This Mistake Almost Got Me Fired…
“Zach! Get in here!!”
I could tell by his tone that my boss and mentor Bill was upset. But I had no idea why…
As I grabbed my notebook and sprinted down the hall to his office, I got a sick feeling in the pit of my stomach. This wasn’t going to be a fun conversation.
“Zach, take a look at this trade run…” Bill snapped as I walked in the door. “…and tell me what the heck you were doing in your account yesterday!”
To be honest, I was a bit baffled.
The previous day had been a good one for the money I managed. I made what I thought were some smart trades and bagged a couple of quick wins. So, why was Bill ticked off at me?
I didn’t realize that Bill was about to teach me a lesson that would literally save me hundreds of thousands of dollars over the course of my career.
Hopefully by sharing it with you today, you’ll benefit in the same way — and build your wealth much faster!
The Secret Portfolio Killer
“Bill, I’m sorry but I really don’t see what I did wrong. Could you show me so I don’t make the same mistake again?”
Fortunately, Bill was actually a great teacher.
Sure, he was a little angry about this particular mistake. And I could hardly blame him! It was his was his reputation and his clients’ wealth on the line, after all.
Bill pointed to one of the blue-chip stocks that I had successfully traded the day before…
“How many transactions do you see here?”
“Four!” I said with guarded pride, “Two buys and two sells. I locked in 75 cents per share altogether.”
“And what do you think our clients are going to do with that 75 cents?” Bill asked me sarcastically.
“More importantly,” he added, “What were you willing to risk if the trades hadn’t gone your way? Did you have an exit plan for each of these positions? Was your profit really worth the amount of risk you took with our clients’ money? Is this a strategy that you can replicate over time? With millions of dollars?”
The barrage of questions overwhelmed me.
I never actually intended to put our clients’ wealth at risk. But as Bill went down the list of all my short-term trades for the particular day, I could see how he was right. This wasn’t the type of trading approach that was likely to work out in the long run.
“Zach, if you learn this lesson today, you’ll be better off than most professional money managers.” Bill told me as he finally cracked a smile.
“And fortunately for us, you won’t have to pay dearly for this lesson. I know too many traders who have blown themselves up by over-trading. It’s an easy habit to fall into, but it’s one that can wreck your career and destroy your wealth.”
“The big money is made in big swings, Zach. So if you want to do well at this firm and make a lot of money in the markets, invest in the big opportunities and leave the short-term trading to the suckers.”
[%= :subscriberName(E, Reader) %], I can’t tell you how helpful this lesson has been to me throughout my years as an investor. And it’s especially important now as the market becomes more volatile — and as barriers for trading have been largely removed for individual investors like you and me.
Today, I’m very concerned that many novice investors will fall into the same mistakes that I made that day — only they won’t have a boss and mentor like Bill there to help guide them.
Let me explain.
Don’t Get the Wrong Message From Zero Commissions
This past October, online brokerage Charles Schwab (SCHW) sent ripples through the brokerage industry by announcing it would allow clients to trade stocks with zero commissions.
In order to stay competitive, TD Ameritrade (AMTD) and E*Trade Financial (ETFC) followed suit. And that means most Americans now have the ability to buy and sell stocks with no commissions if they choose to open an account with one of these brokers.
Now I want to be clear — that this move is good news for investors like you and me. Because every dollar that we save in commissions allows us to more effectively build our nest egg. So I’m happy about the drop in commissions.
But I what I AM concerned about is that no-cost trading is giving some investors the wrong message. And just like the day Bill caught me churning my account, these investors may not understand the drawbacks of short-term trading.
As you can see in the chart below, investors have clearly become much more active in the market. Ever since the new zero-commission trades have gone into effect, the number of online trades has increased sharply!
Now there’s nothing wrong with making extra trades like adding to positions when shares pull back, or taking some profits off the table when you have large gains.
But my concern is that investors are trying to game the day-to-day moves of individual stocks — or the stock market in general — by trading in and out of positions very quickly.
That’s a very, very tough game to win.
Plus, even if you’re successful, it likely means that you’re missing out on many of the great long-term trends that have been handing investors some amazing returns.
- Shares of Apple Inc. (AAPL) have more than doubled over the last 12 months.
- Computer chip maker Advanced Micro Devices (AMD) are up 82% since the beginning of October
- And even “boring” Coca-Cola (KO) is up about 30% (plus dividends) from last year at this time.
These are the kind of returns that you’re unlikely to get when trading in and out of stocks on a short-term basis. Because inevitably, you’re going to have some losses along the way that offset your wins. And it can be very difficult to know when a position should be cut if it doesn’t work out right away.
Bottom line, most short-term traders wind up spending a lot of time and energy, without too much to show for it.
So my encouragement to you is the same as the message I got from Bill:
“The big money is made in big swings!”
So use the gift of zero commissions to your advantage by purchasing stocks with no added costs. But don’t allow cheap trading costs to actually cost you money by missing out on the big trends we cover here at The Daily Edge.
Here’s to growing and protecting your wealth!