The Part-Time Trader (4 page)

But in all of that, I found motivation—a motivation to leave what had become the norm of the past eight years and become the trader I knew I could become. I was a full-time trader in the making, and I was achieving that status as a part-time trader, whose success would eventually pave the way into realizing the career that for so long was only a distant fantasy.

As much as I would have liked for it to be something I obtained overnight, it wasn't. There were times when I would sneak out of the office and just drive. Drive anywhere. To the beach to reflect. To a random hotel where I would just roam the hallways as if I were actually staying the night there. I even at times would find the movie theater an escape into the realm of make-believe for two hours, and on Wednesday when they would even throw in a free bag of popcorn.

At times, I was depressed; at times, anxious and annoyed. The job paid the bills but emptied my sense of self-worth and value. When people asked me what I did for a living, I felt like a coward to tell them what I actually did, “Another piece of someone else's puzzle.” A laborer, a Do-Boy, a willing slave on the plantation of Corporate America in which the chains were a paycheck I couldn't afford to rid myself of.

Extreme, yes, and ungrateful on my part for the opportunity to work and provide for my family? Absolutely! But my identity in life and who I felt God had created me to be were at conflict within. I couldn't reconcile the two with each other, and as a result, I lived my life day to day in discomfort and perplexed both intellectually and emotionally.

Despite all of that, I realized I needed my job. Otherwise, who would provide for my wife and child and their basic needs. As a result, I had to come to grips with the idea that quitting my job wasn't an option for now. I couldn't tell the boss man to “take this job and shove it.” No, I needed it still, and despite my desire and growing skill set as a trader, I could not allow myself to compromise my job security and livelihood for my family and me. So I stuck with it. I grinded it out, and if it came down to a trade and getting an assignment done on time, I made sure the latter was taken care of first because if I allowed my trading to overtake the job at hand, I would never achieve the full-time trader status I so desperately desired. Instead, it would only result in my becoming a full-time failure.

B
ack when I was only 11 years old, an elderly Cuban lady, who was like a grandmother to me and the one who helped raise my mother, passed away. She left my three siblings and me $5,000 each for our college tuition. Since I was still about 7 years removed from going to college, it was important to find a home for this lump of cash until then. Thankfully, my father used it as an opportunity to teach me something that would pave the way for a lifetime of learning and, unbeknownst to him, start what would eventually become a livelihood for me.

We took that money and put it in the stock market. What a time to do it, too! It was the 1990s where everything went straight up. No pullbacks, no flash crashes, no quantitative easing. It was the stock market's gold rush, and everyone was clamoring to get in.

Desk jockeys were leaving their professions en masse to become self-employed day traders. If it was tech, then it must be had. If it was a “dot-com” stock, then sell the family farm for it. They rose from pennies per share all the way into the $100s. Anyone and everyone wanted in.

My father took that money and guided me into choosing two mutual funds. One was an Alliance fund, and the other was a Putnam fund. We invested $2,500 in each one. After seeing my portfolio go from $5,000 up to $7,000, it became quite natural for me to grab the newspaper every morning, and instead of reading the sports section for the latest news on the Miami Dolphins, I flipped immediately to the business section and scanned for my funds in the midst of thousands of others for the latest price of that mutual fund. Over the next eight years, that small inheritance I had as an 11-year-old eventually was worth north of $30,000 by the time I graduated high school.

Beyond just the money that I was making during this time, I managed to keep a small notebook, and throughout different periods of my investment, I started plotting my own prices to see how each fund was rising in share price over time. I had no idea what technical analysis was at the time, but I was doing it in a pre-Internet age in the most rudimentary form known—by hand. It was not candles, moving averages, Bollinger bands, or any fancy form of price representation. It was price and price alone.

What I learned during that time was that there was a wavelike feel to plotting the price of a stock. Even in the strongest of stocks, there was a $3 to $4 increase, then a $1 to $2 pullback, then another $3 to $4 increase, followed by that eventual $1 to $2 pullback. And the cycle would repeat itself. As my investment grew, I also saw where one of the two funds could take a momentary hit and really drag down the portfolio for a period of time despite the grand performance of the other fund I would be in. This is where I learned about risk. I realized that if I was in four or five funds and not putting all my money in just the two mutual funds I was currently in, then if one fund was lagging in performance, it would be much easier for the other four funds to pick up the slack and not allow for such a big performance hit to the portfolio. Now you could say I was becoming self-aware in regard to diversification.

