Jia Wang

What I Learnt from Losing More Than $10k

Jia Wang -

After losing more than $10k. In this post I’ll be sharing what causes me to make such losses and how I manage to recover and grow my portfolio.

I was doing trading and investing at the same time. And I realise that It is important to know your objective before you enter any position.

  1. Investing - Long term and normally we only exit when the company we invest in doesn't meet our criteria anymore. Eg - Revenue has been decreasing showing signs that company’s ability to raise their prices without reducing demand is not there anymore.
  2. Trading - enter a position with a trade setup of risk to reward ratio (RRR) of 1:2 or more. Decide your stop loss and target profit before entering. Look for other trade setup if the RRR does not fulfill. With RRR of 1:2 you only need to be right 4 out of 10 trades and you still profit. Only risk 1% of your entire portfolio when trading. This needs a lot of discipline and you just need to master 1 strategy to grow your portfolio.

Warren Buffett’s two famous rules: 1. Don’t lose money. 2. Don’t forget Rule No. 1.

Trust me, till today. After years of investing I still find it hard to follow the rules above. WHY?

EMOTIONS

I would say controlling your emotions when investing or trading is important. Ideally be emotionless. I was investing with emotions (Greed, Fear, Hope, etc) back then.

Whenever, I'm making profits I don't know how to take profit or in other words I was hoping to make even more. This is where my greed comes in, stopping me from taking profit. When the share price reverses back down where my position is making losses or still in the profit but not as much, I will “HOPE” that the price will go back up and tell myself that I will exit and take profit.

Sometimes if I'm lucky the share price will move back up and I take profit. But most of the time the share price will move sideways or drop further. This is when I will hold and HOPE for the share price to reverse back up.

Fear Of Missing Out (FOMO). Seeing people posting their profits on social media makes me want to know, how are they able to make such huge profits. This makes me want to try the strategies that are working for them. This is where my problem is, I will keep on trying new strategies I see. Most of the time trying out new strategies will make some losses.

I also found out that some people are able to make huge profits is because

  1. They have a big portfolio, with a bigger portfolio they are able to risk more.

Eg. Portfolio of $100k with a risk of 10% and RRR of 1:2 is max loss $10k and profit $20K compared to a portfolio of $1k the max they can risk is $100 and profit $200. (Hope you get it)

  1. They take higher risk  - Different people have different levels of risk appetite.
  2. When they enter a position minimum they enter $1k/share or contract. Eg. If you enter with only $500, 100% profit is only an additional of $500, it wouldn't have any significant impact on your financial life.

You can check out my portfolio review by Marc on 21st March 2020- HERE

Emotion also makes me react to the latest breaking news rather than rational thinking. Whenever there is bad news reported on the company that I'm holding and when the share price drops I would either panic sell feeling FEARFUL that the price will go down further at a loss only to regret when the share price goes back up after a few days. Or don't do anything HOPING that the share price will go back up but it went down further.

The following is how I overcome the above

I overcome this by having a game plan before entering any position. If I’m planning to just trade, then I look for a trade setup that fulfills the RRR. If i'm entering for the purpose of investing then I will apply the value / growth investing framework I learned. With that I know when to exit or to take profit.

With a game plan it enables me to respond by entering by tranches whenever the share price of that company goes below a certain level. Instead of just looking at the share price drop and do nothing only to regret when the share price goes up again. This was what I used to think to myself  “I SHOULD have bought when the price drops, now would have profited this much”.

When I have a game plan the word “SHOULD” and “IF”  no longer exist. Cause when I have a game plan I will execute my trade according to what I’ve set and not look back feeling regret.

Another method I learn is that if I'm monitoring a particular company and if I'm interested, instead of putting it into my watchlist. I can enter at the price I want so it will be in my portfolio and the price I enter will act as an alert for me. So in the future when it drops below my entry price I know I can enter more as it would be considered a discount. I have yet to try this method.

The above method should only be done on companies within my circle of competence and an in-depth research has been conducted. Because when the share price drops I would want to know why it drops? Sometimes it is because investors are reacting to negative news but it’s fundamental of the company remains strong. Eg. Facebook lawsuit in 2018 which caused the share price to drop but fundamental remains strong as their revenue keeps growing. As a result the share price went up after just a few months.

Nowadays, I spend less time on social media, chat groups (Where more than 100 members are in there) and reading the news to avoid being FOMO. Instead I spend more time going through companies earnings reports, annual reports, news / announcements from the company, interviews with the CEOs / Founders to know what their future plans are for their company.

JOURNALING

I find that journaling your trades is important. By journaling you are recording the process why you enter and exit your trades. This process will enable you to identify why you are making losses or profits.

This is how I'm doing my journal currently. The details as below :-

  • Date and time
  • Investing (Long Term) or trading (Short Term)
  • Reason why I entered / exit (Eg. stock idea, recommendation, criteria met for a strategy I’m following, purely based on feeling that it will go up or down (You just know it), base on my research, etc)
  • Any strategy Im applying - if yes what strategy
  • If I’m applying certain strategy, Am I following the criteria before entering and exit
  • What is my feeling when entering or exit ( happy, excited, etc)
  • The more detail you put in the more you will know what is your trading behaviour

Something that I learn, whenever I’m trying out new strategies, stick to that strategy for more than 100 trades and journal it. You will see a pattern, from there you will know what to improve.

Journaling is something I’m still looking to improve. I’m currently using google sheet to do my journaling.

