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A Brief Treatise on the Art of Losing Money on the Stock Exchange

November 3, 2000

Making money on the Stock Exchange is easy. All one has to do is wait for the start of a long bull market, invest your money and wait until the top is reached. Then sell and bank the profit until the beginning of the next bull market.

Of course, some people think making money is hard work. They are always reading the financial pages, listening to the financial news and spend hours in front of their computers massaging the prices of a host of shares in every which way, trying to pick up the next Didata, or even a Richemont. What the people do not realise is that there is only one Didata, but there are more Ixchanges and Idions and Comparex's (only the early days) and Pick & Pays. If one spread one's money around across shares and sectors – just stay out of property funds and gold – the return will balance out between the good and the very good performers.

And for all their hard work, the only people who really benefit are the brokers, who see a handsome increase in their commissions.

If making money is easy, losing money is an art. Many people daub paint at canvas, but the work of the true artist stands out, easy to recognise among the rest.

The art of losing money on shares
As we all know, to be good at art is mostly in your genes. Learning to drive is a skill, and most people can master it, more or less, given sufficient interest and practice. However, driving badly is an art, and for that one must have the right genes, too. A skill one can learn, to be good at an art is hereditary.

The inbred, and subsequently well practiced, ability to select a loser is the most important element in the art of losing money on shares. It does not come easy. In a bull market very few shares are losers and it takes way above average insight and understanding – some would say clairvoyance – to recognise a loser before it really starts to lose money. Of course, it is always easy to spot the loser once it had lost 20% or 30%.

In a bear market many people lose money – it takes the true artist at losing to pick the real losers, those shares that fall by 50% or 60% or, glory be, the ones that straight line it down for 80% or 90% and wipe out almost the whole investment. And if one can pick the 'one-centers' while they are still worth 100c, or perhaps 250c, what a pleasure!!!

Once the purchase of the loser has been made, the process of losing money becomes almost automatic. Some faint hearted people do not know or understand the joy and tense expectation that is experienced when a price goes down . . down . . down . . – the missed heartbeats when it looks as if it might all be in vain, when the price turns around and starts improving rapidly, then the rapturous feeling when the price suddenly reverses and plunges to new lows – and so they chicken out too early and sell, but they do not know what they are missing. Dilettantes, not true artists.

Oh, you say in a bear market most people lose money? It is not an art?

Yes, losing money is easy, once a bear market starts. What makes the difference – what distinguished the true artist from the plebs – is style. Picking the real losers from among the also rans, as explained above. That is why losing money is an art. Everyone can use brute force and blindly stay long into a bear market. That is common place; even people who do not understand the difference between a share and a warrant, or between SAFEX and the JSE, nor know a put from a call if one should come to visit, even they find it easy to lose money in a bear market.

So just losing money in a bear market doesn't count. It is the way it is done and – most important – the ability to select the real losers that count.

Discipline, discipline, discipline!
As mentioned, the first step is to identify a loser.

Once this important hurdle has been crossed, the key to the quality of the artistry on display can be found in the size of the investment. It is easy to recognise people who will never amount to much in the select world of losing artists. They ponder long and hard before staking only a fraction of their wealth on what is clearly going to be a real loser.

The Picasso's and the Tretchikoff's of the stock market plunge their whole stake into the market on the basis of "winner takes (nearly) all" – and what makes it all so exciting and so thrilling is that everyone knows well in advance the bear market will be crowned as the winner. As it always does.

"Faint heart never won fair lady", is often heard in affairs of the heart. The same is true of the joys and pleasures of losing in the stock market. Never a faint heart be – be a devil and take the plunge!.

Once the chips are down and the game begins – and the losses start to mount! – good care must be taken not to succumb to the very strong temptations that will soon be tugging at the conscience. This is where the three main requirements for success come in: they are discipline, discipline and discipline.

Stick to the rules that are given at the end of the article. Do not deviate.

The real, true artist must be able to distance himself – this chauvinistic pronoun is used intentionally; men are much better than the opposite sex at the fine art of losing money– from the distractions that try to pull him away from his magnum opus.

These distractions can be minor, such as the fading memory of the Ferrari that he has been ogling for three years now, long hoping that he could lay his hands on the extra R250 000 he needed to make the purchase price of R1,75 million. Or perhaps the skiing holiday in St Moritz that he is now considering canceling. It gets more tough when he has to find an excuse not to take the family to the Baccarat or the Linger Longer, but has to sidestep the issue with, "The Nando's advertisements are so cute perhaps we should support them, too, occasionally."

