Conversation with a failed trader

Today I met a chap who is a failed trader. This was a rare opportunity. I had known him for about 3 months just from the odd conversation here and there. I knew that he had an interest in ‘stock markets’ and had some knowledge about CFDs. But it was strange how we ended up talking about his deeper interests in a kitchen!

The important part of this conversation was that he regularly bought shares. He said that he never paid much attention to price level when buying. He now invests in a share-dealing ISA, where he could pick shares. He said that he doesn’t sell his shares. Strange. He did not regularly keep an eye on the price of his portfolio. Recently though he saw that the stock markets were heading south, but still hadn’t sold any. I am bewildered but not surprised.

Then shared with me that a couple years ago he tried CFDs and had a bad experience. Whilst shaving he heard some alert, interrupted his shaving and saw that he had just lost £14,000 on a couple positions he placed minutes earlier. That was it for him. He never returned to that sort trading – which he had tried for only a few months. So now he’s happy with his regular dividends and “isn’t bothered” by stock market performance.

So I reflected on this. I just couldn’t understand why anybody would not attempt to find a low point in the travel of a stock, to get in. I would have thought about that even before I became a trader. It’s fine though, cuz people are free to do whatever they want with their money. It’s not my business to advise this chap. He knew of my active interests, so could have asked for any pearls of wisdom I had discovered. But he wasn’t interested.

In essence he is typical of many people who throw their money into ‘investments‘ and just hope that it makes some money in 10 – 20 years. The loss of £14,000 on CFDs was crazy, for sure. Like ‘What were you doing?!!‘  – was my thought, which I did not say aloud. I didn’t ask. So now he sees a share-dealing ISA as safer because he gets the tax-free dividends and is protected from capital gains taxes (in the UK). But hang on, what if the stock markets crash? I don’t think he’s thought that far – he’s not gonna have anything that might be a capital gain. He could go bust – no?

So what’s the point of this post? Right – it doesn’t matter what you’re trading or investing in, the following are the utmost basics:

1. Entering any market at an obvious peak is risky but sometimes justifiable.
2. Entering at a potential turning point, at an apparent correction or bottom is more desirable. Simple but not easy to find.
3. Not watching and throwing money in is plain stupid.
4. Staying in forever, just to collect dividends is somewhat silly. How? Because the dividends ain’t gonna compensate for big losses in equity on share price (or instrument price).