What you’re looking at is a graph comparing my fictional investment portfolio (Stocktrak) with several popular composites, the Dow Jones Industrial Average, the Russell 2000, and the Standard & Poor’s 500, which recently celebrated its fiftieth anniversary. As an ongoing assignment in one of my courses, we used the Stock-Trak trade simulator. As you can see, I was doing fairly well, considering that my “investment strategy” consisted of the following:
- I read one issue of Barron’s on the return flight from Tahoe.
- I occasionally glanced at the front page of the Wall Street Journal because otherwise it fills up my mailbox at work.
- When I remembered to do so, I watched Jim Cramer’s Mad Money. And then I did whatever he said to do.
- It was not uncommon for me to pick a particular security just because.
As you can see by the dashed vertical line, February 27 was a bad day for the market. I did not fare exceptionally poorly, however, which is very fortunate. My mutual funds were “growth/emerging market” funds – Asia and Latin America. They did not take kindly to the Shanghai bust.
But then I did something really dumb, because, well, it’s not real money, and it doesn’t really matter. I bought 35 futures contracts on Gold, which accounts for the lion’s share of my deviation from market performance. The dashed blue line, “What if” represents my portfolio value if I would have refrained from making ill-informed, reactionary decisions. Probably the only reason that I made this particular move is because as students, we are able to see our performance among our classmates – that is, Stocktrak updates your position relative to your classmates on a daily basis; it’s not a competition, and your grade is not tied to your rank, but the mere presence of that information (i.e., Portfolio value and Return%) made me gamble. It appeared that quite a few people had shorted one or more of the indexes. I had not. I went from being #3 or #4 in the class, to the bottom third, overnight.
Now, I’m not a gambler. I’ll play the occasional poker game with the guys, or maybe some blackjack if the game is cheap (and I mean very cheap – like $3/hand cheap). What I had done shortly after February 27, was basically the Martingale Strategy for the Stock Market. As a result, and as should’ve been expected, I lost about $70K in a day or two. Where did the money go? If you guessed “Futures,” you’re right.
Surprisingly enough, I fared very well in my short positions – although the results are skewed by a million dollar bet on the Nikkei 225 which paid off, in my favor, to the tune of $18K. So, for the time being… I’ll leave the investing to the professionals. I don’t have the discipline to deal with it.
Later in the week, I’ll give some more specific shortcomings and errors that I probably could’ve avoided.
