The Tycoon Report

When it comes to trading, a big ego will destroy a big wallet any day of the week.

Two Tuesdays ago we warned of an impending pullback in oil stocks.

We talked about how the so-called “experts” on Wall Street had gone gaga over oil stocks and how wary that made us. Long story short the next day the entire oil sector fell 5%. By the end of the week the average oil stock was down over 15% and the broad market was on it’s way to a two week slide.

We’ve absolutely cleaned up over the last two weeks on the short side but many stocks are now looking very oversold and it’s tough to tell what the market will do from here. Years of experience has taught me that if I don’t have a firm idea of where I think the market is going then I retreat to the sidelines and wait for the trend to reassert itself.

Right now there is no way for me to tell if we get an oversold bounce here or we resume the slide down. Half of winning at this game is to know when you don’t know and being ok with that. In the past I’ve suffered my biggest losses after my biggest market success. Some call it a Wall Street "God Complex." Where I'm from it's called getting a big head!

When you’re knocking down winning trade after winning trade you had better check your ego at the door. Because if you don’t watch out you start thinking that you actually know more then you really do. You start thinking that you know it all. Here’s a news flash - nobody can see the future.

The minute you think you’re blessed with some type of divine talent or prescience, your dead! One of the most damaging things we can do as traders is to overreach and allow our opinions to overide market facts. I learned this lesson the hardest way possible in 1998.

Let me explain:

1998 was the best year of my life and the worse year of my life. I had correctly surmised that the market was way overbought. I knew Asia and Russia were in trouble and that this would have a spillover effect in our markets. So I started shorting the market heavily, Very heavily.

Shortly after that, the Long Term Capital Hedge Fund story broke and the markets got absolutely SMASHED. I made a fortune. I had followed the indicators. I had put my money where my mouth was and had been right. All of the indicators now told me that the market was stretched and completely oversold.

But I thought I knew better.

I allowed my opinion to get in the way of the facts. That is perhaps the biggest mistake businesspeople and investors make. For me, it was the single biggest mistake of my career. Instead of covering my shorts and banking my profits I shorted more. Then the Fed came out and lowered rates and the market rallied. I still shorted more. The market kept rallying.

Convinced beyond a shadow of a doubt that I was right I shorted more stocks. Nobody could stop me. I knew I had underlying conditions correctly pegged and everybody else was wrong. I knew I was going to make my biggest single killing ever.

BUT IN THE END I WAS WRONG. And I was completely WIPED OUT. You see, the market had other plans with my money. It didn't care two licks about y "theories" or hurting my ego. I remember the day I finally covered all my shorts. That night, on the way home, at Grand Central station I seriously thought about throwing myself under a train. I couldn't believe it. I was financially ruined.

In a span of weeks I saw ten years of blood, sweat and hard work just evaporate. Instead of making the biggest score of my life I was destroyed. I had taken out huge lines of credit and was leveraged to the eyeballs and ultimately was compelled to file bankruptcy. Looking back now I can smile about it.

That's because some of the most famous traders in history went through similar experiences. And what the experience cost me in money at the time has proven far more valuable to my success as a trader. But at the time it was the most humiliating experience of my life. And it almost cost me my marriage. It’s not easy to get up from a punch like that.

I stayed low-key for almost a year studying my mistakes and trying to get the capital for a comeback. Fortunately I had three things in my favor.

1. The first was excellent "Street Credit." Many of my friends on Wall Street knew it was only a matter of time before I got back on my feet so they happily bankrolled me.
2. 2. The ability to look in the mirror: I literally studied my mistakes honestly for almost a year. It was a painful process, but you can never be successful at anything unless you learn.
3. 3. A wonderful wife and family: Seeing the smiles of my wife and children every night kept me balanced and focused on what was really important in life.

It took me four years to rebuild my wealth but the lessons I learned were invaluable. I've made far more money in the years since 1998 then I did before. If my experiences can help you avoid taking a devastating loss like the one I suffered then the time I spent writing this issue was time well spent!

“Let the game come to you”