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Thursday 4 June 2020

My Worst Financial Mistake

It's important to stay warm
during winter. 
Back in 2010 (wow can you believe the world cup we hosted was a decade ago!) I had just started a new job. Financially speaking it was a good time for me, this new higher salary was on top of my already low cost base – I was unmarried, childless, driving a paid off car, and renting. 

And so, despite beer being one of my biggest expenses, I was saving and investing quite a bit and this had allowed me to build up a decently sized investment portfolio.

The job I had started was at the company's new Gauteng office, and I was the only employee at that stage. This meant that my first month there was pretty slow and it gave me a fair amount of time to browse the internet. 

And it was during one of these internet browsing sessions that I saw it...

An ad... 

Trade CFDs, learn how here” 

I clicked it...

Being someone who has always been curious about finance and investing, I was keen to check out what this CFD thing was all about.

It seemed pretty cool – trading CFDs (contracts for difference) allowed you to make money when markets both rose (by borrowing money to buy shares to the value of much more than your account balance, a.k.a. going long) or fell (by borrowing shares to the value of more than your account balance, selling them to the market, then buying them back at a hopefully lower price and pocketing the difference, a.k.a. going short.)

I thought the concept was great!

The next question was - well how exactly do I know when to go long and when to go short? 

So I did some reading about that, and came across all sorts of trading strategies which included special indicators and averages. I quite liked the one strategy which used a short term average crossing a long term average to indicate when to buy and sell.

I checked out some charts and kinda visually applied the strategy to them. And it seemed to work!

I then ran some projections about the kind of returns I could get using CFD’s and the results blew me away!

I was sold!

After no backtesting, no thought to position sizing, and no stop loss plan, I decided to move half of the value of my too slow, too steady, well diversified, pretty solid portfolio into this new sleek, sexy, borrow money to get super returns CFD platform. 

I mean, what could go wrong?

The amount I transferred was in the region of R60,000. Remember that this was 2010 money, so if we inflation adjust that at 6%, we get to the equivalent of around R107,000 in today's money. (In truth it is actually a lot more than that, because if I had left the money invested it would have grown considerably more than inflation - more on that a little later).

Right after the had money landed in the account, I entered my first trade with no proper plan, no risk management, no idea how much could be lost and to be honest pretty much no idea what I was doing. I exited that first trade at around a R5k loss. Surprisingly, this loss didn’t phase me too much and I was confident I could make it back.

I entered the next trade. And....

DISASTER struck! 

I made money!!! 

Quite a lot of money at that – R18,000 to be exact! I was up 21.67% in only a couple of days.

Now you may be wondering why I say this was a disaster - let me explain.

That profit gave me an incredible sense of belief that this could actually work. There was some seriously good money to be made right? I suddenly had visions of quitting my job at 30 to travel the world. And this is what turned out to be my ultimate undoing.

The next trade I lost (I think it was 10k) and then I don’t recall much about the individual trades after that. But my account balance dwindled. R50k…R40k…R30k. And this was the problem that the first big win caused – I was convinced the next huge pay off was just around the corner and it would shoot me back into the green. 

If I didn't get that initial big win, I probably would have pulled the plug on this account and salvaged at least some of my money.

But no, the belief of easy profits meant that I continued trading and drove my balance pretty much all the way down to 0. 

R60,000 -  POOF!

But the story doesn’t end there, and believe it or not, I am actually glad I lost that money.

A few weeks later, I got an email from the CFD provider inviting me to an evening to celebrate their one year anniversary of operations in South Africa. I made sure I RSVP’ed yes and I remember asking if I could bring a partner – I wanted my money’s worth! 

I jokingly told my then girlfriend, now wife, that she must enjoy the evening and eat well – because this was the most expensive date I would ever take her on! (To this day, my wife and I still occasionally joke about our R60,000 evening of finger food.)

And as much as deciding to trade CFDs turned out to be my biggest financial mistake I have ever made, this event hosted by the CFD provider turned out to be one of the biggest financial blessings I ever received. You see at that event, there were a number of guest speakers, and one of them was a certain Mr. Simon Brown, of Just One Lap.

His talk was about trading, and about a particular strategy which he liked. He also mentioned that he ran a website – www.justonelap.com. The next day I went and checked out his website and scratched around some of the trading stuff – the stuff I wish I knew before I took the plunge.

But while I was on the site, I also noticed a whole lot of information on how to invest for the long term – and this was the part that proved invaluable in setting me on the straight and narrow. My trading days are now long over, but I still apply many of the lessons I found on the site to this day. 

If I am totally honest, it took me a long time to forgive myself for shredding R60k of my hard earned money. I haven’t run the numbers to work out the actual cost of what that R60k would actually be worth today  - I am too scared to! (Keeping in mind that the other R60k which I didn’t burn continued growing in my investment account and was ultimately used as a deposit for our first apartment - I shudder to think about the amount of interest we would have saved if that deposit ended up being double what we had actually put down… )

But I think there is a lot to learn from this. 

We all make mistakes, but I think that it is important that we use them as an opportunity to be and do better. I now consider that lost R60k to be school fees, and appreciate that (in a totally round about way) it lead to me learning about low cost, long term, consistent investing – and that will score me a lot more than R60k in the long run (if it hasn't already!) 

And just to wrap this all up, I thought I would share some of the other key lessons I took out of this:
  • There is no such thing as quick and easy money without an IMMENSE amount of risk. Those who get it right (Crypto, Forex, etc.) are more likely lucky than smart or skilled.
  • If you want to try something slick, new, and different start with a small amount of money that you are comfortable losing – don’t throw half a portfolio at it!
  • Proper investing is slow and boring, those that accept this and wait it out are the ones who are well rewarded by it.
  • Don’t let the allure of riches cloud your judgement. Make sure you know what you are getting into, have a proper plan and fully understand all the risks involved.
And finally, if any of you would like to share a financial faux pas, please drop it in the comments below - you never know who you could inadvertently be helping!

Till next time, Stay Stealthy!
 - ~ - ~

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