The Perils of Stock Trading
Hello friends, my name is Jack Raines. II will be writing on Alpha’s platform on Mondays. I also write a newsletter, Young Money, where I cover all things investing, finance, and careers. Hope you guys enjoy today’s piece!
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I lost $108,462 in a day back in August. For perspective, my salary at that time was just under $60,000. Losing double your salary on a stupid investment gamble hurts. That is enough money to buy a nice sports car. Put a fat down payment on a house. Take a trip around the world.
Believe it or not, I didn’t want to jump off a bridge. I was in Pittsburgh visiting my friend Tucker when it happened. He had a small position in the same stock. When I walked in his room, I could tell he was waiting on me to explode. Or cry. Or express some wide range of emotions. Instead, I just said, “Well that was pretty f*cking stupid of me, huh?” Then I sold the stock that tanked, went to the gym, and got on with my day.
How did I get here in the first place?
In March 2020, I turned $10k into $30k in a week and a half.
I thought I was on top of the world at 22 years old. I had bet on a market crash with SPY puts, and I was right. The problem was, I thought it would keep crashing when it didn’t. I bought more puts, and that $30k dropped to $10k again by late April as the market recovered.
Then I decided I should be more responsible with my finances. I deposited $6k in a Roth IRA for long-term investments like ETFs.
Three days later, my friend told me about DraftKings going public through a merger with a SPAC: Desert Eagle Acquisition Company (DEAC). This was the first that I had heard of “SPACs”. I didn’t buy it, because I didn’t understand how the transaction would work.
But I did notice that DEACw, or DEAC warrants, outperformed DEAC stock both before and after the merger. When the stock went from $10 to $20, the warrants rose from $2 to $10. After researching these securities, I realized that warrants offered a ridiculous amount of upside as a five-year call option with an $11.50 strike price.
SPAC shares also offered capped downside risk as investors could redeem their shares for $10 cash premerger. I smelled asymmetric risk/reward, and just like that, I was all in.
The next SPAC that hit the headlines? VTIQ and Nikola. Did Nikola seem “scammy”? Yes. But did it have hype? Also yes. So I bought $6,000 of NKLA warrants, and I sold them for an $11,000 profit.
And I parlayed those gains into all sorts of warrants. Fisker, ChargePoint, Genius Sports, ASTS, Canoo, Tattooed Chef, Sofi, Proterra. And that $6,000 turned into $400,000 in a year or so. And I was good. I mean I was really, really good.
$6,000 to $402,041. Ridiculous, life changing stuff.
I knew things were too good to be true when Lucid ran from $10 to $60 in January. I cashed out near the top, and I preserved most of my capital.
The problem was, I jumped back in way too soon. I kept trying to play the game that had made me all of that money, but the game had changed. I thought stuff would recover faster, but it didn’t. I took positions too aggressive, too fast.
The SPAC market was choppy from February to July. I would have a $100k drawdown, then crawl back to the high $300k range. And I grew frustrated, because apparently $400k in a year wasn’t good enough for a 24-year-old trading addict.
So I took an aggressive position in a former SPAC, Katapult. Katapult was a profitable buy now, pay later company growing quickly. Its valuation was cheap given its growth prospects. Compared to its competitors, Katapult was trading for pennies.
Katapult had earnings in August, and they sucked. I mean they were abysmal. Katapult also wasn’t a SPAC anymore, so there was no $10 floor to save the stock. And the stock dropped accordingly in the premarket. And I was all in on Katapult warrants.
$108,000 gone in an instant
The final result was losing about $150k from the peak in total. On one hand, I lost $150k. That sucked. But on the other hand, I turned $6k into $150k in a year. That’s still sick. I traded really well for a while, then I traded really poorly for a while. It is a glass half full / glass half empty situation.
Ironically, this loss was the best thing to ever happen to me. It gave me the chance to step back and think about what I was doing, and why.
After this loss, I finally decided to quit day trading SPACs. It’s all ETFs for me now, baby. Why? Two reasons:
If you want to be good, like really good, you have to be willing to put the hours in. If you want to outperform in the long-term, you have to research which companies you think will outperform. Does your company have solid fundamentals? Are sales growing? Is it profitable or on the path to profitability? Is the valuation too high? Does the market appreciate this sector, or will it? Does the company have a moat? What’s the bear case? What will you do if the stock drops by 30%? 50%? Will you listen to management reports? Read through 10-Qs? Analyze competitors?
