A (very) cautionary tale

Friday, 11th February 2011 14:57 - by Robbie Burns

When I hold seminars, I often hear some terrible stories about trades gone wrong. It's usually about someone holding onto a share for far too long, buying more as it goes down, or building up too big a stake in something that's a stinker. I've met lots of people, for example, who bought Northern Rock near the top and held all the way down, and many people who held onto shares that went bust like Connaught and Aero Inventory. However, this week I met someone with a terrible story to tell. A lovely guy bravely told us how a series of bad trades had a terrible impact on his life, his health, nearly costing him his marriage, his house, and everything. The basis of the story is that he bought CFDs in a company; it carried on going down and he kept buying more and more CFDs. And then more. The share kept on going down and soon he was borrowing from family and friends. The CFDs were costing him a fortune to keep open and he grew more and more scared. I asked him if he would tell me his story in writing, which he kindly did and allowed me to publish it, and here is the edited version. In particular, this is an excellent ‘Warning’ read for newcomers to the market. +++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ "I had been buying shares/Tracker funds for years and thought I could walk on water. I had made more in a year through the late 90's than I could earn as a wage. I had a good share portfolio and was doing very well indeed. I wanted more, so much more, driven by the fact I wanted to retire at 50. I bought CFDs without knowing what the hell they were really...1,500 at a price of around 380, went up, bought 5,000 more on the profit (still holding all) at around 430, bought 5,000 more at 501 and making a killing! Bought 5,000 more at 510. It went all the way up to 586. I was so happy and was - on paper - very rich for me. I was invincible and a Super Trader! So very confident. I made a loss of £2,000 in another CFD position, but learnt nothing. What was £2k when I was so far up on this one share? I was paying around £300 - £350 per month interest, but the paper profits meant this was nothing...I never bothered looking at the global meltdown around me. It started to unwind... but I was too ignorant or stupid to work it out just yet. It kept falling and falling. By the time I realised what was going on, I was in way over my head but managed to close out the first two trades - but was left with an average of £5.05. The price fell down to around £1.08 intra-day over a lengthy period. I was in trouble. In this period, the Broker moved the margin to from 10% to 30% and placed a huge ‘Call’, giving me until the end of the day to provide the funds. I borrowed on credit cards again. I could not afford to lose. I had already sold every share I had to shore this up. I borrowed from family, had a Wedding looming, and my job was looking shaky. I was a dab-hand now at moving my max'ed out credit cards at 0% for a number of months. The next task was to borrow against the house. Family were asked for funds, but not told why. I have a good family who helped me along whilst I was still paying this huge interest each month. I got wed to a beautiful, intelligent lady in this period (which I paid for with a bank loan, the ring cost me 2 months take-home wages...) who knew I was in trouble, but was not in a position to help. I was so close to a complete nervous breakdown and friends were concerned as was family and the now Wife. So, cards max’ed out, 3 loans from banks (all done together to ensure it was not all registered) and then an Equity Release for the house. Not much left to go... Oh yes; I asked the Wife to rid the joint account for which she agreed....I now had a baby on the way and a car that was on its last legs. The job front eased off and I managed to get a higher paid job closer to home, which helped the funds....thankfully I had enough to keep me going…just. Talk about stressed. My health suffered greatly. I hurt my back and was off work for weeks, and one of my parents suffered a heart attack. I thought they were going to die... I felt dead inside and was despairing. It would have been easy to hit the bottle, but I had a good upbringing whereby you face what you have done and sort it out. The share has only just (January 2011) gone above the price I bought at... Now I am in profit and going on your course (and reading the book), I have set my stop-losses and will now make a few quid on the buy price (Ignore the £000's of interest I have paid). I have become quite hardy, although I am not sure why I did not have a complete nervous breakdown... The moral of this story is: Don't play with more than you can afford to lose; don't be a ‘cocky sod’ (that’s over-confident in Northern speak!), understand what the hell you are doing, and the risks. If you don’t get it, then don't do it. Before your readers start to slash their wrists, I have managed to re-build my portfolio and managed to make a good amount (for me); to the point I could make myself mortgage-free. Good things can happen, eventually. No-one knew the full extent of this until now. It has been quite a good therapy typing this to you, but if just one person is ‘saved’, then I am happy enough for you to post this. The Wife and I are fully open with each other now as I felt that, although I had kept above water and protected her from the truth, she should have known. I have shown her all my accounts to show we are actually in a good position now. I nearly lost the lot: job, health, family, house, marriage, and son. I may not make retirement at 50, but I will be in a better shape and will try not to repeat my experience - it has left many mental scars.” +++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ A terrible story. He sums it up well, but the moral is: Don't play with more money than you can afford to lose, don't buy Derivatives if you don't understand what you are buying, and use at least some kind of stop-loss. You ought never to get in such a position. I hope too that this story might just ‘save’ one of you out there about to go down the same route. Also, while you may note the story had a kind of happy ending, he knows he was really lucky. The share in question could have gone bust. Actually, one other moral he is right about is do not be ‘cocky’. I call it ‘smug’. I may have made a lot of money from the markets myself, but I could easily give a lot of it back. My way round it is only to add the ISA money in every year. But to be honest, yes, I have on occasions felt cocky myself. At that point, the market will come and kick you where it hurts. Always treat it unemotionally as a business. Finally, never be tempted to buy more and more of one share as it goes down. It can lead to you losing your capital. A balanced portfolio with sensible stop-losses is always best.