“Stop going for the easy buck and start producing something with your life. Create, instead of living off the buying and selling of others.”
–Martin Sheen, Wall Street
I was going to be a millionaire. That’s what I told myself. I had just read Electronic Day Traders’ Secrets (#aff) by Friedfertig and West. I had opened up an e*Trade account. I had funded it with $1,000. I practiced by watching CNBC. I was ready to become a day trader.
I really thought I was going to be able to identify great stock picks and make money. A classmate of mine from West Point was rumored to have turned our cow car loan, which, if memory serves me correctly, was $14,000, into a quarter of a million. I e-mailed him for advice and stock tips. All I needed was for the first trade to go right, and I’d be in great shape.
I was giddy with excitement. I told one of the guys in the office what I was doing. He was interested, but he was only interested enough to watch. He wanted to watch me make a mint first before he plunged in. He was a salt-of-the-earth guy with a wife and kids and all sorts of things like proms, colleges, and paying for daughters’ weddings to think about.
I had no such encumbrances. I was single. I was dating, and she and I would talk about how we’d have a contest each day to see who made the most day trading and whoever lost made dinner. She put herself through medical school day trading. There was no way this could go wrong!
The allure of riches was just on the other side. All I had to do was figure out the right trade, and boom, I was on the way.
The stock I chose to buy was Skechers (SKX). It had just undergone an IPO and was significantly down from the IPO price. I remember the price. It was $7.00. I couldn’t put in round lot trades for it because, $990.05/$7.00 is not an even number. My investment thesis was that there were a lot of kids wearing Skechers, and even though there were rumors of lawsuits, SKX was HOT.
I also studied the financials, but in reality, I didn’t truly understand them. I was the type of person who wore hiking boots everywhere. Except in uniform, of course. Then I wore tanker boots. Anyway, Skechers were EVERYWHERE that I looked. Did I have selection bias? Perhaps. But, I had a strong feeling that Skechers were undervalued based on the market and based on the fact that every IPO during that day was booming. People were buying pets.com for goodness sake. At least Skechers had sales!
So, on July 15, 1999, I pulled the trigger and bought 141 shares of SKX. To break even, I needed the price to go up to $7.17, since I had to account for commission on the purchase and on the sale – the round trip commission. Figuring that the market would figure out what I was up to, I expected to see it go up at least back to its IPO price, which was $11.81.
So, I waited. And I waited. And Skechers took a dive. It cracked below $6, and within a month, I sold when it popped back up to $6. It could have been worse. I could have ridden it down to $3.25. Or, alternatively, I could have stuck to my guns until May, 2000, when it finally went above its IPO price. But, I didn’t. It turns out, even though it was only $1,000 that I invested, it was a scared $1,000. I was more scared to lose money than I was excited to gain money – prospect theory was at work.
Then, I compounded my problem. I asked for stock advice from my brother. My brother is a smart guy and did well trading, but he gave me a stock tip which I took almost on blind faith. Actually, I did some research, but I wanted to believe that it would work so badly that I ignored warning signals. Why did I do that?
Monkey Brain was doing my investing for me. I was suffering from a bias called motivated cognition. Because I wanted to find reasons to invest in this stock, I looked only for the news and the analysis which supported the conclusion that I should invest in it. Since I was doing my investing with motivated cognition, there could have been one good article for every 100 bad articles, and I would have chosen the good article.
That stock, LL Knickerbocker, eventually went bankrupt, making my shares worthless.
Thus ended my dreams of becoming a day trader.
I’d revive the dream briefly in business school when I started writing covered calls. Strangely enough, though, despite remembering my winners, my wife’s investments, which were all in what I thought at the time were boring old mutual funds, seemed to do better than mine. The numbers didn’t lie, even if I could sometimes lie to myself.
I really thought that I could turn $1,000 into $2,000, and then turn $2,000 into $4,000 and so on. Just to get to 6 digits (which is no small number, mind you), I’d have to double my
bet investment 7 times straight without being wrong. Also, each time, someone else would have to be on the other side of that bet investment and be wrong.
Why did I think that I was going to be able to find companies which I probably knew little about and analyze them better than people who did that for a living?
Naiveté. There is no other word to describe it. Well, maybe there is. Delusional.
Yet, every day, people do the same thing. They watch CNBC and hear Jim Cramer throw out 200 stock recommendations and pour money into those stocks without knowing a thing about them because he says so. There’s even a term for it: the Cramer Bounce.
Peter Lynch, the former head of the Fidelity Magellan Fund, once issued sage advice: “Invest in what you know.”
Take a look around you. What do you know the best? Yourself. You know you better than anything else. You also know what you know very well. You’re in the upper quadrant of the Rumsfeld paradox (known knowns) when you think about the things that you know well.
Instead of trying to find some stock of some company you think you know well to throw money in for your attempt to make your riches, why don’t you invest money in what you truly know and try to get a return out of it instead?
Here are four ways you can try to take $1,000 and turn it into $100,000 that probably have a much higher likelihood of succeeding than day trading:
- Start your own business on the side. You have to be good at something. Turn that something into a side business where people will pay you for your skills. If you’re not great at anything, then find something you’re passionate about and learn everything you can. You don’t have to be the best person in the world at something to make money at it. You just have to be a relative expert – meaning you have to be a lot better than the average person. That’s achievable for an area in which you have a true and deep interest. If you can start a business that eventually becomes something which pays you close to what your current salary is, then that’s a great return on your investment! My partners and I started our business which I subsequently sold with each of us contributing $400.
- Acquire skills which will help you to get promoted and/or to get a raise. Learn how to negotiate like a bazaar stall owner. Figure out what skills your company needs and doesn’t have and go get them. You don’t have to go back to school to get these skills. You only need to learn and be able to demonstrate those skills. Acquire the knowledge which will make you more valuable to your employer.
- Invest in tutoring your children on standardized college tests. Moving SAT scores up ten percentile points can be the difference between a scholarship and the Bank of Mom and Dad paying for university education. It can also be the difference between not getting into college and getting into college.
- Teach your children to be entrepreneurial. Help them to hold yard sales. Get them to set up web sites. Give them negotiating, marketing, and management skills. Set them up to succeed on their own. That decreases the chances of being boomerang children, which will save you much more money in the long run than what you’ll spend getting them that practical education now.
None of these investments will reap their rewards overnight. However, with care, application, and a dose of reality, they will reap returns. You have a much higher likelihood of making money investing in something that you know than trying to get rich quick.