Bumpy ride of stock trading
Late last year I decided to get more active in the trading world and find out what it is all about. Up to that point I barely knew anything about the stocks and all the investing was left to 401k plans and Betterment automation. The curiosity and a commission free trading provided by Robinhood got the best of me eventually: I decided to put some play money in. And the whole new world opened up. Before continuing further, I still think that passive investing through 401k and institutions such as Betterment is the way to go. But if you have an itch to scratch and curious how the markets work, it can be a ton of fun.
Before Stock Trading
Partially what led me to the trading was me dabbling in sports betting the year prior. I spent a full NFL and NBA season making bets and had a successful run with one and not so good run with the other. I learned a ton about probability, built numerous machine models, and just in general was very entertained. But at the end, if the goal is to make extra income, you quickly learn that sports betting is extremely rigged against the bettor by the house. The chances of you beating the house are slim, your hope is to beat the crowd but opportunities for good odds are scarce. At the end, it was not worth the effort and time investment needed to stay profitable. Once the initial excitement wore off and learning benefits of building ML models diminished — it was time to move on.
Enter stock trading
With my limited experience so far, in some ways it feels a lot like sports betting but with thousands of games going on every day instead of select few. There does not seem to be a single party setting the betting lines and instead it’s real life events combined with company performances combined with huge investors and crowds driving the price up and down and you can hop along for the ride.
You come into this field thinking that company’s profile and financial statements are accurate and highly correlated to the stock price. In the long run, perhaps it is, in the short run: it’s all over the map! A random company with no earnings and no active customers can be found trading for a much higher price than an established corporation that’s a money making machine.
It’s a dangerous game to play. The simplest heuristic I can offer if you are curious to start yourself: be prepared to lose it all. Luck has a tremendous influence. Life is random. Order is lacking.
Example of some of the craziness
Let’s take a look at one of the companies that is in the news often lately: Carnival Cruise Lines (CCL).
In December of 2019, if you were reading about CCL, it was a darling stock pick that has done nothing but rise. Some of the sampling from around the web around that time: upbeat analysts, jumping stock price, and investigation into reasons for the rise.
Let’s say you decided to enter the market that December, CCL at $50! Nothing but upside in the news and analyst discussions. Let’s say you pick up 100 shares, you spent $5,000.
Fast forward to today, just three months later: coronavirus enters. The bad news keep on rolling, now the media has done a complete 180, spitting negative articles out at a fast pace, making sure to use the most fear inducing imagery possible. Are you going to have enough courage to hold the stock when it’s now trading at $23 (morning of 03/09/2020)? Your $5,000 is now $2,300. In this moment, it’s a whirlpool tumbling down around you and the temptation will be great to get out and sell at a loss. And just like that you are +50% down. Your money halved. These are not made up numbers, that’s what is happening right now.
That’s the short term stock trading for you, if you actually get tempted and sell. Random, “unusual” events are actually the norm and trying to time it all is foolish. It’s not going to happen.
Bumpiness of it all
In my short time of active investing, I was up 13%, dropped to -30%, rose to 16% gain, and now down -17%. Bump bump bump bump. But those percentages don’t really matter unless you actually sell. Your position might be down one day and up the next, if you have conviction in your position, riding the waves out is the best course of action.
When I read investment books, two common themes stand out: 1) the less moves you make the better off you are and 2) managing emotions is everything. I never truly understood that advice until getting into the trenches. Managing the emotions and having zero expectations short term is the key in this game. Pick a strategy, do your homework, follow the strategy, evaluate the results. If it’s working, stick with it, if not, try to understand why not while keeping in mind: short term drops and rises is a normal occurrence. Don’t panic and be prepared. And hope you have luck on your side.
