This was 2011, and the markets were incredibly volatile. So I did what any reasonable person with no experience does when markets are acting like a roller coaster, I started trading 3x levered ETFs. If you're not familiar with what these are, they're baskets of stocks that moves three times as much as the underlying does. So, for example, if the S&P 500 falls 1% in day, there are bull and bear ETFs that will fall or gain 3% alongside it. It's a legal gambling on steroids. My process was as follows: I would pick one of these products, my weapon of choice was FAZ (bearish banks), buy it, watch the price, and hope it went up. I thought that by trading a lot, I could control my destiny. I would later find out that this cognitive bias is so common that there's a name for it; it's called “the illusion of control.” By buying and selling within minutes or hours of each other, I wouldn't be held hostage to the market. It's hard to put into words the level of dumb this line of thinking is. Overtrading is probably the most common mistake that novice investors make, and I was no exception.
A few months later I caught a break—employment. It was only a temporary position, but I was happy just to have a paycheck. I wouldn't have the luxury of being in front of my computer during market hours, so I moved onto options. At the time, I was bearish on Netflix. I thought their streaming options stunk, and I didn't understand why they were splitting their streaming and physical DVDs into two separate plans. I bought put options a few days before they were set to release earnings. The stock fell 35% in a single day, and I made more than 10 times my original investment. I was hooked on weekly options. The problem was I was always buying options, not selling them, and 76% of all options held to expiration expire worthless.1 It didn't take me too long to figure out what was going on here. I threw in the towel on options relatively quickly.
After my temp position expired, I went back to the library, reading and studying, but mostly trading. I was all over the place. I read books on technical analysis, I studied traditional valuation metrics, and I watched financial television for coverage of economic indicators like nonfarm payrolls. My process was chaos. I was slowly coming around to the idea that Bogle was onto something, that beating the market is a fool's errand. I'm not sure I would have come to this realization as quickly as I had if it were not for Twitter. I was pretty deep in the trading community, watching people's tweets, following their calls, and seeing what they would say when the market went against them and when it went in their favor.
It became apparent real fast that 99.9% of these people were charlatans. It was as sad as it was pathetic, and I didn't want to become one of these people who spent every day on the Internet, pretending that they were crushing the market when it was so obvious to a novice like myself that the exact opposite was happening. I watched people who dedicated their lives to the market looking like fools on a daily basis. I paid attention to everything that was going on that could move markets, and I realized that, even if you had tomorrow's news today, you wouldn't be able to consistently figure out how markets would react. There wasn't an “ah‐ha” moment, it was more like a building realization that this game is really, really hard. Legendary financier Bernard Baruch captured this idea perfectly:
If you are ready to give up everything else and study the whole history and background of the market and all principal companies whose stocks are on the board as carefully as a medical student studies anatomy‐ if you can do all that and in addition you have the cool nerves of a gambler, the sixth sense of a clairvoyant and the courage of a lion, you have a ghost of a chance.2
I was growing less and less enchanted with the market and couldn't stop thinking about how I was paying for my earlier mistakes. And then one day I got an email. A friend got me an interview as an internal wholesaler at a big asset management company. Here was my shot.
I always had this irrational confidence, and I say irrational because I never did anything to deserve to be confident, but I felt that if someone would just give me a chance, that I could make a good impression. I finally was given this opportunity. I met with somebody on the team, and it went great. I was enthusiastic, and he was talking to me about the next steps as if they were a formality, like the job was already mine. Then he took me to talk with his boss and again, we had a great conversation. And then I was asked why I wanted to be an internal wholesaler.
For those of you who don't know, an internal wholesaler is the behind‐the‐scenes person for the external wholesaler. The external wholesaler is the person who meets people who allocate assets. It's the external's job to meet advisers and explain to them why their products deserve a place in their client's portfolios. The internal is busy setting the external's calendar and generally acting as a right‐hand person. So, when the hiring manager asked me why I wanted to be an internal wholesaler, my response was pretty far off the mark. I told him that I loved the markets, and that studying for the CFA prepared me for this role. “Whoa, whoa, whoa, stop the clock,” he said. “Why are you studying for the CFA?” This pretty much ended my chances. The CFA was for analysts, not internal wholesalers, I was auditioning for the wrong role. I was crushed. Here I thought that I needed the CFA designation to give myself a chance to get into the industry, and it ended up keeping me out.
I went back to the library, trading, investing, reading, and hoping. At this point, I was pretty much fooling myself. I knew that I couldn't beat the market, but I kept trying because I didn't know what else to do. My natural network didn't have many connections to finance, and even if they did, the job market was bone dry and I didn't have much to offer. A few months went by, and I was given another opportunity. This time, it was at a discount brokerage. The role sounded perfect, and I was so excited.
