I was just warming up with my How Could I Be So Stupid? (Part 1) article. Though I showed the Grubb & Ellis loss of “only” $10,063, rest assured that there were several other loss examples I could have shown. The Grubb & Ellis loss was more of a representative of several stupid losses of capital, which then pushed my retirement date out. Don’t believe me that there were more losses than just Grubb & Ellis?
- -$12,990 in 2010 (Gulf Resources)
- -$13,699 in 2011 (BioFuel)
- -$12,972 in 2011 (New Energy)
- -$6,122 in 2012 (Dynasil)
- -$8,424 in 2015 (Horsehead Holding)
How’s that for airing some more dirty laundry (and there is more over my lifetime). I just laid down another $54,207 of losses in completely crappy companies. So let this be the day of confession, releasing the burden and shame that I’ve been carrying the past 10 years. And when you think about it, having a retirement date pushed out (though I didn’t think like that back then) is the real punishment.
Having a retirement date pushed out is the real punishment.
This next serving of humble pie is my most embarrassing and costly loss of capital related to one security. From 2009 until 2013, I was taking severe capital losses. This kept my net worth flat even though my income was rising. If it weren’t for these capital losses, my net worth would easily be at the $1M+ mark instead of $631k by the end of 2018.
It really wasn’t until 2015 that I stopped trading … my losses were seriously hurting our household financials. Any retirement plans for my wife and I were in real jeopardy. And I couldn’t risk losing more because I had one daughter in college with another right behind her. The good news is they will both have a college education and no college debt for any of us.
Direxion Daily Small Cap Bear 3X Shares (TZA) – Loss of $70,768
It’s hard to even start talking about this trading (not investing) instrument (ticker TZA). I’ve got many repressed memories, shock, and shame related to this thing. It wasn’t until now that I looked at the actual trading data to try and understand my behavior and approach. This article won’t be about my behavior or approach because it doesn’t matter now and because we should not risk our hard earned cash on this.
First, a brief understanding of TZA. The trading instrument seeks daily results of 300% of the inverse (or opposite) of the daily performance of the Russell 2000 Index. The fund provides inverse (opposite) or short leveraged exposure to the index equal to at least 80% of the fund’s net assets (plus borrowing for investment purposes).
Basically, TZA uses leverage to short the Russell 2000 Index at a power of three. For example, if the Russell 2000 goes down 1% then TZA should rise 3%. Obviously, the only reason to be trading this is because you think the Russell will go down. I don’t want to get into my wrong thought process but that’s what I thought and that’s why I traded this.
If you look at the miserable chart above, there are several reasons to ask “How could I be so stupid?” For example, why in the world did I hold onto a short-term trading instrument for 99 and 622 days? TZA isn’t built for that and you will lose money in those situations. In fact, the longer I held this the more money (percent wise) that I lost.
I look at the dates of those trade losses and I know what was happening during my life. In two cases ($46,455 & $10,081 losses), I was distracted at work and didn’t have time to trade this very dangerous security. Heck, for the 622 days I must have just given up but at least I sold it and got $6,166 back.
This type of behavior will not create long-term wealth. In fact, it is the exact opposite of my strategy today. Buy and hold strong (mostly dividend paying) companies, reinvest dividends, and buy any dips in price. If I had done this from 2009-2013 then my portfolio size would be much different than it is today.
My Real Cost Wasn’t $70,768
Would’ve, should’ve, could’ve as I look back on this loss. All I can do now is learn from it and realize what I really lost – hard earned sweat. Just the quick glance shows I lost $70,768 but it would take me 182 working days (after tax) to earn that back … that’s nearly 9 months of extra work.
But 9 months of work is just part of the story. If I had invested that $70,768 for 10 years at 8%, it would have given me $152,783. Due to my losses in TZA, I’ve got to work 394 WORKING DAYS or 1.5 extra years to make up that money. That means I’ve got to work longer before I retire. If I had invested properly, I could have retired at 60.5 years instead of 62. It’s really that simple.
Due to my losses in TZA, I’ve got to work 394 WORKING DAYS or 1.5 extra years to make up that money.
If you add up all my stupid losses, go back in tie and invest those funds in my Master Stock List, then I would likely have retired in my mid-late 50’s instead of targeting 62. Let that sink in because it’s hitting me pretty hard as I type it. That’s as real as it gets and the impact has been severe to our retirement finances.
Lessons Learned
Where do I begin because the lessons are long. But let’s keep them simple and unemotional.
- Understand what you own – TZA is not a company, it has no earnings, and few really know how it works. So why in the hell would I have traded this thing? Pure gambling at it’s worst.
- Trading is not investing – TZA is only intended to be held for very short periods of time, it’s supposed to be a short-term hedge. But I held this thing for months and just watched it melt away my money.
- Trading takes time – You have to watch your trades constantly. You can’t be a casual trader. I’d trade a stock and be up $2,000, I’d go into a 30-minute meeting at work, come out of the meeting and I’m suddenly down $2,000.
- Everyone has a system (and none of them work) – Sorry, but if you think you have a system you don’t.
- No short cuts building wealth – Investing in strong, quality companies over time is the path … trading will destroy more wealth than create.
- Preserve capital – Losing money is real and can only be made up by making more and working longer.
Are there more lessons? Yes, but the article has been difficult enough to write and I’d like it to end now. I will say though, it was good to finally collect the data and look at the mistakes – that’s how you learn and teach.
Summary
In this article, I bared my soul by showing you $125,000 of my losses. Learn from my mistakes and know that this means I’ve got to work longer before I can retire. It’s really that simple. If you take anything away from this article (other than I’m an idiot), please know that preserving capital is critical. Stock losses mean you’ve got to work longer and it can take months or years to earn that money back. It’s not worth it and it’s a losers game.
To be transparent, I’ve only shared my losses and I actually did make some positive trades too. But that’s the entire point, I was trading and not investing and these losses are real dollars regardless of my gains. I should have been investing in strong, quality stocks with a buy and hold approach. That’s what I’m doing now and I’m just grateful I’ve got a pension as a backstop and my higher income ($250,000 annually) is allowing me to catch-up on these past mistakes. I’d probably be retired or darn close to it by now if I hard done it right the first time.
Thanks for letting me unleash my pain on you and, again, learn from my mistakes.
Thanks for reading!
Mr. TLR