It’s incredibly hard to pick winners (especially at the right time), harder to hold winners, and hardest to cut losers. You can’t half-ass this stuff, or the market will chew you up and spit you out. If you are buying stocks because “you know they will go up over time”, and you haven’t done your homework, you are going to get wrecked in the long-run. Even if you do all of the work required, you could still be wrong. Imagine putting hours upon hours into research, only to underperform because the company didn’t execute. That is a possible outcome.
When you are trading actively (day trading, swinging positions over multiple weeks, etc.) it consumes your brain. Investopedia actually has a great article on this very phenomenon.
“Trading can give you a kick and a rush, and blot out reality, just like illicit drugs. If there is an innate psychological tendency toward compulsion and addiction, the initially harmless (cheap) thrills can turn into an obsessive desire to repeat and prolong the pleasure.”
The pleasure center in your brain that triggers dopamine in response to drugs, sex, alcohol, good food, money, and gambling also lights up when you trade.
Meanwhile, a large loss can be an emotional train wreck. The pain from the losses is a magnitude stronger than the exhilaration from the wins. But it’s not just the responses to wins and losses that hurts. It’s everything in between.
When you have a lot of money in a position, especially a volatile position, it occupies your subconscious at all times. You want to check the market every fifteen minutes. It’s difficult to focus on work, hobbies, and the outside world. It’s hard to stay engaged in conversations because your mind is constantly drifting back to the market. You will find yourself slowly being consumed by these thoughts.
I thought this was just me until I mentioned it to my friend Cole, who also traded a ton. He had been having identical experiences. I imagine there are thousands of others out there in the same boat. Straight up, it’s not healthy. I took my own advice and loaded SPY, and I never looked back. I check the markets once in the morning to stay up to date, and that’s it.
Hit It Big, Then Stop
Maybe you’re like me. You managed to pull off a ridiculous profit, and you want to keep it rolling. My advice: stop while you’re on top, champ.
Here’s the thing: those multi-thousand percent returns aren’t sustainable. Whether or not you know it, you took on substantial risk to hit that home run.
Now you’re going to think you are the second coming of Warren Buffet.
You’re going to think that you’re a genius.
Those big returns give you unrealistic expectations of future returns. You’ll take an L at some point, and your first reaction will be to throw more money in to get your account back to its peak value. Then the L gets bigger. You keep digging a hole while trying to get back to the top.
If you do hit it big early, treat it like the lottery. Pull a bit out and treat yourself, and let the rest compound. If you want to satisfy that itch, trade with a small portion of the account. Don’t risk blowing up everything by chasing another number.
That Goal Post Doesn’t Stop Moving
I wanted to make $100k. Then I wanted to make $300k. Then I wanted to make a million.
See, you’ll set these targets, but once you blow through them the goalpost moves. It’s never going to stop moving unless you force it to stop moving. There is so much more to life than trading for trading’s sake, and you can waste a ton of time getting caught in this cycle if you aren’t careful. I could have kept trading, and maybe I would have hit $500k. Or maybe I would have gone to $0. I don’t know. Here’s what I do know. Hopping out of that rat race was the best decision I’ve made in a long time. Thank God I lost $100k back in August.
The Biggest Benefit of Not Trading
Since I put all of my money in an index fund, I have felt like I have 10x more time in the day. I can write more, and I write better. I have more engaging conversations with my friends and family. I feel more present wherever I am, and my day-to-day life has certainly been more fulfilling. When I was trading every day, my brain was a cluttered mess.
A few final thoughts before we I close out:
Trading is addicting, especially if you have experienced big wins
Outsized returns aren’t sustainable
The time commitment needed to consistently outperform isn’t for most people
The best decision you can make if you do hit is big is cashing out at the top
That $$ target won’t stop moving unless you make it
My life has been 10x better since I hopped out of the market.
Addiction comes in many forms, but we happen to call this one investing. Am I glad I made the money that I did? Certainly. That being said, I’m never again going to let myself be controlled by an activity. If this article hits home to you, reach out. I’d love to chat.
If you liked this piece, check out my other work at Young Money!