Working Together
Saturday, March 30th, 2002On the Art of Losing Money
Daan Joubert
Making money on the Stock Exchange is easy. All one has to do is wait for the start of a long bull market, invest your money and wait until the top is reached. Then sell and bank the profit until the beginning of the next bull market. Actually very simple.
Of course, some people think making money is hard work. They are always reading the financial pages, subscribe to letters on stock selection, viewing the financial channels and spend hours in front of computers massaging the prices of a host of stocks in every which way, using the charts to pick up the next Intel or Cisco or Microsoft early in its career.
What the people do not realise is that there was only one Microsoft, or Cisco, but there are many more Amazon´s and eBay´s and Pets.com´s (if one got in early enough!!) and Wal-Mart´s. One should simply spread one´s money around across enough stocks and sectors – preferably disregarding Transports, Utilities and the Dow giants and, of course, gold, although that might be changing. The return over time will balance out between the good and the very good performers and the gains will pour into the bank.
But only during primary bull markets, of course.
However, if making money is easy, losing money is an art. Many people daub paint at canvas and think themselves artists, but the work of the true artist stands out from the rest, easy to recognise as superior talent. The same is true of losing money on stocks. There are the amateurs and then there are the masters.
The art of losing money on stocks
As we all know, to be good at art is mostly in your genes. Learning to drive is a skill, and most people can master it, more or less, given sufficient interest and practice. And of course , survival. On the other hand, driving poorly is an art, and as for any art, one must have the right genes, too. A skill one can learn, given enough time and practice; to be good at an art is mostly hereditary.
The inbred, and subsequently well practiced, ability to select a loser is the most important element in the art of losing money on stocks. It does not come easy. In a bull market very few stocks are losers and it takes way above average insight and understanding – some would say clairvoyance – to recognise a loser before it really starts to lose money. Of course, it is always easy to spot the loser once it had lost 20% or 30%. Or 70%.
[As an aside, market analysts must be among those with the right genes. Their ability to spot a loser and recommend its purchase to their readers is often of a very high standard. Not for them the warning to avoid these stocks - no; they are nothing if not consistent in their recommendations to purchase these stocks even as the price falls through the 50% level from the high, seemingly intent to cover the remaining 50% in record time. People who have problems losing money on their own initiative could do worse than follow the market analysts.]
In a bear market most investors lose money – then it takes the true artist at losing to pick the real winners, those stocks that collapse by 40% or 50% or, glory be, the ones that straight line it down for 80% or 90% and wipe out almost the whole investment in one go. And when one succeeds in picking a future ‘ten-center´ while it is still trading at $10 or perhaps $25, what a pleasure!!!
Once the purchase of the loser has been made, the process of losing money becomes almost automatic. Some faint hearted people do not know or understand the joy and tense expectation that is experienced when a price goes down . . down . . down . . – the missed heartbeats when it looks as if it might all be in vain, when the price turns around and starts improving rapidly, then the rapturous feeling when the price suddenly reverses and plunges to new lows. These dum-dums they chicken out far too early and close out their positions, but they do not know what they are missing. Dilettantes, not true artists.
Oh, you say because most people lose money in a bear market it is not an art?
Yes, losing money is easy, once a bear market starts. What makes the difference – what distinguished the true artist from the plebs – is style. Picking the real losers from among the also rans, as explained above. That is why losing money is an art – the subject of this treatise. Everyone can use brute force and blindly stay long beyond the end of the bull market and well into the next bear market. That is common place; even people who do not understand the difference between a stock and a bond, or between the NYSE and Comex, nor know a put from a call if one should happen to come for a visit, even they find it easy to overstay their welcome in a bull market and then lose money in a bear market.
So just losing money in a bear market doesn´t count. It is the way it is done, with panache and finesse, and – most importantly – the flair to select the real losers that count.
Discipline, discipline, discipline!
As mentioned, the first step in losing money is to identify a good loser (which of course becomes a winner when it loses enough money!).
Once this important hurdle has been crossed, the key to the quality of the artistry on display can be found in the size of the investment. It is easy to recognise people who will never amount to much in the select world of losing artists. They ponder long and hard before staking only a fraction of their wealth on what is clearly going to be a real loser.
The Picasso´s and the Rembrandt´s of the stock market plunge their whole stake into the market on the basis of “winner loses (nearly) all” – and what makes it all so exciting and so thrilling is that sudden and steep bear market rallies may trip up the unwary loser and may even saddle him with a profit!
“Faint heart never won fair lady”, is often heard in affairs of the marriage route. The same is true of the joys and pleasures of losing in the stock market. Never a faint heart be – be a devil and take the plunge!
Once the chips are down and the game begins – and the losses start to mount! – good care must be taken not to succumb to the very strong temptations that will soon be tugging at the conscience. This is where the three main requirements for success come in: they are discipline, discipline and discipline.
Stick to the rules that are given at the end of the article. Do not deviate.
The real, true artist must be able to distance himself – this chauvinistic pronoun is used intentionally; men are much better than the opposite sex at the fine art of losing money – from the distractions that try to pull him away from his magnum opus.
These distractions can be minor, such as the fading memory of the Ferrari that he has been ogling for three years now, long hoping that he could lay his hands on the extra $50 000 he needed to make the top of the line his own. Or perhaps the skiing holiday in St Moritz that he may just as well cancel now that it is turning into spring. It gets much more tough to stick to the discipline, though, when one has to find an excuse not to take the family to the local five star restaurants, but has to sidestep the issue with, “The McDonalds advertisements have become so cute now, perhaps we should support them, too, occasionally.”