The meeting went great, and the next day I got a call from the person who interviewed me. He told me what I had been hoping to hear for months: “You don't have much experience, but I like you, and I'm going to take a chance on you.” I was on cloud nine. And then I was crushed. My résumé was sent through HR, and they called to ask about a ding on my credit report. I didn't know what they were talking about but promised to get to the bottom of it. During what should have been my junior year in Indiana, I had already committed to a living situation. I was working as a waiter while going to college at home, paying rent every month, and not thinking anything of it. Turns out, one of my roommates didn't pay for some damages, and this made its way onto my credit report. In the few days that it took for me to figure this out, the guy who hired me left to take a job at a different company. I was told the new manager would give me a shot. He never did. This one really hurt.
Back to the library. I started wondering if I was refusing to face the facts. That a career in finance just wasn't in the cards. “Why do you think all these kids kill themselves in high school and college? Who do you think you are that you can skip to the head of the line? Grow up, move on.” I came close. Not that I ever had a plan for what a different career would be, but mentally I was close to throwing in the towel. I was still paying for a lifetime of eschewing education.
I received a third legitimate opportunity, this time outside of finance. I didn't really care because I had gone two years without a job, and I just wanted to get on with my life. It was now two years without a job, and I just wanted to get on with my life. The person interviewing me asked me what I was doing and why I was out of work for so long. I explained my situation, was told to be careful trading options, and was quickly dismissed. The “interview” lasted about three minutes.
A few days later I was in Madison Square Garden for game three of the Knicks/Heat series. As I sat down, I saw an email. Not that I didn't know this was coming, but it was a “thanks but no thanks and good luck.” The Knicks were down 2–0 in the series and were getting killed, so I decided to get the hell out of there. I just wanted to go home.
It was late in the evening, and I was riding the Long Island Railroad, head buried in my BlackBerry, and scrolling through Twitter. My favorite follow, Josh Brown, is tweeting. “So, Zoë Kravitz is an adult
, and Francis Bean Cobain is a teen…and then 6 years pass, we get a bit older.” This tweet is five years old; it only has one retweet, one reply, and zero likes, but this one is burned into my memory. As the train pulls into my station, my phone died. This detail is important because if it wasn't dead, I probably would have been walking with my head buried in it and not paying attention as the person who would change the entire trajectory of my life walked right past me. I walked passed Josh and froze; this was what I had been waiting for. Here was my opportunity on a silver platter.
I tapped Josh on the shoulder, and he was kind enough to give me a few minutes. I explained to him my situation; he gave me his card and said to stay in touch. My wife was waiting downstairs to pick me up, and she said to me, “Who was that?” “That's Josh Brown,” I said. “The guy from Twitter I was telling you about.” To put it in terms she would understand (my wife is a reality‐TV fan), I said, “He's my Bethenny Frankel.”
A few weeks later, Josh put up a blog post that he and Barry were hiring. I emailed him, we hit it off, and I was hired by the person who if given the opportunity to work with anybody in the world, I would have selected. When I started with Josh and Barry in 2012, they were managing around $50 million, and it was just the two of them and an assistant. Five years later, I own part of a real business. We have $700 million that we're responsible for, and employ 20 people.
A lot of people will credit their success to luck, but you can usually tell when they're full of it, when it's a thin veil of false humility shrouded on top of a giant ego. I think it's pretty apparent how lucky I am to be where I am. Sure I made my own luck. I went up to Josh, I spent months and years studying the market and building up enough knowledge to show him that I was worth taking a chance on. But if I never told the hiring manager that I was studying for the CFA, if my credit report didn't have a ding on it, if the Knicks weren't getting blown out, if Josh wasn't on the same train as I was at 11 p.m. on a weeknight, I absolutely would not be writing this book. There is no doubt in my mind that I am extremely lucky to be where I am today.
I learned a lot of ways to fail not just at life, but in the market as well. It's hard to single out the “biggest mistake” I ever made because if there's one thing I did right when I was trading, it's that I cut my losses short. I didn't take any hits that were greater than 1% of my trading account. What stands out to me, as far as lessons I've learned in the market, is that if you have a liability coming due in the next few months or even few years, do not invest.
I knew that I had two big financial commitments coming up: In December 2013, I had a wedding to pay for, and a year or two after that, I would be buying a house. I didn't want to sit in cash, so instead of putting aside money that I was going to need, I remained fully invested, and hedged by shorting the S&P 500, leaving me about 80% net long. This is not smart. The market doesn't care about your goals. It doesn't know that you're retiring in five years, when your child is going to college, or in my case, when you're getting married.
One of my investing heroes Peter Bernstein once said, “Mistakes are an inevitable part of the process.” (https://www.youtube.com/watch?v=MKcZtvwch1w) He couldn't be more right. I've made plenty of mistakes in investing and in life, and I'm fine with that. A perfect history in either endeavor has never been achieved. The next time you take a big loss or sell too early or try to get back to even, remember, we've all been there. The difference between normal people and the best investors is that the great ones learn and grow from their mistakes, while normal people are set back by them.
