Learning from losses in trading and investing

My financial independence journey has taken anything but a straight path. Some endeavours have worked out and some have failed miserably. Some situations I’ve had some control over and with others I’ve been powerless.

Every financial loss has been painful but everytime I’ve come away with more experience and I’ve altered my approach to avoid making the same mistake again.

Here’s a rough timeline of my most pertinent losses and what I learned.

2010

When it came to stock market investing I originally considered there to be 3 main approachs:

My plan was to try each and stick with what worked best for me, accepting any losses as the cost of education.

At the time I was friendly with a guy who happened to be a degenerate gambler and he recommened buying into Bank of Ireland. Their share price had crashed along with the rest of the Eurozone financial sector and it had fallen so much it was bound to come back up again, or so I thought.

My position nearly doubled at it’s peak but I didn’t sell thinking it had further to go, but the bounce reversed and eventually I was down 50%. I sat on the loss for maybe a year and a half before I could get out at break-even and I’ve never speculated on shares again.

2016

My dividend portfolio needed a construction company and Carillion seemed to fit the bill. When they got into difficulties I wasn’t worried: they were a FTSE 100 company with billions in government contracts and were still intending to pay a dividend. I actually bought more to rebalance the portfolio.

The company was dropped from the FTSE 100 and not long after became bankrupt. For a long time after the entry was still listed in my account but with a price of 0 and a loss of 100%. I vowed to abandon dividend investing and was able to complete the process when the market recovered from the COVID crash at the end of 2020. The bulk of my wealth now is in really boring index funds.

2018

Most of my time was being spent in Thailand by now but I didn’t have complete trust in the local banking system. The solution to the problem of excess cash was to buy hard assets: I bought gold bullion, an over-priced Swiss watch and… Bitcoin.

Like with my traditional investments I tried diversifying by buying other cryptocurrencies but when the price of Bitcoin crashed they crashed even harder. I became a Bitcoin maximalist and considered cryptocurrencies to be entirely speculative assets and not investments.

At the bottom of that market cycle I was sitting on a 55% loss and decided I’d nothing left to lose by learning about trading. I settled on market-neutral trading using derivatives and eventually was able to cash out my initial capital which made for a different risk profile and a better night’s sleep.

Manually setting up a 2-legged trade is not without it’s own risks and on 1 occasion I was impatient to finish deploying capital and got caught in a liquidation crash. With some manoeuvring I eventually realised a loss that was a fraction of the initial loss and from then on I changed how I was placing trades. Over time I went a step further and automated order execution.

2022

Finally, the reason for writing this post.

A couple of years ago the crypto lending companies started offering interest payments on deposited assets which they would then lend out at a higher rate. In return for accepting some counterparty risk I was no longer under pressure to always be in a trade and when I was I could easily juice my returns.

Over time I had become comfortable handing my assets over to third-parties but this ended when 1 of the lending platforms I was using decided to disable withdrawals during the recent crash. It’s still unclear if the company is insolvent or just temporarily illiquid.

This incident potentially represents the biggest loss of my years in the markets. Thankfully it’s not an existential threat but it’s been very sobering and I’m unlikely to ever use centralised financial platforms again whatever the outcome.

When I started with Bitcoin self-custody was paramount and so it is again. Hopefully in the future greed won’t overcome common sense and I’ll live to learn another day.

#finance #bitcoin