Ultimately, the tech bubble would burst, just like the housing market later, and my investment of $30,000 shrank in a sudden and drastic manner. Luckily, before this happened, I bought myself my first computer for college (I was proud of my first 500-megabyte hard drive the computer came with), replaced the transmission in my car, and put a new set of tires on that clunker Oldsmobile I was driving. After all was said and done, my investment was worth only $10,000. While I might have walked away with over twice the amount I started with, I still had lost over $20,000 of potential profits that I could have done a better job of securing and not allowing the fantasy of sustained long-term growth to overtake my thinking. In the end, this became my lesson into the meaning of “portfolio capitulation.”

By this time I was in college, and while my understanding of the financial markets was better than most, during the next four years I became more interested in everything that college had to offer me rather than what was becoming of the new financial world with online brokerages and real-time quotes. At the end of the day, I had graduated from the University of Central Florida with my degree in political science, chose against going to law school, failed to land a job opportunity in the White House, found my future wife, and took a job at the first place I could find employment.

I remember the first online brokerage account I opened post college. I went with a discount brokerage that gave me a low commission rate only as long as I conducted my trades on Tuesdays. Strange, I know, but it was the cheapest outfit I could find, and I went with it. I ended up dumping a few hundred dollars a month on companies I found simply by staring at balance sheets, income statements, and cash flows and thereby eventually making a “sound” decision as to whether I should “buy” or move on to the next stock. I did okay, but it was more luck than any kind of special skill set I had working in my favor.

Early on, there was a defining moment for me that shaped my outlook on the time frame in which I chose to trade. I had put about $1,000 in a stock called Urologix (ULGX), shown in
Figure 2.1
. A penny stock at today's price, but when I bought it, it was trading at $8.00 per share. I bought myself a handful of shares, and ultimately I saw this price get as high as $16 per share. If you have followed my trading for any length of time, you know that is a gain I would book the profits on a hundred times over without even flinching.

Figure 2.1
Urologix (ULGX)

Chart courtesy of StockCharts.com.

But I was not the same type of trader back then. Not even close! I was a long-term investor. I was someone who had read all of Peter Lynch's books and had learned to invest the Buffett Way. I even bought the Benjamin Graham and David Dodd book entitled
Security Analysis.
Of course, it was not to actually read it, but in hopes that the words would peel off of the pages and somehow enter into my brain (I still have the book sitting on my shelf today, with no intention of ever actually reading it).

With the limited understanding I had of the financial markets at the time, and the experience I was leaning on from the triple-digit growth from the 1990s that I had momentarily experienced, I was not going to be satisfied with just 100 percent in gains. I believed in the “long-term story” of this eventual sub-$1.00 stock. I married myself to its potential. So I rode this stock higher and higher, and eventually lower and lower, and below my eventual buy price, until I sold this stock later that year at a little more than $5 per share.

I was glad that this happened to me, though—honestly. Had I been successful in this trade, I might have bought into a flawed theory of long-term, “buy-and-hold” investing being relevant and a profitable strategy in the Internet age. I remember that day after ULGX had received the positive FDA news on a drug it was trying to get into production. A coworker in my office came in and I told him all about it. I tugged at my waistline and pulled at my imaginary suspenders as if I had made some genius investment move. He told me to sell and book those gains right away, but I was way above that whole short-term gains strategy. I was long term, baby! He begged me to sell it, having little financial background himself, but he showed me on the whiteboard in my office why I was foolish for not taking gains right then and there, but I ignored him completely.

It wasn't too long after that, in which I had a run-in at the local sandwich shop with my old friend Nathan. He told me how he had just made $400 in a single morning of trading from a stock pick off of his brother. I warned him that was dangerous business and that trading was just another form of legal gambling.

