Embrace Your Investing Mistakes

One of the things I most enjoy about writing on the blog, in Cabot Wealth Advisory, Cabot Market Letter and Cabot Top Ten Report, is that what I’m writing about is REAL.  This isn’t academic theory, and at the end of the day, there’s always a scoreboard to see whether the advice was good or bad.

Moreover, I’m investing right along with you–making some great trades as well as plenty of mistakes, and learning all the while.  Ed Seykota, who made a fortune in futures, once said that he’s a trader who continually studies both himself and other traders.  Well, I try to do the same thing, and pass along the most helpful lessons I’ve learned from my own activities, along with tactics from other great investors.

And that leads me to March 2003, when the last bear market ended.

After three years of pain (the market, remember, topped in March 2000), I had succumbed to pessimism.  I was perusing economic reports that told of worsening conditions.  I was reading bearish opinions on the market, based upon one fact or another.  I was using sentiment, a secondary-type indicator, as a reason to stay bearish.  Finally, I decided to back up my bearish stance with money.

(I specifically remember that most investors thought the start of the second Iraq war that year would spark a market rally.  My contrary thought was that the market would do the opposite and drop once the war began.)

I was already heavily in cash, as I had been for much of the bear market.  That was a good thing.  But I wasn’t content just to avoid any further decline–I wanted to profit from it!  In other words, I was getting greedy.  Moreover, instead of simply selling some stuff short, I decided to push my luck by using options.  Imagine!

Specifically, I bought a couple of put options on the Dow tracking stock (symbol DIA).  I did this despite the bottoming formations seen in the major indexes, and the relatively strong action in the Nasdaq, which remained well above its 2002 lows, the market took off on the upside!

In fact, the Cabot Tides and Cabot Trend Lines–our two trend-following indicators that kept us out of most of that bear market (and this one, too)–gave near-simultaneous buy signals in mid-March.  That was a powerful situation, and it should have, at the very least, had me selling my puts.

But I didn’t … and in fact, I bought more!  After all, I figured, this was just another in a long line of bear market rallies!

I could go on with a blow-by-blow account, but suffice it to say that I ended up averaging down on my put position a couple of times during the next few weeks, even though our indicators were positive.  It wasn’t until more than a month (and about 1,000 points on the Dow) later that I sold my puts and realized what nincompoop I was.  And it was a good thing I did–the market really took off in May and June and didn’t look back.

Why share this story?  Because, if you’ve made mistakes in the past, you shouldn’t be ashamed of them–you should embrace them.  Those who learn from their mistakes in the market are the ones who make big money and improve their results.  Those who repeat mistakes over and over are left with sub-par results.

It’s easy to say “prepare for the next buy signal” or “remain patient,” but until you’ve tried to do it and failed–as I did–it’s hard to realize the importance of such advice.  So take my word for it!

In my own situation, my big 2003 mistake has me content to sit in cash while the market sorts itself out.  (I’ve been doing a lot of that since the bear market started a year ago.)  And it also has me focused like a laser on any and all stocks that are holding up well and have solid growth stories (yes, there are some out there).  I know the work done these days–while most investors are panicking–will pay off many-fold when the bulls return.