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Lessons Learned From My Worst-Ever Trade

By Dr. Steve Sjuggerud
Monday, April 24, 2017

Meb Faber is one of my heroes in the investment world...
 
He's doing fantastic research, and he's always digging to get down to "The Truth" in investing – whatever that truth may be.
 
When I first learned about him around a decade ago, Meb was doing "homework" similar to mine on the financial markets – only his work was more elegant.
 
So what did I do? I sought him out. I had to get to know him.
 
I had to see if he was the "real deal." And if he was, I looked forward to trading ideas on our own paths to The Truth...
 
When we met, I realized he was the real thing. I told my subscribers that I thought he would go on to become a star in the investment world. And that's exactly what happened.
 
Today, Meb shares his ideas through a podcast, where he interviews some of the world's top investment professionals. It's got to be one of the best podcasts about investing out there. I urge you to check it out.
 
This week, Meb had me on the show as his guest. And I had a great time...
 
We covered just about every investing topic you can imagine – stocks, real estate, high-yield bonds, China, emerging markets, the big tech companies, whether we're in a bubble or not, and much more. And we covered a lot of other stuff, too... like surfing, collectible cars, rare coins, and more.
 
It's hard to believe we squeezed all that in.
 
One question we discussed was, "What was your worst trade?"
 
I thought I'd share my answer with you today...
 
Vladimir Putin came out and said he had no intention of bankrupting Yukos, the big Russian oil company.
 
What he wanted to do instead was to put Khodorkovsky, the outspoken leader of Yukos, in prison. And he did.
 
Yukos was trading for two times earnings. So what's your downside in buying one of these massive Russian oil companies at two times earnings when the president, the only guy who had an interest in bankrupting Yukos, says, "I'm not going to bankrupt Yukos"?
 
So what I did was – I trusted a politician.
 
Fortunately, when we bought the stock at two times earnings, I put a 50% trailing stop on it. I thought, "There's no way this could happen, but it is a Russian stock – it could be extremely volatile."
 
We put the widest stop I've ever put on anything, which is 50%, on Yukos.
 
Sure enough, Yukos went right down 50%. We stopped out. I felt terrible for my subscribers. I felt I let them down. How foolish was I to trust the words of a politician?
 
Yukos went all the way. Putin bankrupted Yukos.
 
That may not be the most memorable, but it surely was impactful.
 
You probably learn more from your losers than your winners, because you dig in and say, "What did I do wrong?"

Two lessons from that trade are:
 
•  
Never place a trade that depends on trusting a politician.
 
•   Always use a stop loss – even if it's as wide as 50%. Even when buying at two times earnings, your downside risk is still 100%.

That's just a couple of minutes from our 90-minute episode. I think there are a lot of nuggets of wisdom in this show, and in his previous podcasts.
 
If you're interested in learning to become a much better investor, I urge you to check out Meb Faber's podcasts. Find a guest or topic that appeals to you, and start there... As for my own guest feature, you'll be able to find it on his website this Wednesday.
 
Check it all out at www.MebFaber.com.
 
Good investing,
 
Steve




Further Reading:

"The go-nowhere investments loitering in your portfolio are a very real opportunity cost (and many times, real dollar cost) to your wealth," Meb Faber writes. "The challenge is viewing our assets with genuine objectivity..." Learn a simple method that will re-focus your portfolio and boost your investment gains right here: The Zero-Budget Portfolio.
 
It pays to keep your eye on what the best investing thinkers are saying... Recently, Jeremy Grantham – the "guru of bubbles" – said we are not in a bubble today. "Who would know better?" Steve writes. Get the full story here: The 'Bubble Guru' Called the Last Market Peak... What's Next?

Market Notes


NEW HIGHS OF NOTE LAST WEEK
 
Cigna (CI)... health insurance
Align Technology (ALGN)... invisible orthodontics
LabCorp (LH)... medical testing
Quest Diagnostics (DGX)... medical testing
Becton Dickinson (BDX)... medical equipment
Canon (CAJ)... medical imaging, printers, cameras
T-Mobile (TMUS)... wireless telecom
Yahoo (YHOO)... Internet pioneer
Facebook (FB)... social media
Shopify (SHOP)... e-commerce powerhouse
Alibaba (BABA)... world's largest retailer
Best Buy (BBY)... TVs, computers, appliances
Take-Two Interactive (TTWO)... Grand Theft Auto, NBA 2K
Time Warner (TWX)... media and entertainment
Live Nation Entertainment (LYV)... live events
Dave & Buster's Entertainment (PLAY)... arcades
PepsiCo (PEP)... soft drinks
Dr Pepper Snapple (DPS)... soft drinks, juices, flavored beverages
SodaStream (SODA)... do-it-yourself soda
Whole Foods Market (WFM)... natural and organic foods
Chipotle Mexican Grill (CMG)... burritos
Bob Evans Farms (BOBE)... sausage, bacon, mashed potatoes
Philip Morris (PM)... Marlboro, Parliament, Virginia Slims
Reynolds American (RAI)... Newport, Camel
Spectrum Brands (SPB)... Remington, George Foreman
PulteGroup (PHM)... homebuilder
Lennar (LEN)... homebuilder
Two Harbors Investment (TWO)... "virtual bank"
Annaly Capital Management (NLY)... "virtual bank"

NEW LOWS OF NOTE LAST WEEK
 
ExxonMobil (XOM)... Big Oil
Calpine (CPN)... natural gas power plants
W.W. Grainger (GWW)... safety gloves, ladders, motors, and more
Tempur Sealy International (TPX)... mattresses
Revlon (REV)... makeup, perfume, lipstick
Rite Aid (RAD)... drugstores

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