Monday, January 21, 2008

Personal Crises and Market Crises

When I watched High Probability Trader's (HPT's) recent video, it brought back so many painful memories of my own market debacle in 1982. The pain, the loss, the self-loathing: it literally hurt for me to watch the video. But I respect him tremendously for posting it. It's a side of trading no one really likes talking about.

Markets go through crises of confidence and so do people. And, for markets as for people, the downside is always so much quicker than the upside.

Markets crash when there's something fundamentally amiss. We see it now in the housing and credit markets; at other times in market history we've had other catalysts. Our personal crises also come when something is fundamentally amiss. My own trading meltdown in 1982 was a reflection of a much larger dead end that I had created for myself in relationships and career.

That led me to change everything in 1983. I laid the groundwork for a new job that would start me on a path toward working with healthy people using a little-known set of techniques called brief therapy. I tossed the weed, cut way back on the alcohol, and finished the year at a New Year's party where I met Margie, my wife now of 24 years. I also took a long break from the markets and only returned after a lengthy period of study--and a new approach to money management.

Tomorrow morning I'll take a long historical look and tell you what tends to happen after market declines of the magnitude we've seen lately. I don't want to spoil the ending, but the gist is that crisis very often brings opportunity.

And so it is in life--IF we muster the heroic spirit to change what's fundamentally amiss. Maybe someday, HPT, you'll be a 53 year old guy writing about the painful crisis that made the turnaround possible. That will make it all worthwhile--



number2son said...

That video has made the rounds quickly through investing blogs. I don't think anyone with more than a few years in the markets hasn't had a moment like that.

That young man is feeling pain for sure, but he showed a lot of character in making it public. Maybe he will help someone down the line from making a similar mistake.

I hope he recovers quickly from this setback and learns from his mistake -- as we all must do if we are to become better managers of our own capital.

SSK said...

Hello Brett, Thanks for the video, it brings back mistakes in my trading history also. I hope this fellow remembers the words of Vince Lombardi's quote "The greatest accomplishment is not in never falling, but in rising agian after you've fallen". I hope this trader can learn to carry on and learn. Time, study, experience, self reflection all cost something in terms of time, energy, emotion and money. For some, more than others. Thank you for all you do to help in that learning curve. Best, Steve ~SSK~

neumes said...

I don't day trade, but even those of us with longer hold periods know the pain reflected in that video. I lost enough paper profits in the crash of 1987 to have paid off my mortgage. I thought my investing life was over. It wasn't.

I'm keeping my eye on Citigroup and banks tomorrow. I'm interested if the momentum of the banking sector decline will be less than the overall market.


BirdMan said...

Good stuff Doc.

martyy said...

Hello Dr. Brett,
having done a similar thing as HPT last year (lost a 6-figure sum) I would like to say that your website has been the greatest help in dealing with disaster.

Anyway, there a couple a things I'd like to say:

1) the stock market is all about psychology. If you're in the red, analyze the situation carefully. Where should I cut losses and what should I keep? Mind you, this is very difficult if you look at the situation last year with the market going up and down very quickly (Although 7 years ago it was worse).

The mistake I made last summer was to get all panicky when the market went down the drain and to realize too late when it came back. Most losses were unnecessary.

2) Never play with (or "invest") money which you can't stand to lose. Even though I am facing great losses it hasn't wiped me out personally. Of course I'd feel better to have the money back in my account right now, but it's gone. Should have bought a Ferrari instead, that would have been more fun.

3) Don't leverage. I think the panic we see now is in parts due to over-leveraging. Although it's tempting to play the market with, say $40,000, when your account only hold $10,000 in cash. Don't! When it goes down like it's doing now you'll be wiped out within hours. Luckily, I never leveraged much, at most maybe 10-20% of the account value.

4) Diversify. Don't hold all in one or two positions.

5) Buy only companies which are standing on solid ground. Be very careful buying into companies which you know nothing about.

6) Don't panic when everybody else does. It's important to have an exit strategy planned ahead of a panic.

Actually what I have realized is that it's good to always have cash at hand: Once the situation has calmed down you can plan your next move.

7) "Shorting" is psychologically a lot more challenging than actually owning shares. When you own a stock and it goes down 20% you can keep it, if it's a good company it'll come back. It always does, eventually. If you've gone short and the stock has gone up, then you got a problem.

Anyway, perhaps there are more than these "7 golden rules" but as a final rule: sometimes it's good to look at stock charts going back maybe 10 years, rather than just looking at the past 12 months. That sometimes helps a lot in a mid to long term decision making. differently.

