My worst financial mistake

‘If I’m honest, it took me a long time to forgive myself for shredding R60 000 of my hard earned money.’
Stealthy Wealth emphasises that there's no such thing as quick and easy money - not without immense risk. Image: Shutterstock

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 still single, 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 saying ‘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 – CFDs (contracts for difference) allows you to make money when markets both rise (by borrowing money to buy shares to the value of much more than your account balance, a.k.a. going long) or fall (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 pretty cool.

The next question was how exactly do you 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 CFDs 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 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 R5 000 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 R10 000) and then I don’t recall much about the individual trades after that. But my account balance dwindled. R50 000…R40 000…R30 000. 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 RSVPd 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 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 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 R60 000 of my hard earned money. I haven’t run the numbers to work out the actual cost of what that R60 000 would be worth today  – I am too scared to. (Keeping in mind that the other R60 000 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 R60 000 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 R60 000 in the long run (if it hasn’t already.)

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.

This article was first published on Stealthy Wealthy here, and republished with permission.

*Simon Brown now hosts MoneywebNow – our business news livestream and podcast, weekdays from 6:30 – 6:50am, here.

Get access to Moneyweb's financial intelligence and support quality journalism for only
R63/month or R630/year.
Sign up here, cancel at any time.

COMMENTS   25

Sort by:
  • Oldest first
  • Newest first
  • Top voted

You must be signed in to comment.

SIGN IN SIGN UP

Financial Fitness would have been a more prudent path.

Or any of many similar educational providers.

I bought shares in a beach cottage 10 years ago because I thought I was going to get a contract. I never got the contract and battled like crazy to keep paying for the cottage shares.

I have never bought anything in advance again. Now I wait for the money to be in my account before I spend any of it.

This is an excellent piece of journalism. It must have been very painful for the author to confront this extremely painful reality. This is the daily life of the trader. Traders are always regretful. They regret the fact that they took on too large a position when the position is in the red, and they regret taking on such a small position when the position shows a profit. They regret putting the stop-loss too close when they get stopped out too soon, and they regret putting the stop-loss too wide when they suffer a larger loss. Regret is the constant companion of the novice trader.

The professional trader, about 1% of all traders, operates from a carefree state of mind. He does not try to predict what is going to happen next. He does not expect to have certainty about the market. He embraces the fact that anything can happen. He simply executes his edge. His edge provides him with a greater probability that the market will move in his favour. Trading is a probabilities game, not a prediction game. Some of the best market analysts lose their money because of faulty position sizing.

Trading is gambling, but if you are the house, then gambling can be very profitable. Your edge puts the odds in your favour and position sizing must keep you in the game for your edge to generate profits.

Novices seek certainty in the market while professionals look to find certainty in their system, their edge, position sizing and maximum gearing.

Ed Seykota said that everyone gets what they want from the market. Those who want excitement, get excited. Those who want to make money, make money.

The isn’t much of a difference between an investor and a speculator or trader when they do not make use of gearing. It is gearing that increases the risk of a trader beyond that of an investor. Investors wait patiently for compound growth to kick in. Inflation and economic growth lead to compound growth, which, according to Einstein, is the 8th wonder of the world. The amount of compound growth depends on time in the market. The longer the investment horizon, the lower the risk and the higher the profitability. Therefore, time is the ultimate fund manager.

When the trader takes on gearing, he must be right at the right time, or the margin call will take all his cash before the market turns in his favour. He must be right at the right time. He must be able to time the market. That means he does not have time on his side, he is short of time. That implies that traders are “short” the best fund manager. Traders are shorting the best fund manager in proportion to the amount of gearing they take on. Time is the most valuable commodity. You will realise this when the margin call comes. This explains why 85% of traders lose their capital within the first year of trading. They are right at the wrong time. They bet against the most precious commodity.

The trader who has used gearing for more than 5 years, and still has money left in his trading account, is among the very few successful traders on earth. Whether it is the buy-to-let property market, a new business venture or trading, gearing is the killer.

Sensei, I love reading your comments, you are wise indeed. (Yes, leverage is a killer)

So, I have a question that I hope you can comment on. With all the debt being generated since CV I expect that the rand will pay the price in accelerated depreciation (yes, I realise that it will continue to tank anyway) so I am puzzled that I have yet to come across a comment anywhere that confirms my expectation.

While I am at it I might as well ask where you think our worldwide financial system is headed when it is operating like a drug addict. Debt upon more debt plus growing interest with no way of ever paying it off.

