After 25 years of trying to beat the market I have made every mistake in the book, and invented a few new ones. In my mind I have made more foolish mistakes, but since Wall Street keeps score using dollars I will talk about one of my biggest losers.
Although it plays a significant role, the amount of money lost isn't the primary reason for feeling foolish. My initial and repeated lack of discipline, and how easily I could have avoided (or mitigated) the trade, forces my head lower in shame.
If you take anything away from this story, leave with a renewed sense of discipline, restraint and preparation in your investing. Because losing isn't about rotten luck, stock manipulators, the SEC, or anything/anyone else other than yourself.
Here's the shortened highlight version of events.
Worst of Times: Lehman
In 2008, I was actively trading and by September I was enjoying an outstanding year, but I was also setting myself up for failure. After years of working on market timing entries and exits I felt I "finally made it" and it wasn't uncommon for me to make several trades a day over a week's time and not have any losers.
I didn't know it at the time, but our brains begin to assess risk differently after repeated successes. It's the same reason why investors will string several successes in a row, only to lose all their gains (and maybe more) on their next idea. I began focusing on how much I could make, instead of how much I could lose. I also began ignoring my rules of entry.
I wasn't a discretionary trader. I had a significant edge by using exceedingly strict rules of entry and exiting. Ignoring any of my rules meant that my known edge was gone. When your focus shifts from "how much can I lose" to "how much can I make" you can quickly lose sight of how crucial it is to follow your trading plan.
When you begin cutting corners to find a reason to be in a trade, you know you're in trouble. One of my rules for a particular fading trade type was not to enter during the last hour of trading. During the last hour of trading, stocks that are hitting daily lows will often accelerate to the downside. If you're fading the move, you can lose a lot, fast.
In early September 2008, after trading Lehman Brothers successfully several times during the day, my Tradestation scanning computer alerted me to another buy setup from Lehman. Only this time, the alert was just after the one-hour minimum trading time cutoff. What I should have done was smile and be happy with my trading gains for the day.
What I did was ignore the rules and mentally "pretend" that it was "close enough." Lehman was crushed into the closing bell as smart money was liquidating as fast as they could. By the closing bell, I was underwater over $20,000 and proceeded to raise another red flag that I was on the wrong side of the trade.
Instead of exiting and acknowledging my mistake for what it was, I started reading news stories to find a justification for remaining long. In fairness, knowing the driving force behind a stock is worthwhile because short- and long-term problems can be treated differently. I dug my heels in and by the next day I was down $40,000. Instead of exiting, I started to hedge my position with options.
By this point, I thought Lehman may be bought out cheaply or at least dead-cat bounce, and I sure didn't think the Federal Reserve would allow Lehman to fail. Between Lehman's fixed-income book and overnight securities used by money market funds, there was considerable motivation by many parties to avoid a total liquidation.
It doesn't matter, though -- I wasn't supposed to be in the trade. That's foolish mistake number one. I shouldn't have stayed in the trade -- mistake number two. Using hedging strategies to continue the position was mistake number three, although arguably the least of my errors.
My final foolish error was on the Friday before Lehman's bankruptcy. I was already home from my office and watching the after-market trading. I don't recall what but some positive news popped the share price higher and I thought about using it as an exit and taking my loss. I passed on the chance and remained glued to the news wire.
By Monday, after an exhaustive weekend, Lehman declared bankruptcy and I closed out for a loss near $50,000. It was my largest loss up to that date, and it was because I allowed fear of missing out to trump the fear I should have had for disobeying my trading plan.
Best of Times: Crocs
But along with expensive lessons, I have memorable victories that stand out above the crowd. During the summer of 2007, before the market meltdown, if you weren't making money in real estate you were likely making money in the market.
After all, it's not hard making money when all you have to do is pick a stock you like and buy it. The market was at all-time highs, and short-sellers were an endangered species. It was during this time that Crocs caught my attention.
Crocs was a rare perfect storm stock for short-sellers. It was trading for over 100 times earnings, had one primary and easily copied product, and high call option premium. I day-traded Crocs with a short bias, but my wisest trade was selling options and having the conviction to hold. It wasn't easy for someone who publically posts their trades -- especially in the face of others mocking me for "not understanding" how Crocs was changing footwear forever.
What my critics didn't know or conveniently forgotten, was I had history on my side. All else being equal, after a stock increases from $10 to $50 a share in six months, it's extended. After breaking above $49 the first time, the weekly chart was a TD13.
The critics (and shareholders) ignored that stocks trading above a P/E of 20 generally underperform those that are trading below. With Crocs trading near a 100 P/E, I knew the odds were in my favor technically and fundamentally.
Remember, being right about a stock isn't enough. John Paulson wasn't alone shorting housing-related products, but many others caved in because they entered too early. I knew that I needed to get the timing right or possibly face exiting at the worst possible time. My solution was using premium collected from writing call options as my buffer in case I was early.
After Crocs traded above $50, I began selling out of the money call options. I can't say it was "easy" at the time. In fact, it "felt" wrong to go against the flow, but logically I knew (hoped) it was the correct trade based on back testing similar price moves.
At first Crocs moved higher and lower, allowing me to scale in and out and increase my average. Then my day came and Crocs crashed, allowing me to cash out with my largest options gain of the year.
Sometime in 2008, after the overall market began falling I was shopping in Macy's . By chance I saw a pair of Crocs on clearance. It was the first and only pair of Crocs I have bought, and I still have them. They are sitting on a shelf in my office.
At the time of publication the author had no position in any of the stocks mentioned.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.