Wait a minute? How is the loser above down 132%? Isn't the most one could lose 100%? When you buy the stock with your own money, yes that is correct, the most you are on the hook for is what you invested. However the brash new rookie who is trading on margin and trading leveraged ETFs, thinking he can do no wrong, yet can owe a fuck lot more than his initial investment.
The fundamental cause of trouble in the investing community is the dumb ones are cocksure while the intelligent are full of doubt
Let's take a step back and let's pretend your friend opens a modest margin account (2:1 leverage) meaning with his $10,000, he has $20,000 in buying power. When we started out as prop traders our leverage was over 100:1 (because we were professional traders with our Series 56, now we have a few more licenses to add yet these have nothing to do with improving our trading). A Series 7 is not going to make you a successful trader, trust me, I have one along with the 56 and a few others. Back to the leverage talk, we have seen shady brokers offer newcomers as high as 1000:1 leverage, meaning one could start with $1,000 and have the ability to buy $1,000,000 worth of stock. Now your eyes might be lighting up at this (dumb) idea.
Why is this the dumbest idea on this planet, because just think for a second what happens when you’re wrong (I know you think you will be 100% right every day) however with that kind of margin, what percentage loss will wipe you out of your own capital? What percentage loss would blow you up with that type of margin?
1%, a measy one percent loss would blow up your account in your first trade, shit there are some high beta Chinese names that on Monday morning at 9:31am have a bid ask spread wider then 1%. Now that’s not even the worst part, the rookie trader now armed with his own bomb strapped to his chest is given the detonator with a smile and doesn’t even know it, yet.
“We know that dumb money doesn't know, they just don’t know that they don’t know.”
Where do they tend to go first? Penny stocks, options, or leveraged ETFs and ETNs. All of the most riskiest asset classes known to man, even makes me cringe considering a penny stock as an asset class. What's an ETN you might be wondering? Here's the definition and let's see if you have a better idea of what they are.
Confused yet? Remember the greatest enemy of truth is very often not the deliberate, or dishonest lie, it's the myth, the persistent, persuasive and unrealistic myth that causes the real pain. Too often the new trader holds fast to the cliches that will blow up his account. The rookie is now armed with a margin account and a list of 100+ triple leveraged bearish ETNs. His eyes light up since he's is going to make the market his bitch with his Spongebob Squarepants margin account. He can dream for a second how his 100:1 leverage and 300% leveraged bearish ETFs will turn that $1,000 into a million in a week!
However reality sets in quick, now the new guy has no time to read the prospectus of these ETNs, or time to look at the daily chart of these pieces of shit. Come on guys, he just found a bull flag on the 1 minute chart!
I'm going to ride this back to $3,000 and that would make me a billionaire!!! How naive. What they are not aware of is that this stock has been reverse split more times than Kim K in that video with Ray J. The stock was never at $3,000, it's just the ETN has to keep splitting the stock to keep it from going to zero as it's designed to go to. Yes, you read that correctly, they designed these ETNs to go to zero and tell you to your face that they will do so. People still line up to buy them (myself included many years ago) if you don't believe me take a look below.
If you read the risk factors they tell you that it's going to $0 in time, however fuck those guys, the rookie is here to turn his 10 franklins into a billie before they go to zero.
So let's recap. We have rookies with no idea of risk management, game planning, chart reading or any basic trading skills, who are given a margin account that can be anywhere from 2:1 to 1000:1 leverage and they tend to gravitate towards 300% leveraged bearish ETNs. Disaster. Now it's not just broke, dumb money that does this. We have seen smart money fall victim to this as well when they get overconfident in their trading. A BSD who manages around $400,000,000 of his client’s assets once told me:
“Over the last 30 years in this business, all of my client’s biggest blow ups were due to margin and nothing else.”
In the beginning most want to act like Spongebob with there inflatable arms, they are so focused on how quick they can double their lunch money yet they fail to realize that the market rewards patience, not leverage. I, myself have learned this lesson the hard way and it almost ended my career as a trader. We have watched first hand hundreds of professional prop traders blow up with leverage, we have seen millionaires lose their entire network from one bad bet, and we have witnessed thousands of rookies piss through their bankroll in just a few months with margin and leveraged ETNs. For all of those losers, there is not one success story that we can think of over the last decade plus of trading. Please do not take this lesson as you trying to prove us wrong and being the one guy or girl to make money in that space because all that really matters is having time on your side, not walking through a field of landmines carrying a box of grenades and a gallon of gasoline while smoking a cigar.
Do you have balls?
In the Group Chat share your experiences if you have (unfortunately) dabbled in margin or leverage ETFs or ETNs. Shit if you’ve made money net net using either we would love to hear that as well!
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