There are 1001 ways to lose money in the markets. Starting with the deceptions, but continuing with methods of snatching defeat from the jaws of victory. Chair mentioned a number of them in Ed. Spec. and Prac. Spec. including his Uncle Howie’s methods, his Grandfather’s methods, sexulation, hubris, hoodoos, fixed systems, trend following, technical analysis, the propagandists methods, Abelprectorish bearishness, body snatcheritis, everchanging cycles, and trading during times of personal or family events.

There is also Livermore’s most expensive last 1/8th of a point, and the other Livermorean folly of asking the market to buy a coat or a car, making the danger of trading the P&L and not the markets. We should never forget the Expert Professor’s good warning not to confuse luck and skill which was echoed by Professor Diebold’s discussion of alpha and beta. The greatest way to lose money of course, is the weak hand syndrome, whose symptoms strike both on the bailout and on the failure to capitalize on the rise after the fall, which is more of the loss of opportunity variety of losing money. A good number of ways to lose money involve the use of, failure to use, or the over use of leverage or capital. All in all there are 1001 ways to lose money, and I invite you to add to the list.

Vic responds:

One way not to lose as much money as usual is to eschew forums where the agenda is controlled by someone who you are not convinced has the ability to make a profit in real life. Also, do not assume that each day of the week and hour of the day has the same regularities.

Try not to take flyers on other people’s trades as you will become weak, not knowing how convinced they are of their prospects, and will tend to bail out at the worst time.

Do not read books by people with get rich schemes, as if they had one (other than selling books) they would not share it with you. Nor for that matter should you read books talking about how great a personage was in the past. The question is always what is the going forward reason that this method of thinking/methodology should have an edge, not already discounted, in the future.

Do not put on trades where there’s only one way for you to get out at a profit. For example buying at 3:50 p.m. with the idea that you have to close it at 4:00 p.m. because the close looks strong. The same for moves in the first ten minutes.

Be careful about going against near the ends of the day, and the ends of periods, because the strength of the other side increases in proportion to their profits on a trade.

Never be overconfident. You can sink in a moment on a boat, and lose everything with one bad trade in the market. Try not to be overly pessimistic either though, as the market is very resilient, and the infrastructure is designed so that the system can continue and capital can be raised and entrepreneurs will reap returns for their creativity.

Do not ever brag about your trades, or have too big a position relative to the total money flows in and out of your niche, as you will tempt others to run over you. And after a long period of abstinence, when all the moving averages look the worst, that is when you should test whether the expectations and risk reward are in your favor.

Always be flexible and strong in your thinking and money management. Do not have positions where you might expect on average to fluctuate by more than 4% a day on your capital. Stay away from news stories that put you in the same frame of mind as the average public, that lose so much more than they have any right to do. And when you have a big unrealized loss, and the position comes back to break even, test the odds of a continuation as opposed to a reversal.

Do not ever play another persons game. If you are set up to speculate, speculate. if you are set up to grind, grind. Do not make markets or engage in arbitrage where banks and dealers have about a million times the capital availability that you do.

Make sure that your costs suit your occupation. If you are day trading, be sure that your commissions and borrowing costs are in line with your competitors’. If they are much more low cost or quicker than you, how do you really expect to compete with them.

Many of these rules seem like those that Poloinius gave to Laertes … Above all others, remember that the only one that can really grind is the house.

Steve Leslie offers:

I will mention one sure fire way to expose yourself to loss and one to potentially expose yourself to complete financial ruin.

Firstly, the best way to lose money is to focus on your winners and forget about your losers. Mentally we like to watch our winning trades more than our losing ones. The reasons for this have been described in great detail on this list by many.

For example, if you buy a stock and it goes down — not uncommon thinng to have happen. So you have a mental stop of selling half the position when it gets to a 7 percent level. Unfortunately though you do not fulfill your obligation and hold onto the position. Then you notice it is now down 10% and still no action on your part. It continues to grind lower and suck your capital with it. Still no action on your part. and it goes lower. Now you stop looking at it because it has become too painful to watch, so you shift gears to another stock that is going up. This is your excuse. You have now fallen into the trap of avoiding pain and seeking pleasure. So now what do you do? You sell the stock that is going up or has already gone up 20% to offset your unrealized loss. Had you kept to your strategy, you would be out of the loser, booked your loss and now you let your winners run. You have also freed up available capital that can be used for other purposes rather than sit as dead money.

Another way is to own too much of one thing. I always tell clients, friends and anyone else who will or will not listen, not to over expose yourself financially to any one stock, no matter how appealing it is. I don’t care if they claim to have the cure for cancer, don’t own too much of it. I personally believe 10% of an individuals portfolio should be the maximum. I cannot think of any scenario where you want to own more, unless you know more than the general public. Now this is where you get the Bill Gates, Larry Ellison, Paul Allen, Andy Grove Arthur Blank, Sam Walton and others argument that this is how they became fabulously wealthy. My reply is that you ain’t them! The interesting thing about these overnight wonders is that it took years for them to become overnight wonders. 25 years from where Sam Walton opened his first store to his second. Some of them also had more than one bankruptcy in between their successes, so beware the headlines. Paul Allen incidentally used to have a terrible record in investing in companies. I have lost track of what he is doing now.

For every Microsoft and Intel, I will point out Enron, World Com, Calpine, Tyco, Imclone and many many more. The best regulators, analysts and money managers in the world never saw Enron coming. What makes you immune from such an event showing up in your portfolio?

The sand can shift very quickly, especially in stocks that have technical expertise. Two and a half years ago, Biogen Idec was flying high and their stock was at 65. Then they found that several patients with MS who were taking their drug developed a rare form of a brain disease called PML, and the stock dropped from 60 to 35 in two weeks. After an exhaustive study, the drug returned to the market and the stock is now 50. It has yet to recover its price fully.

Peter Lynch said that if you want to find one good stock you need to research 10. If you want to find 10 you need to research 100. Now be realistic. Who is going to research 100 stocks. Who has the time, energy, resources, knowledge. etc to play on this field. Most of us are involved in other things such as running a business, earning a living, running kids to soccer, helping with homework, holding together a fragile marriage, watching the next American Idol …

To take poetic license, I paraphrase Ratzo Rizzo in Midnight Cowboy “You know what you need Joe Buck? You need management. Money management that is.”

Andrew Moe contributes:

As corollary, take care when playing in other people’s markets. Strong runs in energy, then metals has made it look easy to profit from commodities. And with incessant reminders on increasing global demand from all the experts, folks are lining up to add oil, gold and wheat to their portfolios. I can just see old Ben on the floor of the exchange, reluctantly agreeing to sell some of his contracts, “When it’s beans in the teens, I’ll sure look foolish for having sold so low…”


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