Hello my friend and thanks for reading this. My best hope is that this helps you on your journey.
There are a lot of “guru’s” out there that want to boast and brag about how much they make and how they do it only trading and hour a day.
I don’t want to talk about all my winning trades. I want to talk about my biggest losing trade because I think you can learn more from my most painful experience and hopefully it will help you avoid making the same mistakes and avoid some of the pitfalls that naive and inexperienced traders make. I share this because trading and investing can certainly be very rewarding but it can also be extremely unpleasant when you lose.
To some, 80 thousand dollars may seem like an awful lot of money and to others that may seem like a drop in the bucket. To me, it was a painful loss but it wasn't devastating. Honestly, the more painful experience for me, is knowing that I also had my family members and good friends in the stock based upon my recommendation and because of that recommendation they lost money. That hurt me more than taking the hit to my own account. I have had some phenomenal returns from the stock market as an investor/trader. The only thing that gives me some comfort from my family and friends taking the loss with me on this particular trade is the fact that they had previously benefited from some amazing wins like Marvel Enterprises (bought out by Disney), Melco, Sirius, MGM and many others over the years.
HOW DID THIS HAPPEN?
While it wasn’t a crippling loss, it was still much larger than any loss I had previously taken as an investor in a single stock. I pride myself on doing due diligence and really digging in deep to stocks I am considering for investments. I love to find good story stocks or value plays that are either misunderstood or simply out of favor by those on Wall Street and I have the patience to build my position and hold until the story or the street turns positive and investors take notice and driving the stock price higher.
MISTAKE #1: CAUGHT UP IN A FANTASY
The stock I was involved in on this particular investment (VRNG) was a patent stock. I say "was" because the company has now changed its name and abandoned the patent portfolio business for the most part. This loss happened a couple years ago when patent “TROLLS” were getting a ton of press. The company that I had stock in had won in the lower court with a jury of 12 against Google for patent violation of their search technology. The award was somewhere in the neighborhood of half a billion dollars. It was true David and Goliath story.
Microsoft chose to settle out of court with the company which only validated the patents further for me and the investment thesis. The patents were challenged by Google six times through the U.S. patent attorneys office and each time they were upheld. I read court transcripts, talked to senior executives at the small company, read every piece of research I could find, listened to every conference call and earnings release. I literally spent hundreds if not thousands of hours on due diligence and I became convinced this was going to be the biggest home run of any investment I had ever been involved in. It was a slam dunk!! It was going to be like taking candy from a baby, a No Brainer!!
Long story short I put my money where my conviction was. I loaded the boat!! I didn’t put everything I had in it but I took a very aggressive position and far more than I should have. I was not even slightly concerned; I knew the stock was undervalued for the amount of the award that was coming down the pike. If the stock dropped off of a negative Nancy report or some sort of hit piece I would add to my position at areas of price support. I would day trade it and take short term swings but I always kept a core position that I just kept adding to. The percentage of my portfolio allocated to the stock was clearly irresponsible in retrospect. All I focused on was how huge of a win this was going to be. I had visions of what I was going to be doing with all the money I was going to rake in off this trade. What stocks I was going to roll into after I locked in some of my profit after the company received its half a billion and the stock shot up.
REALITY
After after the 6th upheld decision on the companies patents from the USPTO the case was submitted to the Supreme Court and the unthinkable happened. Everything that had happened over the previous 2 plus years didn’t matter. Not the guilty verdict from a jury of 12, not the experts opinions, not the USPTO upholding the patents 6 times, not the lower court judge…… nothing mattered.Two judges out of a 3 judge panel ruled in Googles favor. In the blink of an eye the stock tanked and then halted. I pulled up the news and my stomach tightened it was almost a surreal feeling as the news sunk in and I realized it was over for that stock. I knew it was going to open significantly lower and there wasn’t a snowballs chance in hell I was getting my money back from that stock.Then I started thinking about all the friends and family I was going to have to call and break the bad news too and I started feeling sick to my stomach. I was embarrassed and ashamed of myself for letting myself be so clouded by my conviction and not thinking about the “what ifs”!
LEARN FROM MY MISTAKES
As I look back its clear I made some huge mistakes. However, the experience helped me become a better trader and investor and I wanted to share what I learned with you.
