Investors have been looking for income from alternatives to low yielding bonds since the Federal Reserve lowered the interest rates to zero after the 2008 financial crisis. This search for income in a low interest rate environment has led to a huge inflow of investment into master limited partnerships and high yield bonds over the last few years. According to the Wall Street Journal, from 2010 to 2014 a net $44 billion flowed into MLP mutual funds and exchange-traded funds. Lured by yields of 6% plus at a time where the 10 year treasury bond yields 2 percent, investors have been forced into assets that carry far more risk.
Below is a very sad tale from a newbie trader who didn’t understand that taking asymmetric risk can be fatal. The trader shorted a $2.00 stock thinking it was going to go to zero, but then a news release was put out saying a group of influential investors had taken a position in the stock and the stock immediately zoomed up 600% in the after hours market.
The lesson here is that taking a short position where you have only $2.00 of upside and unlimited downside (in his case much more than he even had to lose) is like picking up pennies in front of a steamroller. You could make a little, but if you’re wrong you’re going to be flattened.
This story is an absolute worst case scenario, but even so the risk is not commensurate with the reward.
A 32-year-old small-business owner from Gilbert, Arizona, posted this page after a huge loss on KaloBios Pharmaceuticals.
Hello to all you traders out there. I’m starting this page out of the recommendation of other traders in the community.
I hesitated on doing this but I literally owe Etrade $106,445.56 as of this moment what would you do if you were in my situation? I’ll do whats needed and sell what I have to get them paid but if someone feels my pain and is willing to help out—who am I to say no?
If you don’t want to donate I understand, at least read my story of what happened today and protect yourself from the same happening to you! This is a terrible lesson for me but if this helps just one person than I’m happy I wrote this.
I’m a fairly new trader, been trading since about March of this year. I have learned alot about the community and trading…well not enough about trading as you will soon hear.
I have a fairly small account, but its over PDT. As of this morning it was $37,000. I keep it small because I wanted to manage risk, the most I can afford to lose is what I have in the account….$37,000. When I get some profits I take them out of the account because I wouldn’t want to lose more than $37k.
I was holding KBIO short overnight for what I thought was a nice $2.00 fade coming. At the close of the bell I saw the quote montage clear out and figured today there was no action after hours in the stock. So I went to my office for a long meeting. I got out of the meeting and saw a message from one of my buddys, he asked if I was ok since I was short KBIO….my heart dropped. “Shoot did I blow up my account, everything I worked for? I don’t want to lose all $37,000 that would be terrible.” —It was much worse.
The stock was at $16 and my account was negative over 100k. I figured it was a mistake, Etrade would never let that happen, they must have cut the position when my account got to $0….nope. I immediately called them and they confirmed I still owned all the shares. He says that it got out of hand too fast for them to cover me, he says that all he can do right now is cover. I was devistated. I asked him to cover at $16 and he waited trying to find me a good exit. I told him to do it asap and the fill was around $18.50 avg.
At the moment not only is my $37k gone, but I now owe ETrade the negative balance of over $106k. I always knew I could blow up an account and I was financially able to “afford” to lose the $37k. Never in my wildest dreams did I imagine that Etrade would NOT have some sort of stop or circuit breaker in place that would automatically cut a position if the account went to $0…..how could they ever let it get to -$144k loss on a account that small! Also, why did I have to call them to find out what was going on, why did they not alert me or call me when it went neg???
Cliche´ – “Make Hay When the Sun Shines”
For my son and daughter: The sun is shining right now, but some days are rainy. You have to appreciate the good days and prepare for the inevitable bad ones. Now that you have a job, you need to begin a lifetime of saving.
I love cliche´s. The dictionary defines them as: a phrase or opinion that is overused and betrays a lack of original thought. But I see them as useful pearls of wisdom from experience that are easily remembered and used to convey a valuable lesson.
What are some of your favorite cliche´s? Why do you like them and how do they relate to business, investing or life?
Let me know by sending an email