Foshan, thank you. South Africa runs a real risk of hyperinflation and collapse of the currency. Unlike the USA, Canada, Europe, England and Japan, the rand is not a reserve currency. We cannot export our inflation to other countries, so all the devaluation will be pent-up within our borders. Those countries can run large deficits and Debt/GDP ratios and fund it by monetizing the debt. It is of the utmost importance that our Reserve Bank remains independent, that our banking system remains well-capitalised and that our pension funds remain protected against looting by the ANC.

Economic growth is the foundation that supports these 3 pillars of the purchasing power of the local currency. Lockdown is an economic earthquake of 9 on the Richter scale. Lockdown threatens Reserve Bank independence, liquidity in the financial system and the value of pension funds. By implementing lockdown measures, the government effectively charged every citizen R1 million for something that isn’t worth more than R100. It is the destruction of value on an epic scale. Those who cannot afford to pay the cost in terms of the loss of purchasing power will pay with their lives.

It is of the utmost importance for investors, speculators and traders to realise what effect the debt levels of governments will have on them. Sovereign debt is a transfer mechanism. The level of sovereign debt in itself does not say much under a fiat currency regime when the sovereign can print the money to pay down his debt. The sovereign cannot default in nominal terms, on his local-currency debt. Governments can, and regularly do, default on their debt in real terms, in terms of purchasing power that is. This is what will happen over the next decade. Developed Nations will default on their debt in real terms, not in nominal terms.

This brings us to the transfer mechanism of government debt levels. Government debt and deficit spending, transfer real wealth from those who hold the currency, to those who hold real assets like shares, property, commodities, and education of some sort. The higher the debt levels, the stronger the transfer mechanism. The best-performing stock market in the world was the Zimbabwean stock exchange during the hyperinflation of the Zim dollar. The high debt levels in Developed Markets bring special opportunities for investors because the debt won’t be repaid, the debt will be devalued. Devaluation is the inverse of Robin Hood. It steals from the poor to fund the wealthy.

Those investors who are apprehensive of the large levels of government debt, and sit on the sidelines, earning interest, will be wiped off the face of the earth by the devaluation tsunami. Under these circumstances, the name of the game for professional investors is to borrow at low interest rates to buy appreciating assets. Align yourself with the position of the government to also reap the rewards of the devaluation of debt.

Inequality is not a free-market phenomenon. Inequality is the inevitable result of a fiat currency system with fractional reserve banking and currency devaluation. The devaluation of money drives inequality because it transfers wealth from the poor to the wealthy. The crazy part is this – socialist spending on grants and cadre-deployment and BEE projects is the real driver that forces a government to devalue the currency. Devaluation is always and everywhere the result of political decisions.

Therefore, inequality and poverty is divine justice for the myopic voting habits of the ignorant majority. The majority vote for inequality and poverty, and then they get it. There is no way on earth to prevent the average voter from turning his environment, and reality, into a manifestation of his mindset. The political-economic system enables and delivers this fair and just phenomenon. The only way to prevent this from happening is by restricting the right to vote. The Chinese government understands this.

My regret is getting emotionally tied to a share. A stop-loss is the way to go ie. cut your losses.

Wow!

Thank you Sensei for your very comprehensive reply. It contains wonderful insight and wisdom as well as a great definition. It also raises a question:

You write, “the name of the game for professional investors is to borrow at low interest rates to buy appreciating assets”, Above you said “gearing is the killer”. Are you saying that the prognosis for our economy is now so bad that it warrants using leverage at these low interest rates to our advantage?

Your brilliant definition:

“inequality and poverty is divine justice for the myopic voting habits of the ignorant majority”

Socrates would have loved that!

Thank you again. Very much appreciated.

Mine is called BRAIT. It was a big mistake!

I dsagree that trading is gambling. The stock market (equities, cfd’s and SSF’s, etc) can be traded very profitably if you have made the effort to know your subject. High risk = exponential profits, if you get it right.
But you have to spend a lot of time reading, and watching movements.
I remember once watching Anglo shares resembling a yoyo, and piggy backing it I made a profit of 0.6M in 3 months.
In my 60 years of investing in equities and instruments, my losses were restricted to the past years decline, because I took my eye off the ball (getting old now)
Trading is not a poker game.
I would agree that crypto is gambling as it is an illusion of cash, it has no concrete value and predicting movement is impossible.

Well done; I envy guys like you and agree; the only time I have made money is with careful, well reasoned strategies BUT I have made 2 big mistakes.