Again, I would like to say that your website has been been a great help in dealing with "loss". But it's just money, after all, the arms and legs are all there.

It's important to reflect and learn from the mistakes in order to avoid them in the future. If you've lost money and don't know what you did wrong, then you got a problem.

Perhaps you'd like to put a "rules of the game" thing on your website, on the side to be there forever. So that people don't make the same mistakes over and over. I should have known better, but I got caught up in the panic, which is always a mistake.


PS. just to let you know that I haven't lost my humor: somebody out there has my money now and is driving that Ferrari. So if you know the guy, say "hello" from me.

Bill aka NO DooDahs! said...

There's some good material here about using the self-disgust as a motivator for self-change, and there's some useful material for a rational trader that made a mistake. Here's another take on it.

I don't know that it's "character" to share this video. There's a certain amount of ego in showing off (even "celebrating" or wallowing in) one's screwups, and this is not an uncommon type of behavior in addicts or alcoholics. Oh, "woe is me!" The "poor me, poor me, pour me a drink!" phenomenon.

I think the change needed isn't one of method, but of attitude - method will change automatically after that.

I would suggest that if you’re a retail hack like myself, but:

* you’re the type to trade the ES (or any other contract) more than, I dunno, ten or so different times in a morning
* you’re not using a dedicated, backtested system, and
* your best trading day ever was so large, it equated to 1/3rd the amount of loss it would take to knock out your account,


YOU ARE NOT A TRADER – you have a gambling problem.

Get help now, or find some other risk-taking venture in which to work out your frustrations with: skydiving, hang-gliding, shooting your slingshot at lions in the zoo at night, SOMEthing other than trading!

Seykota is fond of saying that everyone gets what they want from the markets, and the best evidence of intention is what you get. A good friend of mine, “Pond-hopper George,” once told me that a rationalization is when I take a s***ty motivation for doing something, wrap a “good” motive or two around it, and eat it, pretending that a s**t sandwich doesn’t taste like s**t. I believe those three things, whole-heartedly.

The point? When someone comes to the market without a clearly-defined method, blows up from using too much leverage on a single trade, a trade which was known to be an account-threatening bet when it was made – then I believe that person didn’t want to make money, or at least, that money wasn’t their primary motivation for trading. I believe that person wanted the thrill of the game, the excitement and ego-boost of the big score, and was using trading, at least primarily and at the moment of blowup, as a venue to work out some serious emotional issues, primarily related to risk-taking.

This is by no means a phenomenon limited to retail traders or day-traders. Think about the unbridled arrogance of LTCM, Victor Niederhoffer, Brian Hunter, and others; they had their own issues, actually, probably, still have them. When trading becomes an ego play to prove how good or how smart you are, it’s not trading anymore. Combining that attitude with leverage is like taking your Vicodin with a quart of tequila. Trust me, I know.

HPT's sharing that video might help a few people who already have the right attitude about trading, but those who are in it for the thrills, or to act out some other life drama through the markets, won't learn from somebody else's pain.

Dan said...

As a new trader (6 months) I can so relate to seeing those drawdowns. Trading does a great job of bringing character flaws to the surface - and I'm not talking about the profanity. Every time I drive by a bad auto accident I drive more carefully for a while. This is no different.

reddweb said...

well said "Bill aka NO DooDahs"; Great insight, did you experience any of these(pain) before? It would be surprising to see someone gain insight intuitively(without real life experience) and still stick with it(discipline/follow it).

Bill aka NO DooDahs! said...

Trading-wise, I have had no blowups or near-blowups in three years of building account equity and trading part-time. My worst drawdowns have been in the mid-teens percentage.

I experienced my self-destructive acting out of internal drama, fears, and insecurities through events in my life that happened years before starting to trade.


That experience, and spending some time trying to help others with similar problems, is why I can see it so clearly in HPT. He's a [insert bad situation here] waiting to happen; blaming everybody else for his problems, ranting about how "if I'd only held on to the trade," claiming that everybody is calling him the "idiot of the internets" for his video, and by the way, trading compulsively 10-20 times a day before work while swinging leverage several times his account balance.

He's not dumb. He's just dysfunctional. He needs help, but won't get any until HE thinks he needs it, which is why this post is here and not on HPT's blog. I could staple this to his forehead and he wouldn't notice, until he was READY to notice it. From looking at his blog today, he ain't ready.

Rik said...

Sadly, it seems if he had not exited with the big loss, Tuesday, he would have recovered. Or, am I wrong?

Brett Steenbarger, Ph.D. said...

Thanks for the great insights on the trading crisis; they're much appreciated--