Notes
1. Joe Summa, “Do Option Sellers Have a Trading Edge?” Investopedia.
2. Quoted in Ray Dalio, Principles (New York: Simon & Schuster, 2017), 34–35.
About the Author
Michael Batnick, CFA®, is the Director of Research at Ritholtz Wealth Management, a Registered Investment Advisor firm based out of New York City, with offices located across the country. As a member of the investment committee, he is responsible for the construction of client portfolios. Michael became a CFA charterholder in 2015.
In his spare time he enjoys reading and spending time with his wife Robyn, son Koby, and dog Bianca.
Index
13D registration, 90
101 Years on Wall Street (Brown), 50
Abbot Labs, 91
ABX Index, 134
Ackman, Bill, 3, 85, 88 CNN interview, 92
confidence, 88–89
persistence, 89
Adams, Evelyn, 131
Airbnb, 151
Alcoa, trading, 157
Alfond, Harold, 81
Amazon, 139–140 earnings, 7
Animal spirits, 126
“Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias” (Kahneman/Knetsch/Thaler), 75
AOL/Time Warner, merger, 49
Apple earnings, certainty (example), 120
shareholder wealth, 109
Arthur Lipper, tracking, 70
Art of Contrary Thinking, The, (Neill), 67
Assets under management (AUM), reduction, 61
Automatic, Sacca investment, 149
Bacon, Louis, 103
Balanced fund, transformation, 50
Bank of England, currency defense, 103
Bank of Taiwan, investments, 40
Baruch, Bernard, 7
Batnick, Michael, 155
Behavior gap, 99
Bell, Alexander Graham, 29
Benchmarks, 77
Benjamin Graham Joint Account, 7
Berkowitz, David, 88
Berkshire Hathaway Buffett control, 76
drawdowns, 143
market cap, 79
recovery, 114
shares, decline, 142
stock, Buffett purchase, 76
value loss, 57
Bernstein, Peter, 121, 164
Bernstein, William, 37
Betting on Zero (Silvan), 94
Betty Crocker, comparison, 91
Black Monday, 102
Black‐Scholes option pricing model, 39–40
Blood money, 91
Blue Chip Stamps, 141–142
Bogle, Jack, 45, 159 firing (Wellington Management), 51
impact, 47
performance, problems, 51
Boston Security Analysis Society, Samuelson remarks, 51
Brokerage house, offer, 20
Brokers, long‐term relationship, 61
Brooks, John, 68
Brown, John Dennis, 50
Brown, Josh, 162–163
Bucket shops closure, 18
usage, 16
Buffalo Evening News (purchase), 142
Buffett, Warren, 4, 10, 73, 140 annual forecasts, 77
circle of competence, 80
comparison, 100
gross returns, 76
investment philosophy, 76–77
limited partnership, closure, 111
Oracle of Omaha, 76, 78
Pearson, contrast, 114
Bull market, margin for error, 67
Cabot, Walter, 50
Capital, usage, 17
Carr, Fred, 69
Cayne, James, 40
Charlie Munger: The Complete Investor (Griffin), 81
Charmin, comparison, 91
Chartered Financial Analyst (CFA) exam, 158–159
Chasing the Last Laugh (Zacks), 27
Chesapeake & Atlantic, 20–21
Chicago, Burlington and Quincy Railroad, 16
Chicago Herald (problems), 30
Church and Dwight, value, 91
Churchill, Winston, 91
Circle of competence (Buffett), 80
Cisco, gains, 57
Citron Research, 113–114
Clemens, Samuel. See Twain
Clinton, Hillary, 113
Clorox Company, The comparison, 91
value, 91
C.N.A. Financial Corporation, 70
Coca‐Cola stocks, problems, 58
Columbia Business Sc
hool, 4
Columbia Gas System, shares (purchase), 58
Commodities, trading, 21, 123–124
Companies investor search, 5
valuation, 157
Complexity, masking, 15
Contrarian Investment Strategies (Dreman), 76
Cooper, Richard, 59
Cotton, purchase, 19–20
Credit default swaps, purchase, 133
Crest, comparison, 91
Crist, Steven, 120
Cunniff, Richard, 112
Currency cross‐trades, impact, 60–61
Darwin, Charles, 37
Davis, Ed, 140
“Dead cat” variety, 22
Death spiral, 42
de Cervantes, Miguel, 109
Deferred compensation, 68
Dexter Shoes, Buffett purchase, 79–80 problems, 82
Dimson, Elroy, 123
Disney, 40 investment, 50
Diversification approach, 109, 115
understanding, absence, 101
Dividends, payment, 79
Don Quixote (de Cervantes), 109
Dot‐com bubble, 77 problems, 147
Dow Jones Industrial Average (DJIA), 142 gains, 7
high levels, 102
peak (1929), 67
peak‐to‐trough decline, 9
Big Mistakes Page 16