An investment lesson reaffirmed over a sandwich
I was struggling to eat a steak sandwich one Friday lunch. It wasn't because it was fatty and sinewy, but because I was anxious.
Just before I went to lunch Fortescue (ASX:FMG) went into a trading halt. That morning I found myself curious about CFDs (contracts for differences). I'd opened an account with a reputable provider and had already made two small test trades. One successful and one not.
I was short Fortescue when it went into its trading halt pending an announcement. I had $50,000 riding on this and I was leveraged. Quite leveraged. Now you will understand why every mouthful was getting caught in my throat.
It was a fictional $50,000 thankfully. But I was still so anxious over the outcome. The CFD provider funded the account with a fictional $50,000 as a trial to get me in. The previous two trades I'd placed had opened my eyes to the short-term shenanigans going on in the market: people were buying, selling, gaining and losing in mere minutes – or less.
If you work for a listed company this is not in your mind at all. You're planning and creating things that will affect the business months and years ahead. Not seconds. This is the same way I think about shorting: when you short a stock you may have hundreds or thousands of people coming into work every day working against you. Doing their job so your trade goes against you.
By the time I got back from lunch Fortescue had come out of its trading halt and my account had been liquidated. After the halt, Fortescue rallied 2 to 3 per cent and that was it for me. My fictional fortune up in smoke.
What was I going to tell my fictional wife? My fictional kids? This was the last thing we needed. I felt fictitiously sick.
Even though the money wasn't real, the trade itself and the outcome mirrored hundreds of trades a day put on by real people with real money. People speculating and not investing. The mentality required to buy and hold successfully is rare – let alone the ability to bet for or against a company (you generally know little about) and remain sane.
The other real outcome from this experiment is my version of the sleep at night test: the enjoy a sandwich test. I have always been and will continue to be a long-term investor for a number of reasons but the simplest one is how money affects me mentally. We encounter enough short-term issues where money (generally the lack of money) increases an already stressful situation. We don't need to add more short-term stress and burden. Select your stocks carefully, stay for the long haul and enjoy your sleep and sandwiches.
Frequently Asked Questions about this Article…
A CFD, or contract for difference, is a financial derivative that allows investors to speculate on the price movement of an asset without owning the asset itself. Investors can profit from both rising and falling markets by going long or short, but it's important to note that CFDs are highly leveraged and can lead to significant losses.
The author felt anxious because they had a leveraged position on Fortescue, which went into a trading halt. Despite the trade being fictional, the potential for loss was real, highlighting the stress and risk involved in short-term speculative trading.
The author learned that short-term speculative trading can be stressful and risky, often leading to anxiety and potential losses. They reaffirmed their preference for long-term investing, which allows for more stability and peace of mind.
Shorting a stock involves borrowing shares to sell them with the hope of buying them back at a lower price. The risks include the potential for unlimited losses if the stock price rises, as well as the challenge of betting against a company where employees are working to improve its value.
The 'enjoy a sandwich test' is the author's personal measure of investment comfort. It suggests that if an investment strategy causes anxiety or stress, to the point where you can't enjoy a simple meal, it might not be the right approach for you. Long-term investing is preferred for its ability to provide peace of mind.
The author prefers long-term investing because it aligns with their mental well-being, reducing stress and allowing them to focus on the bigger picture. Long-term investing avoids the short-term volatility and anxiety associated with speculative trading.
Speculative trading can lead to significant financial losses, increased stress, and anxiety. It often involves making quick decisions based on short-term market movements, which can be unpredictable and risky.
Everyday investors can reduce stress by focusing on long-term investment strategies, selecting stocks carefully, and avoiding highly leveraged or speculative trades. This approach allows for more stability and the ability to enjoy life without constant financial worry.
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