There is a good post on Abnormal Returns, Rapidly learning the lessons of risk and return, on bear markets as learning opportunities. The subject of learning opportunities got me thinking about all the interviews with traders I’ve read over the years. A theme with many is the often disastrous consequences of starting out early in your trading career with a string of winners. Beginning with a series of winning trades makes it all too easy to conclude you’re a born trading genius because it’s so clearly easy for you. Naturally, rationality then demands you lever up and start making trading history.
The inevitable soon happens and your account is blown up, and maybe even your house and marriage are gone. But if your initial success was long and large enough even that might not stop you. Armed with a Teflon-coated brain from your early success, new knowledge is prevented from intruding on your fantasy and in short order only a few minor tweaks are deemed sufficient to guarantee success. Then the second blow up happens.
I long ago concluded the absolute worst thing that can happen to a trader starting out is an unbroken string of success. In that regard I was very lucky. The first mutual fund I ever bought ended up a $5000 loss. The first individual stock trade I made was a loser. The second futures trade was a loser. Seven of the first eight options trades I ever made were losers. In fact as I see it now the single best trade I ever made was a loss. The largest loss I’ve ever had in fact.
It happened not long after I started trading stock index futures, in the good old days before pint-sized e-mini contracts. Though I would have been horrified to think so, I was executing my version of the forex trading ads, “When properly positioned, $1.57 can become $27,000,000,000 – in two weeks!” For reasons which now elude me I decided to make a big increase from my usual position size, to roughly $2 million in S&P contracts – on a very modest account…on a Fed day. Of course the market immediately went against me, blew right past my mental stop, and then briefly paused at an inflection point. I felt 90% sure it would turn around and blast off, but then I thought of that 10% chance it could go the other way. The losses would be huge and very hard to come back from, both financially and mentally. After 3 seconds I got on the phone and pulled the plug – right at the low of the day. I lost 20% of my account in 10 minutes, but strangely enough I felt pretty good about it. Despite being blinded by greed and my near certainty it would end up a winning trade, I had done the most important thing: I prevented disaster.
Many are probably thinking how horrible it was that I missed out on such a great trade. If only I had stuck with it! But if I had stayed in that trade I shudder to think how things would have turned out later. That one trade would have been monstrously profitable on my small account, but I also would have been richly rewarded for doing nearly everything wrong . Being over-leveraged, having a hazy trading business plan, not having stop orders in place, ignoring a high risk situation, and best of all really having no f-ing clue what I was doing. At some not too distant point in the future there would have been a blow-up for the ages patiently waiting for me to stumble through the door. Because of that painful loss I was spared that fate, so to me it remains my best trade ever.
The next time you take a loss thank your lucky stars it happened. Celebrate it. You did what you needed to do. Smile, secure in the knowledge that you have been spared the curse of the Teflon brain and been given the chance to learn something very valuable before it’s too late. Over time the returns could well be enormous.
 Insert unflattering comparison to Wall St here.