Hi friends,
I am sharing a letter from Richard Smith, founder of TradeStops (tradestops.com). It tells an interesting anecdote that contributed to Trump's chief strategist, Stephen Bannon, developing his anti-establishment ideology. It also gives some great general investment advice.
Finally, at the bottom, I mention a rule-of-thumb about using trailing stops.
By Richard Smith
Wednesday, May 24, 2017
I have known for a long time now that poor investment decisions have real and serious consequences for individuals and families.
But I never dreamed that a classic investing disaster could have been instrumental in getting a president elected.
It's an astonishing tale. And we can learn from it today…
Steve Bannon is widely credited with helping to get Trump elected president. He's now President Trump's chief strategist.
His father, Marty Bannon, spent 50 years working for AT&T. Over his career, he accumulated a significant position in the company's stock. For Marty, that investment was an insurance policy for his family. If financial disaster ever struck, he believed at least AT&T would keep going strong.
Then, on October 7, 2008, Marty was watching the news. The whole financial system seemed to be unravelling – and his nest egg at AT&T was going down with it. Marty didn't even bother to call his investment-banker son, Steve, to ask for advice. He just panicked, and sold…. his entire position.
In the end, Steve Bannon watched nearly all his investment-banker friends get bailed out by the easy money policies of the federal government, while his father suffered.
The Wall Street Journal recently detailed how this experience cemented Steve's convictions – and his future. From the article…
Steve says the moment crystallized his own antiestablishment outlook and helped trigger a decade-long political hardening >that has landed him inside the West Wing… His decision to embrace "economic nationalism" and vehemently oppose the >forces and institutions of globalization, he says, stems from his upbringing, his relationship with his father and the meaning >those AT&T shares held for the family.
"Everything since then has come from there," he says.
It was a devastating loss. And it shows how the greed of the establishment created a bubble that put the investments of working-class Americans at risk.
But what, as investors, can we learn from it?
A lot…
Investment decisions are serious… and consequential.
Not all of them are as consequential as this one, obviously, but it's an important reminder that painful losses can happen in the markets. Investing is not always fun… And the stakes can be high – many investors, like Marty Bannon, set about building a nest egg with retirement and family in mind.
Marty ultimately lost more than $100,000 because he sold his shares for less than he paid for them. This may never happen to you… But it is possible.
If you're going to invest, you must be mentally prepared to ride out market downturns. You can't sell everything anytime the market pulls back.
It's easy to let emotions take over when your position sizes are too large.
Marty's position in AT&T was too big for him to manage without emotion getting the better of him. It's critical to have the right position sizes. This is never more obvious than in the throes of a market crash.
No matter how sure you are of a company's success… no matter how reliable it has been in the past… nothing is certain in the markets. A diversified portfolio spread out over numerous uncorrelated assets will lower your risk. It will keep your individual losses smaller. And it will give you more peace of mind, even during a crisis.
Watching too much TV is terrible for your investing.
The media are in the business of capturing your attention… And the best way to do that is through your emotions. The media love when you get emotional. It means you're paying attention. The more emotional, the better. If you're going let TV influence your investing, just keep that in mind.
According to the Journal, just days before Marty sold, an analyst on the Today Show told viewers to pull money from the market if they needed any cash for the next five years. That kind of warning sure gets people's attention – but it doesn't help investors make good decisions.
It pains me greatly when I hear stories like Marty Bannon's… or like what happened to the employees of Enron, who had been encouraged to invest their life savings into the company's stock.
Unfortunately, this kind of thing happens in the stock market way more often than it should… And the little guys often draw the short straw.
Stories like Marty's get me out of bed in the morning, determined to make TradeStops the investor's best friend… and to help give you confidence and conviction when the going gets tough.
Regards,
Richard Smith
Tradestops is an excellent service I (Mwána Comète) highly recommend. It is so much more than a system for monitoring your trailing stops. For those that use trailing stops, I hope you do not share them with your broker or enter them into your online brokerage system.
Why? Because many times your broker will enter your stop loss in the market on a GTC (good-til-canceled) basis. That means other traders can see where your stop is set.
If the market gets close to that point and lots of investors have set stops at about the same price, the market makers will move the market to trigger those stops, knowing once the selling is done, the price will quickly rebound.
I hope you enjoyed the post. If so, your upvote is appreciated, and feel free to resteem!
Bye for now!