HERE WOULD THE INTERESTING PART. I WILL GO THROUGH SOME OF MY OPTION TRADES FOR THE PAST 1 YEAR

I started my options journey in July 2019 attending Options Mastery Bootcamp (OMP) with Jonah and Victor and subsequently Jason, Jeremy and Ariel joined in as well. And since then we have formed a group on WhatsApp and Facebook to exchange ideas on companies we think has the potential to grow and what options contract to enter.

I started my options account with $2,500. At that time my 1st trade on 27 August 2019 was a sell put on XOP at the strike price of $21 premium collected $1.18. With only $2,500 I can’t do much because whenever I sell a put my account will be locked down (limited buying power) for a month and I can only do it on companies which are trading below $25. More on how options work in another post.

Since then I realise that I need to have a bigger portfolio to do more trades and grow my portfolio quickly. That is when I decided to fund my account with my active income consistently and start to buy some shares and buy calls instead of sell puts.

Don't just fund your account once and expect it to grow exponentially. You will need to consistently fund your account and consistently invest in great companies if you want your portfolio to grow.

And I don't just focus on options. I'm using options as a tool to generate cash flows. My current goal is to use options to generate consistent monthly cash flow to replace my active income and at the same time reinvest it into my investment account.

I was advised to open 2 separate accounts within TD Ameritrade during my portfolio review session by Marc Teo.  One for long term investment and another for options trading. With that I will have a clearer view of my portfolio. I'm not supposed to touch my investment account for the next 5-10 years as it is for the long term. I can only enter more positions for my investment account and not sell, unless the company I'm invested in no longer met the criteria.

BELOW ARE SOME OF THE COMMON MISTAKES I MADE DURING THIS 1 YEAR

  • STOCKS - Didn't cut loss even though the share price was going lower and lower. I was HOPING it will bounce back. And even though the share price did bounce back up I was still HOPING it will bounce back HIGHER. Until it went back down and I realised it would never come back up. Only then I decided to cut loss. This was Qudian (QD) - entry price around $6, cut loss at around $2, current price now is $1.50

From the event above I learned not to rely on 3 third party research. Do your own research and trust yourself, do your own due diligence. Because I trusted those research houses saying this company has the potential to grow and a good future ahead, I did not cut my losses until it's too late.

  • OPTIONS - Mini Leap call (Long term Buy Call) far Out of The Money (OTM) on turnaround company. Even if it's a long term contract of 2 years, if the underlying share price goes down or doesn't move the premium will slowly reduce. Premiums don't normally go back up due to time decay, unless there is a sudden spike in the share price. Even if there is a spike, the spike needs to be very high in order for the premium move up.
  • Buy call or put on a short term contract - 2 to 3 months expiry premium will drop very fast unless you are confident there will be a big spike up or down in share price in a very short period. If not don't ever enter a short term contract.
  • Don't buy put on fundamentally good companies, in my case Disney. The reason why I entered a Buy Put was because of the COVID-19, where all theme parks were required to close, movie production stopped, their cruise line could not operate. But it turns out that they are able to overcome this situation and was not affected much by this COVID-19.

From the above trade, I learned not to enter into short term buy calls or put. Short term buy calls are also not what I learn from the course I attended, so I will stick to a 2 years contract or the longest contract. I also don't feel comfortable buying put as you can only buy put on lousy companies and I don't see any opportunity other than at this current situation.

I would prefer to buy calls, sell calls and sell puts. The best would be to collect 100 shares or more on different companies and sell calls to collect premium every month.

My current focus is to grow my portfolio using options with not more than 30% of my current portfolio and the rest I would use to enter shares bit by bit according to the market situation.

I'm also planning to try by just using the buy call strategy on my new account with a capital of $2k and see how much it can grow by the end of the year.

Lastly, I believe that investing in yourself is the best investment you will ever make. It will not only improve your life, it will improve the lives of all those around you. That is why I spend a lot every year on courses. At the same time I'm also lucky to have a group of friends to stop me from Shiny Object Syndrome and keep on reminding me to stay FOCUS. That’s the benefit of having a small group.

If you are wondering what are some of the investment courses I sign up for? I will list down a few below.

  1. WEALTH HACKS BY SEAN SEAH
  2. PROFIT FROM THE PANIC BY RESH
  3. USING THE DEEPER STRATEGY IN THE STOCK MARKET BY JOSARAH (this a combination of Fundamental and Technical Analysis (FATA))
  4. HOW TO INVEST LIKE PRO IN 7 DAYS BY SEAN SEAH
  5. YOUR COMPLETE GUIDE FOR PROFITABLE STOCK OPTIONS INVESTING BY GLEN HO

SUMMARY

  • Only invest in the company you understand. (Your Circle of Competence)
  • By not cutting loss you are actually missing out on another great opportunity. Cut loss and take that remaining to enter into a better position. Look forward and don't look back at your losses.
  • FOCUS on MAX LOSS. Not on MAX Profit.
  • The importance of Portfolio Sizing, you are supposed to use like 1-3%. definitely not more than 5% of your portfolio.
  • Emotion will prevent you from making the right decision and hesitation leads to poor execution.
  • If you have multiple contracts and are wondering which to close first. You should close those with:

1) shorter durations

2) lower strike prices

In this order. As those with lower durations and lower SP have higher time decay.

  • earnings trades are speculative in nature. meaning higher risk/reward. using the wrong % allocation would have very bad consequences. Don't lose money unnecessarily. If you want to follow the trades, make sure you follow the rules.
  • For those with smaller fund size. some trades might not be suitable if it's outside your budget. you do not need to follow every single trade. there will always be new trades opportunities. please don't FOMO
  • Form a small group between 4-5 people. So you can exchange stock ideas. And most of the time stop you from entering risky trades.

Let me know what is your biggest loss and why did you make such a loss? Post yours and share with others in the Facebook Group.