Trading Realities: This Ain't No Game

04/09/10 08:56:43 AM

by Donald W. Pendergast, Jr.

The failure rate for inexperienced traders is thought to be greater than 90%. Here's how to sidestep some of the common mistakes that can devastate both a trader's confidence and account equity.

Security: Silver
Position: N/A

My very first trade was made in mid-August 1979. Having just returned home after a 4,000-plus mile driving vacation all over the western US and Canada, I was ready to act on Howard Ruff's advice (from his 1978 best-selling book How To Prosper During The Coming Bad Years) to buy as much silver as possible. I phoned a metals dealer, Investment Rarities in Minneapolis, MN, and bought a half-bag of pre-1965 junk silver coins and had them shipped to my parents' home. I'd parted with most of my accumulated $4,000 in life savings (not bad for a 19-year-old) to swing the purchase, and then needed a few more bucks to rent a large safe-deposit box to store the coins. As it turned out, I'd made a great investment, but my major mistake was to neglect to include a predetermined "get-out" price, just in case the silver market tanked. I was long at about $9.20 an ounce and was so firmly convinced by Ruff's well-reasoned plea for investors to buy and hold silver that I could only envision higher prices in store for my bag of coins and not the possibility for a trading/investing calamity.

Of course, that was only my first mistake; the next one was failing to determine how and when to take any profits that might materialize. Would I sell at $20? How about $25, or even $30? And what if I did sell out at $20, only to see the metal top $50, as Ruff suggested? Like any other teenager, I just did what came naturally -- I closed my eyes and hoped for the best.

Doing so made for a very nervous kid. I would rush out to buy The Wall Street Journal every morning at the local magazine rack, anxiously tearing through the pages to see where the silver market closed the day before. The price shot up a few weeks after I bought and then retraced, causing me to become much more protective of my investment. Realizing that silver could fall in price, I decided to sell on a possible runup toward $15, so certain was I that it was going to happen.

Mercifully, the market cooperated, and I was able to sell out in the latter part of September 1979 at a price of $14.50 an ounce. I netted about $1,800 in profits during the course of the six-week trade and felt like a million!

As wonderful as that windfall gain was (and remember, $1,800 in 1979 dollars is approximately $7,500 in today's money), I was now faced with my next issue -- what to do with the profits? Should I take another shot at the silver or even gold market? Should I put the money in a bank CD paying more than 9% (by 1981 you could get more than 14% on short-term Treasury bills, believe it or not) or just splurge? A rational solution would have been to put half away in the bank at 9%, a quarter of it for future investment opportunities, and the final quarter for my car. With my car's appetite for high-octane leaded gas, I probably should have invested in a gas station or two.

Ultimately, I spent all of the profits and then more on a new 1980 Turbo Mustang and was laid off from my job at a large computer manufacturing facility about three months later -- talk about bad timing! After several months of unemployment that lasted well into 1981, I saw all vestiges of my windfall profits vanish, swept away with the springtime winds. I ended up selling my brand-new Mustang. It was the tail end of a very nasty series of recessions that rocked the US from 1974 to 1982 and I was caught right in the middle of it. It took several years before I got back on my financial feet again. I was more cautious in future investments but still had my share of thrilling victories and agonizing defeats, all because of a lack of a focused, disciplined trading/investing plan.

So take it from someone who's been there and done that and lived to tell about it:

1. Determine beforehand how much you are willing to allocate to any trade or investment. Never play with money you'll need to pay rent, buy food, or cover your college tuition with, and always look at every potential trade/investment from a ''how much can I lose'' viewpoint rather than from a ''boy, am I gonna make a bundle on this one'' mindset.

2. Have a predetermined strategy that will automatically take you out of the trade/investment, either at a loss or a gain. Hint: don't get too greedy.

3. Create a logical manner to allocate the profits that you may generate; you may decide to reinvest half the gains and safely park the rest in an insured savings or T-bill account. Take into consideration your current and future financial situation and always err on the side of caution, as it's far easier to deal with a modestly sized trade that goes bad if you have plenty in the bank, whereas if you've sunk your entire nest egg into one trade/investment and have it go south, you could be in for a world of hurt for years to come -- and it won't be fun, I can assure you of that.

Let me leave you with this bit of wisdom, author unknown:

"A smart man learns from his mistakes; a wise man learns from the mistakes of others."

So learn to not only be smart, but also wise.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title:	Writer, market consultant
Company:	Linear Trading Systems LLC
	Jacksonville, FL 32217
Phone # for sales:	904-239-9564
E-mail address:	lineartradingsys@gmail.com
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Trading Realities: This Ain't No Game

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