1. Getting lazy and not regularly and always following data, advice and gut. Understand you need to follow, or at least be aware of, trends. They do not necessarily follow good assessment.

2. Listening to rumour, sentiment and tips.

I agree with Sensei; one is always regretful about not buying Sasol at R25, predicting the covid 19 bounce etc (I missed both grrrr). You have to try and learn from this.

I still own Steinhoff shares.

This is such a made up story it belongs on netfllix

Stealthy Wealth has a blog. This article is just the latest on a series covered in his blog that has been going for more than 5 years now. It is true.

I bought into one of those holiday schemes, after I built up some savings after working 1 or 2 years! Paid it off over 24 months, and then to add insult to injury the company changed “owners” a couple of years later and they hounded me to prove that I actually paid the monthly amounts while threatening to hand me over to debt collectors (while I was at home with a 4 week old baby).It still haunts me that I was that stupid!!!

Mine was returning to South Africa after having spent 9 months travelling in the UK and Europe on the back of profits trading in the gold mining sector in the late 1970’s.

I lend money to Thabo Motlaung from Sana capital who ran away with my cash. Still waiting for my money to this day.

‘’Dealing, is a mug’s game’’

Well done and well-said mate – I thoroughly enjoyed your openness and your article.
I often get mocked on Moneyweb when I quote my many years of experience (> 40!) in the FX market etc. No market moves faster and is more volatile than the FX market – the size of the average interbank market transaction could be ZAR 100 million.
Average daily turnover per Spot dealer in bigger banks could be > ZAR 2 billion per day. There are so many lessons that I have learned in my trading life (both local and overseas – these markets are also very different as the offshore deals are much bigger and most major currency pairs are traded – in SA Most trades are against ZAR, and in US Dollars).
I would summarise the biggest lessons I have learned with trial and error as:
1. The Market is never wrong.
2. Never underestimate sentiment in the market.
3. Never fall in ‘’love’’ with your position.
4. The first loss is always your best loss.
5. Always make certain that your ‘’ dealing’’ rules and principles are in place – the 51/49 (being right and or wrong) rule only works if the same amount, same stop loss (trailing, etc.), and take profit (trailing, etc.) are adhered to.
6. NEVER DOUBLE UP! Cut your losses and ride your profits!
7. On a daily basis – there are 3 very important decisions that must be made, with regards to your market view – buying, selling, or being square. Never trade on someone else’s view if you don’t have one, because you don’t have one yourself!

Your comment is a gold nugget.

Like you say – don’t trade on someone else’s view – If you haven’t got your own plan, then you are part of someone else’s plan. I can remember how many bullish reports were published on Didata by major international fund managers when the price was at R71.00. Later it became clear that they were trying to get out of their positions and they were offloading their Didata shares on the readers of their newsletters. Didata was called “the darling of the stock-exchange” back then, similar to what Naspers is today.

R71 was the all-time high in Didata and from there it crashed to R2.50 before it delisted.

Agree with all of the above.

In addition I can add the following.

Learning when not to trade. You don’t have to be in the market all the time. IE. I don’t trade the S&P open or try an take a position before non farm payrolls.

Patients. Ensure you tick the boxes before entering a trade. Don’t jump the gun.

Trade what you know and see and not what you think or hear.

My first big financial mistake was when I retired and decided to try CFD trading. Fortunately I limited myself to R10,000 and went to a weekly meeting where the markets were discussed. It took nearly a year of ups and downs before I called it quits! I heard later that our “teacher” lost everything !
The biggest mistake though and the one I really have not forgiven myself for is listening to the “noise” a few years back and selling my Naspers shares….. We live and learn !

I believe John Maynard Keynes encapsulates all the aforementioned lessons in one line;
‘Markets can stay irrational longer than you can stay solvent.’

On Whether trading is a gamble or not, that simply depends on the trader and not really the system/market. ‘Risk comes from not knowing what you are doing’_ W.Buffet.

If you hasten yourself into trading without the due diligence of possessing the knowledge and the understanding, then you are simply gambling on two options, up or down/ long or short.

Check your emotional state when trading.

My biggest losses came after a broke up with a girlfriend. I thought I made rational decisions but in hindsight, not.

End of comments.

LATEST CURRENCIES  

USD / ZAR
GBP / ZAR
EUR / ZAR

Podcasts

NEWSLETTERS WEB APP SHOP PORTFOLIO TOOL TRENDING CPD HUB

Follow us:

Search Articles:Advanced Search
Click a Company: