I made a speculative investment betting against the S&P500 as I believed we were heading for another crash like we experienced in March.
I was wrong, horribly wrong. And it cost me $30k!
Now that I have had a few weeks to reflect on my choices, I can see I made a lot of mistakes.
I thought it would be good to write a brief post about what I did, why, and how it went so wrong, which meant I ended up losing $30k USD a few weeks ago.
What trade lost me $30k?
If you have read my recent monthly updates you will have seen that I have been dabbling with inverse ETFs. These track a particular stock, index, or asset, where you only make money when they go down, hence the inverse bit.
Inverse ETFs are easy to buy and manage compared to short positions, there is no need to worry about margin calls. A great article on Inverse ETFs here by the Investopedia guys.
A friend mentioned a particular Inverse ETF called the Proshares UltraShort S&P 500 (ticker SPXU). SPUX looks to replicate the movement of the S&P500 but in the opposite direction and is leveraged 3x, meaning that a one percent move in the S&P500 in either direction triggers a 3% move in the SPXU.
SPXU is considered extremely risky and for investors who are extremely bearish on the S&P500.
You can see the recent chart for the share price of SPXU and at which point I bought and sold it.
I invested $80k with an average price of 18.00 and ended up selling around 11.20, resulting in a 38% loss and gut-wrenching $30k loss.
Not my finest hour that’s for sure!
The other issue with this particular inverse ETF is the problem of decaying share price.
The leveraged nature of SPXU means that it should be held for no longer than one day because of its daily rebalancing of the portfolio.
How long did I hold it for? Hmm around 3-4 weeks, clever eh?
Looking back over the duration of my holding SPXU I calculated it was losing 0.7% per day.
With the prospect of the S&P500 reaching all-time highs and the decaying nature of the SPXU, I decided to sell, realizing a $30k loss.
And is typical when attempting to time the market, a few days after selling the market dropped 7-8%.
Giving me another lesson on the unpredictability of the market. Interestingly, I wasn’t too despondent though as I was very relieved to be out of the position.
What was I thinking?
Was I motivated by profit (greed) or was I looking to protect my current investments against a big drop (hedging)?
It’s fair to say a bit of both.
I genuinely believed the S&P500 would significantly drop, all the economic data was making a very good case for this.
At the time I invested, COVID-19 infections were rising rapidly in the US, and the UK, with millions of becoming unemployed each week. Businesses are suffering big time, and many are not going to make it.
Rationally this is sound, but when you have the FED pumping in new money and supporting the US market, you simply can’t compete.
The biggest piece of advice that I read is from Financial Samurai (excellent blog by the way), with the salient advice of “don’t fight the fed”.
if the Fed explicitly says it will be the backstop and use whatever means necessary to prop up the capital markets, believe it.
I can see now that I was so keen to “take advantage” of the market uncertainty and make “easy” money it affected my judgment.
Ex-investment banker friend of mine Reza (check out my interview with Reza), writes an insightful blog that mostly talks about investment, wrote a great post on the typical ways of losing money when trading stocks.
Apart from the last point of being a “sheep”, you can safely say I ticked the other 4 points 😉
What did I learn from losing $30k?
Clearly, it’s never great losing money, especially a sum like $30k – I could live in Malaysia with my family for a year on this amount of money (well nearly)!!
However, what would be worse is not learning anything from the experience.
This would be a double whammy!
This reminds me of a quote,
The definition of insanity is doing the same thing over and over again but expecting different results. Albert Einstein
I pretty much ignored every common-sense piece of advice you read about investing. With the main one highlighting the danger of emotional trading or investing.
I mean, originally I had a stop loss to trigger if the share price dropped 10%, but as the price got nearer I canceled the stop loss – I know, I know, crazy eh?
How not to trade
- No clear trading strategy
- No stop loss
- Emotional trading
- Not understanding completely the financial instrument your investing in
Looking back with the power of hindsight this trade seems crazy now.
Ironically though, I lost less on this trade than I did when investing recently with experts who work in finance. (I have a great trading history lol)
And this is the thing, I am finding more and more that money-managers are great at sales but not necessarily provide the outcome. Then again, no one can time the market every time.
I have to confess that whilst this trading loss doesn’t affect my lifestyle, it delivered an emotional kick in the balls and fostered a distrust of what the market is doing.
I still hold most of the stocks I invested in over the last 12-months, mostly for dividend yield (although some have canceled or reduced their dividends), I still intend to keep them as they are solid companies that are and should continue to do well.
At the best of times, the market can seem irrational, but lately, it’s been a roller coaster of a ride. I can’t help but feel more bullish on bitcoin and gold. I am back to being in a partly cash position again and feel safer sitting on the side-lines in the short term whilst I see where we’re going.
Ultimately I will grow my wealth and keep saner by focusing on my business instead of trying to make “quick and easy money” in the markets. And the bottom line, you can’t time the market. And you certainly can’t fight the FED!