The destructive power of Greed

How many of you bought $AAPL at $4xx.00 in Jan 2012, watched it climbed all the way to to $644 in three months. endured the correction to $522 in one month, cheered the resumption of the meteoric rise to $705 in four months, and then suffered the persistent and painful downdraft all the way back to $4xx?

I did not buy $AAPL so I missed the whole meteoric rise but I had witnessed a friend who did all the above.

“It is going to a $1,000!”

“But the market cap is north of half-a-trillion already!”

“Don’t matter, they are not making enough iPhone to supply the demand!”

“But the chart is heading south, why don’t you put a sell stop at $680 to lock in profit?”

“Hmm, I will think about it.  But I will sell some at $800 to lock in some profit.”

But the price never climbed back above $705 since then.  $AAPL began its descent week after week.

“Did you sell at $680?”

“No, I know $AAPL will go back up.  I’m afraid if I sell at $680, I will miss the bounce back to my $800 profit target.”

“But the price has been going down week after week and it doesn’t look like it is stabilizing yet.”

“Do you know that they cannot make enough iPhone to sell?  I hear of iPhone shortage everywhere.  Besides, if they nail the big China phone company, price will go back up to $1,000 in no time.  However, I won’t be greedy, I will sell at $800.”

“You do realize that for each week $AAPL drops in price, it will make it that much harder for you to sell for profit because you’ll be telling yourself you may be selling at the bottom, right?  Basically, you may freeze yourself up to sell if price continues to decline.”

“No worry, $AAPL is not going to go back to $400.  It is an opportunity to BUY!  If you do not have $AAPL share, this is YOUR opportunity to buy some now on the cheap!” He gave me that sly look as if he was letting me in on his special secret.

Needless to say, I’ve to witness my friend gives all his gain back to the market.  Since his average cost is around $4xx; he allows a phenomenal 75% gain evaporates in front of his eyes.

There was another case I witnessed that happened at the time when Linux was the talk of the town.  There was an IPO on a company that sell and support the use of Linux launching in a week.  My friend and I bought some shares of another company that also sell Linux OS in a disc.  I forgot the name of the company.  Anyway, when the IPO was launched, the company we bought did not move much even though the IPO was opened at $100+ on a $28.00 IPO price.  Seeing that there was no following the coattail with our stock, I took my profit and ran.  I also told my friend he should take profit as well.

“Did you take your profit?”

“Well, my hand was on the phone and I was about to dial my broker number; but I could not move.  I was sweating and it was as though another force was preventing me to call.  I could not go through with the phone call.  No, I did not sell yet.”

“Why don’t you try again tomorrow?  Watch the market open and sell if price begins to fall off.”

The next day came and I asked my friend if he had gotten out.

“I couldn’t get up in the morning to watch the market open.  Obviously, I missed the gap-up but the prices fell off afterward and is now down 7% for the day, so I don’t see the point of getting out now.  I think I will wait for it to go back up.  After all, Linux is the new wave.”

Price did not climb back up and eventually my friend had to give back 50% of the gain before he finally sold.

There was another case which I mentioned before in one of my Biotech posts.  After I sold my lot and locked in my 360% gain, I told my friend of the possible unreliable data being promoted on the web, he brushed me off and thought I was being too “weak”.  And to prove his point, he later told me he bought more at the high of the day (which happened to be the historical high of the stock).

Now, this friend was quite intelligent on his own right but he was ignoring all the red flags because he was too consumed by his greed on this particular biotech stock. He was like a different person when i talked to him.  He defended his stock like a star-crossed lover defending his/her loved one when others were trying to warn him/her of the “integrity” of the person he/she was loving.

Needless to day, he lost money on the stock instead of multiple gain he should be taking home with. He later confessed to me that he was already dreaming of an early retirement, planning for his world traveling, etc at the time I was alerting him of my sold-out position.

Such is the destructive power of Greed.

I was not immune to this emotional force as well.  I had my share of being possessed by greed and lost money as a result instead of a gain.  However, I also believe that if we don’t learn from our past mistakes, we are doomed to repeat them again and again.  Hence, instead of putting my past “possession by greed” experience in a far-away corner in the remote part of my brain, I put it on a pedestal in front of me to “remind” myself of the debilitating effect of greed.

This, from my experience, is the only way to control this monster.  As long as we are human, we are always one-step away from falling into the abyss of Greed and be possessed by it.  And once you have fallen, there is no exorcist around to help you escape.  And the only cure available is that the stock you are possessed by get bought out by another company and thus force the gigantic gain on you or that the stock actually reaches your lofty price target and you come to your sense to take it.   Sure, it can happen to you but you need to look at all the corpses around you who have tried the same thing but are not as lucky as you are.

Here is a litmus test to see if you are possessed by Greed:

Stock shoots up and begins to climb

“Ha! Ha! Ha!  It is going to the moon!” (you may be possessed)

“Wow! Go! Go!  Let me move my trailing stop just in case.”  (it’s ok to be excited since you are not a robot; however, you have a plan so you are not possessed)

Stock retraces by 50%

“I’m buying more!  What’s an opportunity! It is gong back up higher!” (you may be possessed)

“Sh*t! I’m going to watch the support, if it get taken out, I will sell some to lock in profit.” (you certainly have a right to be pissed off to see your gain drops by half; but you are not possessed since you have a plan to lock in some profit )

In summary, we have all been possessed by Greed at least once; therefore don’t put that experience away since we have paid dearly for it.  Instead, put it in front of you to remind you of this lesson.  Tell yourself you won’t repeat it again.

It is working for me and I believe it may work for you too if you can acknowledge the destructive power of Greed.

My 2 cents.

ps. Here is a classic example of controlling greed by The Fly himself:

The Fly loaded up on VHC because he had reason to believe it would go much higher; however, after seeing price action languished for too long when it should be going up, he decided to sell his positions in pieces until he sold his whole lot to lock in his gain.  Enough said.

beavis



Categories: Trading philosophies and thoughts

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