Just this last week, the DOW dropped 500 points. The financial market went into a panic. Many investors lost, especially if they clicked that “sell” button.
Most people didn’t see this coming. A very few people “in the know” knew what was going on and bet on futures banking on the Euro.
My friend was one of those people who bet on the Euro. A few years ago, he had a corporate job making a steady income. He took a plunge and started day trading. He made enough to quit his job and support a healthy lifestyle in a luxury condo without a worry in the world. He’s been living happily every day since.
But after a few bad investments, he hit some rocky roads. A few months ago, he asked me for a small loan to get out of a minor setback he had put himself into. I agreed, but only if he paid me back with a brand new Macbook Pro.
I’ve been bugging him about the Macbook Pro for the last week or two.
So he decided to make a risky move.
He went all in on a Euro future at 1.12.
The DOW took it’s crash. He got excited as he anticipated his 10-20x ROI on his investment for the contracts he bought.
He would’ve been back up to a level where he could go anywhere he wanted and do whatever he wanted once again.
But there was a problem: He didn’t have financial reserves set up in his account though and went all in.
The first two days, he was up 35%. Then the third day hit. The future took a dive from 1.12 back to 1.11. The lowest it’s ever been. It was there for only about 30 minutes or so, then soared back up higher to where it had been before at 1.1487. Because the future had fallen down to 1.11 though, his broker forced him out of his contracts so they wouldn’t have to risk being responsible for the potential loss.
My friend did three things right:
1. He timed his bet properly.
2. He predicted the DOW would drop when it did.
3. He set up a strategy to earn at least 10x what he had invested while everyone else lost.
But instead of succeeding, he lost too. Now he can hardly pay for food.
He lost because he didn’t have a nest egg to back up the temporary drop in the price of the contract, while he was heavily leveraged in the trade and couldn’t make his margin calls. Which means that I lost too because I don’t get my new Macbook Pro and instead I have his older Macbook Air which is worth slightly less than the loan that I provided to him.
Back in 2008, a similar thing had happened to me. I was working for a real estate investment fund at the time. Within one month, I gathered up all the documentation necessary to sell 25 condos in Florida in between $250,000-$300,000 in value each. I was on track to earning $50,000 that month, plus I had deals lined up to make the same for the whole year.
I was excited. My partners were excited. We were going to be making more money than we could ever have imaged. My clients were excited they were going to be able to have prime real estate in Florida.
But then, a few days before the banks finalized the deal, Bear Stearns went down in a fire sale. Then, lending guidelines changed overnight.
My clients ended up with none of the properties they had expected to acquire. My partners were left with hundreds of deals they couldn’t fund. I was left without my expected earnings of $600,000 year. I was devastated. It took me months before I could pick myself back up to try something else again.
There were many other situations that I have either personally encountered or witnessed others going through that led to the same demise.
From each bad situation and failure comes a lesson. Or multiple lessons may that be.
Those lessons are:
1. Always keep financial reserves. If my friend had reserves to cover his call margins, he could have made a lucrative trade. If I had financial reserves back in 2008, I wouldn’t be stressed out eating top ramen and figuring out how to pay for rent while praying for a $50,000 check, yet getting nothing. Without financial reserves, it is hard to recover after any industry turns volatile.
2. Don’t count your eggs before they hatch. In life, things don’t go as planned. Even when everything looks perfect, something out of your control can come up. For me, it was a shift in the financial market. For Zirtual, it was not having bridge financing in between raising additional capital. For others, it can be laws or the government or even zoning restrictions that can just kill off a surefire deal.
3. Diversify your resources. Back in 2008, I spent 100% of my time and resources on the real estate deals. My friend spent 100% of his time on the Futures trade. Because of that, both of us lost big. Now, I split my time and resources into various areas to keep myself diversified, in case any one particular part of my income stream just falls apart.
4. Learn from your mistakes. In life, we don’t learn from our wins. We learn from our losses. Take the time to sit back and analyze why a situation went the way it did. Study it, learn the lesson, then move on. Dwelling on the situation will keep you stuck in a feeling of pity and regret. So once you internalize the lesson, move on.
5. Be thankful for the experience. Each situation we go through is a learning experience. I spent my weekend being bitter over not having a new laptop as mine is on the brink of dying. But I did hold his older Macbook Air as collateral. I’m going to be selling that off, taking a minor loss of a few hundred dollars, then buying the new Macbook Pro I intended to buy in the first place. But by being bitter over the situation, I wasn’t able to enjoy my time out with friends this weekend. Life is too short to wail over situations that don’t go our way, so instead of dwelling on the situation, learn from it and move on. Then be thankful it happened, so you can make sure it never happens again.
Have you ever made a sure bet and had it backfire on you? How did you handle the situation? I’d love to hear more. Comment below.