Deep inside, though, I was jealous. Every Monday, he'd tell about these stock picks his brother Matt was getting him into and how he was creating a great side income in the financial markets. As a long-term investor, $400 in a stock for me was probably worth a year of gains. Something was not adding up in my mind. I looked into it, and gave his brother Matt a call. We talked about trading, and he gave me a few stock picks to trade the next day. The first one was a $4 stock that I sold later in the day at $4.16 per share.

Wow! That felt dirty. I had just made 4 percent in a matter of hours on just one trade and I liked it. It didn't even feel right, almost like it was a crime to make a quick gain in a day's worth of work. For the next month or two, I would call him regularly, and Matt would give the latest picks he was trying to get into.

“Hey man, you got any picks today?” I'd ask.

“Sure, ABC if it pulls back to $10.25 and XYZ if it comes down to $7.40,” he replied.

“That's over 20 percent away.

“Wait for it!”

Click.

I would do exactly what he told me to do and make a few bucks here and there, but then I realized here I was in my cubicle and I would be anxiously calling him asking: “Should I sell?,” “Why is this stock dropping?,” “Do I get in?,” “What does a halt mean?” Relying on another person for stock advice just wasn't going to get me out of this job I clearly hated with a passion.

A lot of the stocks that I traded were downright “penny stocks.” Some of these stocks traded at fractions of a penny. Essentially what I had done was create a formula with Matt where stocks that had risen 200 to 300 percent in a short period of time would eventually peak and pullback. What our formula sought to do was “catch the falling knife,” which also happens to be a concept I am gravely against today in my own trading. Nonetheless, I was trading and the formula worked surprisingly well. I would later come to realize that it had a lot of the same characteristics of Fibonacci theory. The only problem with the formula came when the stock didn't perform like it should. I wasn't using stop losses, because my belief was to wait for the stock to come around to profitability. In two such instances it didn't, and boy, did it ever hamper the performance of my trading!

MBA Holdings (MBAH) was my first disaster. I bought this stock at $0.015 per share. It had just made a massive run up to $0.08 and I thought I was buying it on the “cheap.” There was a story behind this stock, and if it could pop just a few pennies, I would have made thousands on the trade.

It was exciting. Every day I had no idea if this stock would make my wildest fantasies come true or not. Instead, it taught me that I could have what I believed to be was an “iron-cast” formula for trading and beating the markets handily, but if I did not take the risk side of the trade as seriously as the profit side of it, I'd never make it in this business. Though I quickly learned this with MBAH, I did nothing to rectify this glaring problem in my trading style (much less my infatuation with stupid penny stocks). In fact, in my mind, the trade was not a red flag but an anomaly or unfortunate event that should be ignored.

There was one such occasion during the MBAH trade where I was on business travel at some event where our company was marketing our products to other companies. We were in Kansas City, Missouri, at the historic Union Station. I was away from my computer, smartphones didn't exist, and the travel laptop I was assigned did not do me much good outside of our hotel room. In order to keep track of my pathetic MBAH, I was relegated to taking regular breaks from the booth under the guise of taking an “important phone call,” needing to buy something to drink, or having to use the restroom.

I found this little room tucked away near the bathrooms, where it was unlikely that anyone I knew would find me. My broker at that time was TDAmeritrade. I took out my flip phone, dialed the 800 number that allowed me to get a quick quote of any stock in the market. But I had to say each letter of the stock symbol into the phone mouthpiece.

Let me just say—for those who ever walked by me while I was doing this, it would usually turn heads for those in proximity to my voice. Roughly 80 percent of my attempts to get a stock quote would end in “Sorry, I did not understand, please try again.” And if the stock symbol contained a “B,” “D,” “P,” “V,” “E,” “N,” or “T,” you could rest assured the phone conversation would be difficult one to get any stock quote for. Trying to get a quote for MBAH sounded something like this:

“Welcome to TDAmeritrade's automated phone service. You can either say the company name or symbol.”

“M . . . B . . . A . . . H . . .,” I would state punctually.

“I'm sorry, I did not understand, please state the company or stock symbol again.” It replied.

“Eeemmmm . . . beeeee . . . A . . . aechhhhh,” I said, more clearly than before.