Compass Resources. My talk is cheap. I am duly dismissed as an imbecile.
In the following months Compass continues higher to $6.00. Paul’s one and only shareholding is nearing $600,000.
Diversification is for pussies.
You know how this story is going to end. Compass reverses and starts lower. By late 2008 it has halved to $3.00. By late 2009 it’s in the dust and delisted.
Sadly Paul rode it all the way down. He gave back the $600,000. He even lost his initial $25,000 stake.
What I Learned…From Paul
It’s a common story. People fall in love with a stock, a company or a story. They ride it up and ride it right back again.
So what did I think of the book? A good read, for sure. Humbling. Sad. However, people like Jim and Paul aren’t going to learn from it.
In their own world they’re above it. They had both bought into their Retirement Trades.
So, the takeaway here is:
- Don’t fall in love with a position.
- Don’t put all your eggs in one basket.
- Have a clearly defined exit strategy before you buy a stock.
- A single position should not be your defining success or failure.
P.S. THIS SHORT VIDEO depicts another similar story. Matrix Engineering (MCE) was touted by a couple of big names with even bigger followings. They rode it up. The story was so compelling they even rode all the way down again. This video shows how our Growth Portfolio managed the trade.
I know which result I’d prefer. How about you?
P.S.S. – The only story of importance is price action. If you’re interested in trading the Growth Portfolio – which is exactly how Trish and I manage our SMSF, then CLICK HERE to start today.
