Dear Ezra and Lian,
This is such a part of my life, I forget sometimes how much it freaks people out when they hear about it for the first time. I mean, the people who think they know me well. They never see it coming. It will shake my friends much more than you or I. Money often does.
Today (Aug. 25, 2015) and the last few days are like a replay of the autumn of 1997. Currency trouble in Asia has led to large stock market declines. The swiftness with which this has unfolded is breath-taking. In 1997, similar events took months to roll out. I felt the US stock market was grotesquely over-valued and fuelled by speculative loans. The stock markets doubled in value in 30 months. Billions of dollars had been wiped out in Asian bond and stock markets, yet nothing happened here in North America.
On Oct. 21, I turned 25. The next day, for the first time in my life, I bought about $35,000 in “uncovered put options” on the S&P500. All of my options were well “out of the money.” I could only make money with a big crash. If the prices on the stock go down, my investment goes up. The further down it goes, my investment would rise exponentially. The very next day, the Dow Jones Industrial Average (DJIA) went down a lot (187 points). My “investment” went from $35,000 to $55,000. The next day, the DJIA went down another 128 points. My investment was now worth about $80,000. By the end of Friday, I couldn’t wait for Monday.
Monday came and it was historic. From Wikipedia, “By the end of the day, the Dow Jones Industrial Average fell 554.26 points, or 7.18%, to 7,161.15. Back then, this was the 12th biggest percentage loss and 3rd biggest point loss on record… The S&P 500 fell 64.63, or 6.86%, to 877.01…This crash put the Dow down 12% from its then-record high of 8,259 on August 6… Volume also hit a record high. New York Stock Exchange volume topped 695 million shares, breaking the previous record of 684 million shares traded on January 23, 1997. $663 billion in market capitalization was wiped out.” For me however, I was now worth about $280,000. I picked up the phone to call my supervisor. I was going to tell him that he would never see me again at work. For me at 25, I was young enough and with no responsibilities. That was plenty for me to retire. However, I hesitated and decided to wait for late Tuesday afternoon to make the call.
I took the day off on Tuesday. I got ready for the day that I knew would change my life. I was confident by the end of it, I would have quit my job and begin a new life’s journey. I had my plan, when my investment got to $1 million I would start selling my options. Before the market opened at 9:30 am, stock futures were showing that there would be another day of losses on the stock market. Hong Kong’s Hang Seng had fallen 14% overnight. All good news for me.
From 9:30 to 10:06 am, the DJIA lost 186 points. In those 36 minutes, I “made” about $270,000. My total was at $550,000. After 10:00 a.m., I was making over $10,000 a minute. The rate was actually rising exponentially because of the nature of my investment. At this rate, in another 45 minutes I would be worth more than a million dollars. By the end of the day, I was on track to have over $4 million.
Then a funny thing happened on my way to this new life. Alan Greenspan, the Chairman of US Federal Reserve decided to intervene in the markets. In a coordinated effort with some of the world’s biggest banks and brokerages, they began buying to prop up the market. The stock market turned around. It began to rise.
I will cut out all the details. Let me just say a few things. I sat stunned. I couldn’t sell. I kept waiting for the stock market crash to overwhelm the Fed’s actions. One day moved into the next. Options have expiry dates. I literally held onto them until they were worth nothing. I had made and lost over half a million dollars in a few weeks.
In my personal aftermath, I felt like “Hmmm, I should want to kill myself for losing all this money, but strangely I don’t feel that way at all.” My parents could have really used some financial help at that time, but I made a big mistake. I really regretted not being able to help them. It was easy come, easy go. I kind of felt nothing. As the years have rolled by, I do regret my missed opportunity. It’s been really hard the last few months watching the Shanghai Stock Index fall, but not making these same bets again. Your well-being has kept me making safe financial choices.
Here are a few things you can learn from your dear-old-Dad;
- Greed can kill you. The last few days have probably created losses over $1 trillion worldwide (my guess). There are going to be a lot of people who kill themselves because of that. If they had been satisfied with a small return, they would have their money somewhere safe now. Instead, some like me, will have lost everything. They won’t be able to deal with the consequences.
- Greed can sneak up on you. Ezra, you and I are pretty non-materialistic. Don’t let that fool you into making foolish choices based on greed. Until October 1997, I had no idea I could be that greedy. I mean I wasn’t satisfied with $550,000. I wanted a million dollars. How crazy is that?
- Have an exit plan. How are you going to get out of an investment, decision or situation? If you let your emotions guide your decisions, you will make bad decision after bad decision. Make a plan when you are calm and have no stress. In the heat of the moment, if you stick to the plan, it can get you out of trouble.
- Be accountable to somebody else. All of us need somebody to hold onto us and pull on our chain when we can’t move or we are doing something stupid. Making decisions while sitting alone in front of the TV or the computer is a recipe for disaster.
- The single best way to get addicted to gambling or anything for that matter, is to win the first time. If your first experience is great, you will come back for more. Lots of drug dealers/”friends” will give potential clients/”friend” a free first sample. The addicted will come back for more because they keep trying to experience that first time again. I didn’t make a really good investment decision, I got extremely lucky on my first buy. That was dangerous. It could have ruined me.
- Practice letting go. When we fall in love with our decisions and our stuff, we can’t let go. It is a constant struggle with me, but I daily have to let go of things. This is one reason why we constantly have to save money, give money to charity, take our old stuff to the second hand store, and throw out garbage and papers. We have to let go constantly. If we don’t, our possessions will possess us. Hold everything lightly in your hands. When it grows wings, let it fly away.
This will mean a lot more to you when you are older and you find out how difficult it is to earn money through honest, hard work. I hope my bad experience helps you in some way.