It gets downright dangerous for the loser´s mental health when he sits and watches his money disappear while his wife is trying to arrange a loan from Father-in-law so that the mortgage installment will actually get paid at the end of this month now that the warning letters for the three missed installments have arrived. If the banks only knew how distracting those letters are to one who is intent on setting a record loss for the quarter, they would reconsider the practice.
While it is undoubtedly the weakling´s way out, perhaps one should fund a small trust for the wife and kids, even sticking the house into the trust as well – just to get them and their nagging off one´s back to ensure peace and quiet while one goes the whole hog with the rest of the household wealth.
If the expert artist can deal successfully with these extraneous events and other intrusions that threaten to shatter his concentration, the point will eventually be reached when the second most important decision has to be made – only second in importance to the one that selected the loser in the first place.
When to sell?
Sell too early and then one has to watch in disbelief as the price keeps on falling. Sell too late and then the disappointment of missing the true bottom will linger for a long time.
Heretics who believe in that abomination known as a “stop loss” just do not know the pure joy one experiences from that most difficult feat – selling right at the bottom. That is the true pinnacle! (Not even the rare occasion when one manages to buy right at the top comes near, although that achievement too is one to tell envious cronies over and over at the local pub. A spirited rendition of how it felt when the stock was delisted with no remaining value is sure to have one of the listeners order another round.)
Ah! How rare is that most exquisite of triumphs, when one attains the “Perfect Double” – buying right at the top of a bull trend in the chosen stock and then managing to sell right at the bottom of its bear trend. Magnificent! Particularly if the selection had been a good one that lost more than 80% on the way down. Or even a heady 90%!
That is what dreams are made of! Despite its lure, and the great effort all losers expend in pursuit of this most glorious achievement, very, very few taste this kind of success even once in a lifetime of trading.
Of course, the fact that the trading career of most losers is of limited duration may have something to do with it.
Throughout this, there is one cardinal rule that MUST be obeyed at all times!! This is the principle of STOP PROFIT! If one buys a stock and the price insists on going higher, it is imperative to sell very soon, immediately the rising trend is confirmed. One can always use the excuse of, “It is wise to bank a profit before it turns into a loss.”, or “Nobody went broke taking a profit”, to bluff those acquaintances who have the perverse desire to make money on the stock exchange. For one´s colleagues in the losing stakes, a better excuse will be that on occasion one has to accept a profit, building a stake while waiting for the right opportunity to pick a loser.
Just like the pigments and brushes painters must have if they are to practice their art, the loser has to have money to begin with. Some inherit it and others have to save for a long time before they have a stake to lose. Then, at times one has to pocket one´s pride and accept it from wherever it comes – even from a profit.
Provided it is not too large and does not happen too often.
Conclusion
For all aspiring losers out there, novices as well as people who have been contemplating the market and wondering whether they should take the plunge – with the emphasis on the term “plunge!” – here are some hints:
During bull markets the real pro keeps his money in the bank. It is not worth the effort and risk to try and pick a loser when almost all stocks are hitting new highs every week. However, the novice may find that his bank roll is a little too thin to become a star at losing. In that case it is acceptable that the novice climbs in during the bull market to make as much money as possible. Provided he does not brag too often about it – remember, during a bull market it does not take any skill to make a profit. The whole herd is doing so.
When the bear market starts – that is the time to aim for. Make sure to speak to your bank manager about an overdraft and check what size mortgage you can get on the house.
Select a loser. Some experts say that the most likely losers are those stocks who have run the most during the bull market – particularly those who have kept on hitting new highs while the rest of the market was already under some pressure. Others say, “No. Go for the ones that have already been beaten down during the tail end of the bull market – now known as ‘value stocks´. They are the current dogs and when the bear market begins they will be beaten down even more.”
Do not spread your cash over too many stocks. Trust your judgment and stake it all on the one you believe will be the real loser of the bunch. Now don´t be chicken and go for a half hearted attempt!! Take the plunge! Jump in right at the deep end!
Seal yourself off from all distractions that might cause you to slip up and sell before the bottom is reached. However, if you do fail, bear up. There will always be another bear market a few years from now.
Remember, if your purchase was poorly timed and the price persists in increasing along with the rest if the bear market rally, there is an easy solution – the Stop Profit.
The sign of the master at losing is the “Average Down”. When it is evident that a true loser has been selected, purchase some more as the price plummets. This is the time when a mortgage on the house can really come in handy – why look around for other stocks to shift into when you have been so spot on in your selection. Double up and make sure you lose the lot!
Lastly, and the very most important – Close your ears to the heresy of a “Stop Loss”. Many a true losing artist has fallen by the wayside, never to realise the full potential of his natural talent, simply because some misguided soul has hypnotised him and enticed him into that abominable practice.
The above is not written in jest, nor in ignorance.
It is the result of a lifetime of observation and personal experience that speaks.
Losers, listen. Success winks. Simply follow the rules. Enjoy!
© 2000-2002 Daan Joubert
Daan Joubert is an independent market analyst. Trained originally as a physicist, he did research on cosmic radiation in Antarctica where he was the leader of the South Afrikan SANAE team. He has also worked as a systems software engineer, in management of information systems – MIS, and for the stockbroking firm of Barnard Jacobs and Mellet. He currently makes his home in South Afrika.
