Why Your First Loss Is Your Best Loss

The Most Important Investing Lesson Is Something Only the Market Can Teach You

You Can Be Very Wrong

In this Bitcoin fueled era of rapid gains and a stock market that has been on a very long bull run, it has me thinking.

I remember when I was in my early 20s and I just started trading stocks. This was in the dot com boom. People were making money hand over fist just buying anything with a Dot Com in the name.

There is a feeling in the air that you just can’t lose.

I knew people taking their student loans and plowing them into the stock market and doubling their money. It was total euphoria.

I started putting some of my meager paycheck into stocks. I bought Celera genomics, an early gene mapping biotec. I bought JDS Uniphase. I bought Lucent, Intel, Kodak (yes Kodak) and a tiny startup called FiberCore.

Notice how I remember the exact names so well after 20 years? It’s because I lost money on ALL of these.

Bubbles Usually Pop

The dot com boom turned into the dot com bubble and it popped. It was painful. I lost almost all my money that I had in that trading account. Even the survivors were beat up and I sold them in a panic.

The lucky thing is, I was fresh out of college and not making a whole lot back then, so my account was a little less than $10k. It wasn’t big enough to get me in trouble.

In the trading world, the saying goes, “Your first loss is your best loss.” It puts things into perspective.

It snaps you back into reality.

Euphoria Is a WMD

When you are making money and lack experience, it messes with your head in a big way. I know because I was making money, it felt easy, and it messed with my head.

You start to think you know things that other people don’t. People start asking you for tips or to “manage their account”. You start trading on tips from other “geniuses” and you think you’re a genius too!

Everything you are trading on feels almost like “inside information”.

It’s at this very moment when you feel like you’re at your best, when you are usually most stupid.

The euphoria is rocket fuel. Your ego grows along with your head and you start to make decisions that are not based on anything real. No rules. No system. Hey, you’re a natural!

But even the best traders can lose. The risk is there, it’s real, and you are definitely not one of the best traders.

Euphoria is like a WMD for your portfolio.

Learn Your Lesson

Having money in the game and taking a loss is a beautiful thing. You get humbled real quick. You realize you’re not a stock picking genius.

If it’s a small loss, it was just the market telling you, you were wrong.

If it’s a big loss, you realize you’re human and that your natural human tendencies have lead you astray. Your ego got in the way of doing the right thing. You probably broke all your rules- or you didn’t have any rules to begin with.

That first loss is indeed your best loss. It’s even better if it’s small.

It will teach you to follow your rules, manage risk, manage your money, and be prepared for Black Swans (unforeseen circumstances).

It will teach you that no matter what, you’re not special. The market is special. Do you know what makes the market special?

The market is always right.

Make it Happen

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