In 2000, I learned some very valuable – and expensive – lessons that still guide my trading today. It all started during the go-go 1990s, and it ended in spectacular fashion when the dotcom market bubble burst.
I made every mistake during the dotcom market bubble
If you were bullish, the 1990s were really fun. At the time, I was managing a rather large pension for Sunkist Growers, and I traded “on the side” for myself with a small Schwab account. I never thought too seriously about making big money. Then I discovered “margin”, and I began pyramiding my trades on top of one another.
You likely know that trading on margin means you are borrowing from the broker against your collateral (stock). I didn’t know it at the time, but you can get into a lot of trouble with a margin account (and using it). Some use it smartly and advantageously, but I did not. During that time, no one talked about the market going down, so my strategy became “margin to the hilt”.
Each day, the market surges were so large that my account ballooned to levels I never thought were possible. Oh, there were the few brushes with disaster, like the Russian ruble crisis, Asian contagion and mess at Long Term Capital. But these fires were put out quickly, and the markets kept going higher.
I played all the tech stocks under the sun. You name it, I owned it: Yahoo, CNET, Doubleclick, CMGI, Infospace, Go2Net, Juniper Networks, Redback, Arriba, Brocade and especially the companies that had a Y2K fix for your computer systems (Accelerate Tech was one). There was a time in 1999 when traders would just flock to one hot name each week. Traders were making money hand over fist.
All the while, traders who were stuck on the sidelines or shorting stocks said the dotcom market bubble was getting too big and needed to be pricked. It was easy to ignore them as the gains continued to stack up.
Finally, the Fed said, “Enough.” In the three years since Alan Greenspan’s “irrational exuberance” speech, the bubble had only grown bigger. It was at dangerous levels now, so the Fed enacted a series of interest rate hikes. That was enough to choke off the excess risk. The markets crashed down to Earth in early 2000, crushing some companies in the process.
I nearly destroyed my account
As for me, you guessed it. In just a few short years, I grew my small $7,000 account to $500,000. I did this by continually taking on massive amounts of risk, naysayers be damned. By July 2000, I was left with just under $100,000. Because I was trading fully on margin, I had very little cash to buy the dips. I didn’t have any index puts in my account to protect my portfolio.
I learned valuable risk management lessons from this painful outcome: Don’t trade more than you can afford to lose. Take wins when you have them. Keep plenty of cash on hand. Always have index puts in your portfolio.
Market bubbles are a normal part of trading life. They represent extreme greed, and they go back centuries. A lot of traders, investors and analysts are speculating that are we in a market bubble now. Are we really? Find out what I think in next week’s blog.