Friday, August 6, 2010
On Greed: Part I
"... greed, for lack of a better word, is good." - Gordon Gekko
I decided to learn about investing when I was in my second year of law school. I read everything I could get my hands on that could teach me anything about market fundamentals, company evaluation, etc. As of today I've been trading stocks for about eighteen years, options on equities for about thirteen and currencies for roughly two. My brief experience has taught me that greed can be very good, but it can also break you in half, make you despondent and even make you doubt whether you have what it takes to be a successful investor. Greed by itself, for lack of a better qualifier, is not good. Managed or rational greed, however, is good. I'll try to explain myself.
This true story dates back the to the year when the tech bubble finally burst. I was a novice investor - still am - filled with awe and jealousy of Warren Buffet's 22% average profit per year. Imagine my surprise when I started making an average of 16% profit per month trading option spreads on tech stocks. Greed drove me onwards and I started buying calls on everyone's favorite stock at the time: Yahoo. Calls were tripling almost monthly and before long I had turned $5,000 into a little bit over $300,000 thanks to the magic of margin and compounding.
To reach this performance in a span of roughly six months I started doing everything I learned you should never do. I traded spreads based mostly on the Black-Scholes mathematical model - this is good. However, as I got greedier I kept lowering my probability of success and increasing my risk in the expectation of a higher profit, and it was working. Whenever a trade went against me and I got the assignment on the put contracts I had sold, instead of selling the stock and limiting my loss, I would hold the stock for the three days I had to settle the transaction. Because we were in a bubble market about to burst, the stock would go back up, and I would make a double profit. I would profit the premium on the put contracts sold plus the profit on the stock assigned. Life was sweet and I knew more than anyone. I was God's gift to the investment world. I must be! Imagine, less than five years trading experience and making these incredible profits... Had I any clue to what I was doing, I would have realized that this erratic market behavior was the clearest signal that the economy was due for a correction, at the least, and quite possibly a meltdown.
The economy melted down...
I lost $300,000 in two days...
I am not kidding when I say that I spent almost two weeks in shock.
I was not yet thirty years old and had over $300,000 sitting in an account. Less than a week before the meltdown I was considering withdrawing all that money and placing it in bonds. Yet, unfettered greed drove me onwards... and downwards. Every so often I wonder where I'd be now if I had acted on my instincts and withdrawn that money. How much easier, more filled with conveniences, would my life be right now... or the life of the people I care for, if not mine. I will never be able to stop my pondering, and I will never be able to know the answer.
Greed, for lack of a better word, will tear you to pieces.
To be continued.