The first obvious lesson learned was being clouded by my own thoughts and not considering all the the potential outcomes. I was overconfident and gave little thought to what would happen if he ruling was overturned. Regardless of how right you may think you are. The bottom line is that the stock market is speculation and anything can happen. Don’t allow yourself to get clouded by the hype, or your own conclusions, or the thoughts of hitting the grand slam. Don’t fantasize about how you are going to spend the money before you make it. Put more focus on what your risk is if the worst case scenario were to play out. That should help you stay grounded and more disciplined with your position sizing.
MARGIN
Thankfully, I do not use margin on my overnight hold positions exposing myself to potentially limitless losses but I know there are many people out there that do use margin. If I had used margin on that trade I could have been wiped out and potentially in debt to the broker. That is a risk I am unwilling to take and if you are a new trader or inexperienced I strongly urge you to consider taking the same stance. No one can ever force liquidate my position and I take comfort in knowing that. Margin can increase the size of your trade and add to the thrill of trading and I know that having leverage can be very attractive to the trader with a small account but it can also increase the intensity of your emotions because you are trading with too much size and the last thing a new or inexperienced trader needs is heightened emotions.
MISTAKE #2: POSITION SIZE
Trading with appropriate size, with a clearly defined risk reward strategy and my own money gives me peace of mind and takes some potentially emotional reactions out of the trade. Psychology plays a huge role in trading, and you want to keep your emotions under control. When we take too much size, extend ourselves with margin or chase an entry on a stock. We immediately add potential triggers that could intensify our emotions that in turn lead to making poor decisions. One of my favorite quotes from Warren Buffet is “The stock market is a device for transferring money from the impatient to the patient”. If you are emotionally charged it’s very tough to be patient.
MISTAKE #3: BINARY EVENT
There are some traders that will tell you to never hold a stock into earnings and personally that is just silly to me. If you are familiar with the company and the chart is in a dominant uptrend from the lower left to the upper right above the 200 day and the company has a history of beating on earnings there is nothing wrong with holding into earnings. If the stock has an erratic history with earnings then just lower your risk exposure by shrinking the size of the trade. Some of the biggest moves can happen off an earnings report both to the upside and the downside and having a reasonable amount of exposure is often worth the risk.However, when you have a binary events like trial data from biotech’s, FDA rulings on a potential drug approval or in my case a ruling from the Supreme Court. These events are basically a flip of the coin so you have to recognize them for what they are and play them size appropriate. Binary events can literally make or break a small company and you have to be prepared for either outcome. It is okay to hope for the best and prepare for the worst in scenarios like this. Preparing for the worst will force you to reevaluate your position sizing into a binary event. If the news goes in your favor you can always add to the position. There is no justifiable reason to gamble with and uncomfortable position size when the outcome of the event is a 50/50 chance of success or failure. The odds aren’t in your favor and you have no edge. You are basically gambling.
MY MISSION
It’s been a couple of years since that event occurred for me and it is a lesson I will never forget. It helped me decide how I wanted to run my service here at Alpha Wolf Trading. The memory of how I felt when I lost my friends and family money in that trade is as strong as it was the day it happened. I decided I want to help teach people how to fish for themselves. I do not have an alert service for day trades because I feel the window of time is too short for people to get in and out trying to follow someone. I do post my swing and long term hold trade plans and I do alert out when I enter a swing or long term hold but not so that people follow me into the trade. I do the trade plans so that people can see the process; to see how the trade plans can perform if you have the patience and discipline to let the trade come to you.
KEEPING IT REAL
Do all my trade plans work? Can I guarantee you that you will make a certain percentage annually on your account from trades that I post that you decide to take? The simple answer is no.
THEN WHY SHOULD I JOIN?
The membership and education are designed to teach where to look and what to look for, to teach you to have a plan and how to build one, to help you recognize when you are acting impulsively, to help you manage your expectations and give you a sounding board to bounce ideas off of. The goal is to make you self-sufficient and help you evolve in to the best trader or investor you can be. If you're interested in joining our family, check out our 3 membership plans, the Pro Alpha annual plan being the best deal and for this memorial day weekend the Pro Alpha plan is only $399.00, JOIN NOW!
If you have any questions, feel free to email me at tim@alphawolftrading.com.