It gets downright dangerous for the loser's mental health when he sits and watches his money disappear while his wife is trying to arrange a loan from Father-in-law so that the bond installment at the end of this month will not go the same route as those for the past three months. Even more so if the building society is beginning to write nasty letters, which makes it that much more difficult to concentrate on the essentials.

I know it is the weakling's way out, but perhaps one should fund a small trust for the wife and kids, even sticking the house into the trust as well, if one wants to go the whole hog. Then the wife can run the domestic expenses from the proceeds of the trust – at least the nagging will stop and that will be one less distraction.

If the expert artist can deal successfully with these extraneous events and other intrusions that threaten to shatter his concentration, the point will eventually be reached when the second most important decision has to be made – only second in importance to the one that selected the loser in the first place.

When to sell?

Sell too early and then one has to watch in disbelief as the price keeps on falling. Sell too late and then the disappointment of missing the true bottom will linger for a long time.

Heretics who believe in that abomination known as a "stop loss" just do not know the pure joy one experiences from that most difficult feat – selling right at the bottom. That is the true pinnacle! (Not even the rare occasion when one manages to buy right at the top comes near, although that too is one to tell the cronies over and over at the local pub.)

Except, of course, that most exquisite of triumphs, when one attains a "Perfect Double" – buying right at the top of a bull trend in the chosen share and then managing to sell right at the bottom of its bear trend; even more so if it had been a good one that has lost more than 80% on the way down.

That is what dreams are made of! Despite its lure, and the great effort all losers expend in pursuit of this most glorious achievement, very, very few taste success even once in a lifetime of trading.

Of course, the fact that the trading career of most losers is of limited duration may have something to do with it.

Throughout this, there is one cardinal rule that MUST be obeyed at all times!! This is the principle of STOP PROFIT! If one buys a share and the price insists on going higher, it is imperative to sell very soon, immediately the rising trend is confirmed. One can always use the excuse of, "It is wise to bank a profit before it turns into a loss.", to avoid any criticism from fellow artists. A better excuse is that on occasion one has to accept a profit, even if only to have the wherewithal for a new venture into the market in pursuit of a loss.

Just like the pigments and brushes painters must have if they are to practice their art. For the loser, money plays a somewhat similar role and at times one has to pocket one's pride and accept it from wherever it comes – even from a profit.

Provided it is not too large and does not happen too often.

For all aspiring losers out there – novices as well as people who have been contemplating the market and wondering whether they should take the plunge – with the emphasis on the term "plunge!" – here are some hints:

  1. During bull markets the real pro keeps his money in the bank. It is not worth the effort and risk to try and pick a loser when almost all shares are hitting new highs every week. However, the novice may find that his bank roll is a little too thin to become a star at losing. In that case it is acceptable that the novice climbs in during the bull market to make as much money as possible. Provided he does not brag too often about it – remember, during a bull market it does not take any skill to make a profit. The whole herd is doing so.
  2. When the bear market starts – that is the time to aim for. Make sure to speak to your bank manager about an overdraft and check what size bond you can get on the house.
  3. Select a loser. Some experts say that the most likely losers are those shares who have run the most during the bull market – particularly those who have kept on hitting new highs while the ret of the market was already under some pressure. Others say, "No. Go for the ones that have already been beaten down during the tail end of the bull market – now known as 'value stocks'. They are the dogs and when the bear market begins they will be beaten down even more."
  4. Do not spread you money over many shares. Trust your judgment and stake it all on the one you believe will be the real loser of the bunch. Now don't be chicken and go for a half hearted attempt!! Jump in at the deep end!
  5. Seal yourself off from all distractions that might cause you to slip up and sell before the bottom is reached. However, if you do fail, bear up. There will always be another bear market a few years from now.
  6. Remember, if your choice was poor and the share price persists in increasing along with the rest if the bull market, there is an easy solution – the Stop Profit.
  7. Lastly, and the very most important – Close your ears to the heresy of a "Stop Loss". Many a true artist has fallen by the wayside, never to realise the full potential of his natural talent, simply because some misguided soul has hypnotised him and enticed him into that abominable practice.

The above is not written in jest, nor in ignorance.

It is the result of a lifetime of observation and personal experience that speaks.

Losers, listen. And obey!


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