A young retail trader explains what it’s like to make the retail trade from hell.
Maxwell Strachan, December 2, 2021
I was 26 and stupid. I had arrived in the U.S. when I was 18. I didn't have money and worked shitty jobs to get through college. I didn't go to a nice school, and I've worked in sales ever since I graduated. My first job paid me $40,000. Next one $50,000. So I basically only started getting money like three and a half years ago, when I got a good job. And I was like, Oh my God, this is really great.
I had no other passions other than really earning money, just stacking it up, so I just worked and saved up quite a bit. That's all I did for three years, and I just needed to do something else to kind of take my mind off of work. Because if I kept working like that, I'd go crazy, and investing seemed like a thrilling, fun journey. It was kind of like gambling.
I'm super conservative. I don't spend anything. My monthly expenses are around $2,500 a month. I pay $900 a month in rent. The three biggest purchases I've made in the last 10 years were my laptop in 2014, which was around $1,500; my car, in 2017, which was around $2,700, $2,800; and then recently, I bought myself a new iPhone, which I've never done before ever, for $1,300. I usually use my mom's old phones when she gets a new one.
It’ll come off as stupid, but I consider myself conservative from an investing perspective. I had $300,000 in a high-yield savings account, and I made like $1,000 a year on it, which was ridiculous, but I had been following the market pretty constantly. My job involves a lot of researching companies and trying to understand business and economic models. I like to read a lot, and there’s a lot of books on investing.
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I put chump change, like three grand, into crypto, when I only had five grand to begin with in 2017, and I lost all of it. But I was seeing everybody making money hand over fist, and I wasn't. I work in tech, and a lot of my colleagues were worth, like, $10 million. But the big tipping point was GameStop. It was just ridiculous, and I got greedy and had FOMO.
It didn't start with Alibaba. It started with a $5,000 bet on AMC. Then the $5,000 became $15,000 when I bet on something else, then it became $50,000 when I bet on silver. And that's when I was like, Okay, I'm done with this. Now I want to buy a safe bet. And the safe bet was Alibaba. It had fallen from $330 to $245, but I had wanted to find a company where the price-earnings ratio was low, and every single analyst had a buy rating with like a 40-50% upside on it. Looking at all of TipRanks, my understanding was that this was a very, very safe bet with a limited amount of risk.
Then I just went all in on this one single stock option: The $200 strike price call option on Alibaba. I would describe a call option as a leveraged bet on an underlying stock, which helps you increase the upside (or downside) of the bet you're trying to make. I initially invested $300,000 in February, basically every single liquid asset in my account. Not retirement, but everything cash. I didn't have anything left. My thesis was I might not make a lot of money, but I won’t lose much. The downside seemed limited, and that if worse comes to worse, it would go down to like $280,000.
[The price started to continuously drop almost from the get-go.] I was watching it night and day, and it took a mental toll. The issue with Alibaba is it's dual-listed stock. It trades in Hong Kong and in the U.S. So all day you're watching pre-market and opening in Hong Kong, and then again in the U.S., Monday through Friday. You're constantly watching.
My mom told me on April 13, Get out today. And it might have been ego. It might have been just stupidity, ignoring the facts. but my conviction was high. If you listened to “smart people,” they all said it would go up. So I was like, Hey, this is gonna rebound. And as my salary came in, I saved another $100,000. So in July, I put in another almost $100,000. I basically transferred all the liquid cash that I had and maxed out my account. If my company had not paid me at the end of July, I wouldn't have made my rent payment on August 1. My mom told me not to do it. And I still did it. When I invested the other $100,000, she told me sell tomorrow, sell tomorrow, sell tomorrow. I didn't listen. It was stupid, an extreme level of greed and risk taking.
The next 10 days after that, it dropped by another 30 percent. It was fully out of the money by then. [Editor’s note: “Out of the money” means below the price at which the option’s owner can buy or sell the underlying security. In this retail trader’s world, it meant he was screwed.]
THIS IS WHAT HAPPENED WHEN HIS BET FELL FULLY OUT OF THE MONEY.
The whole $400,000 turned to almost zero. [Editor’s note: For more about call options, go here.] It was at that time that I knew I had that there's no coming back from this. I was literally begging for it to come back so I could even get $300,000 out. Just praying, you know like once you go from desperation to literally praying? And I’m not even religious.
But the truth was, I was still somewhat optimistic. I still had $75,000, and I was hoping that Alibaba would make a recovery, which of course it did not. My next thing was Okay, how do I earn all this money back? But it fell from $75,000 to $50,000 and …
I was pretty depressed for like two months. I knew I messed up and felt stupid. I was so unhappy that my parents didn’t want to make me feel more stupid. Sure, my mom told me off a couple of times, but she was also supportive because she knew I was already beating myself up. I should have listened to her. She told me to diversify a little. Don't go all in on one. But I felt like, because she told me not to do it so many times, I actually had to.
I sold and shut down my Robinhood account in October, right before my birthday. I decided I don't want to have this hanging over my head. [Editor’s note: He walked away with under $20,000.] The day I sold it, I was like, You know what? I fucked up. It was a mistake. But clean slate, dust yourself off and move on. I felt better when I sold, much better actually.
One of the things that actually helped me was I met this random person. He told me a story that changed my perspective a little. This guy, he’s in his 50s or something. It took him a long, long time to save up like $150,000. He put it in the market, and he lost I think $110,000 out of the $150,000. What he told me touched my heart. He said that all he really cared about now was having enough money now to send this to two girls to college. And I was like, what am I really crying about? I have a roof over my head. I have food on the table. It changed my perspective.
I don't believe in passive index investing. You know how Warren Buffett made a multimillion dollar bet that the index will outperform a bunch of hedge funds over a decade long period? My truthful belief is I don't necessarily believe passive investing to be the answer.
But I also don't think this maniacal [way is the answer either], because a lot of retail traders are simply not educated, and trading stocks is not within their circle of competence. I feel like the younger folks are really, really stupid, especially folks who have money now. There’s a lot of other folks like me who think they know the stock market and the right way to manage risk exposures and diversify, but a lot of them do not. They're just overconfident idiots.
When you want to do videos on YouTube about credit spreads or any of these options or derivative-centric strategies, which have inherent risk, most people have this inclination to believe they're smarter than the rest. The truth is we're not. I was fucking stupid. I had no idea what the hell I was doing. I just felt so confident in my bet.
It's my fault. At the end of the day. I was stupid enough to not diversify. But I don’t think Robinhood is a net positive for society. The way it's designed, you get dopamine hits. When you place a trade, when you see it go up or down, the green or the red, it's addictive. If their model is payment for order flow, there's no question they just want you to trade, no matter if you win or lose money. [Editor’s note: “Robinhood Markets Inc. gets about 80% of its revenue from payment for order flow,” according to Bloomberg.]
Making Facebook addictive is one thing. But making people's financial livelihood addictive is a whole next level of evil. And Robinhood has gamified their application. It hurt me quite a bit. I've been fortunate and lucky, and I'm still young. But if somebody who's working a minimum-wage job gets addicted to stuff like this, that is financial ruin, and that's what I don't want.
Alibaba is today trading at $125, which is almost half of where it was at the beginning when I bought it. In retrospect, it's extremely obvious that it was a stupid decision from a risk management perspective and from a basic investment fundamentals perspective—a combination of ego, greed, overconfidence, and FOMO. Still, if I could do it again, I wouldn't have put the other $100,000 in, but I would have still made the initial $300,000 bet, even if I would have lost it all. Had I not gotten this lesson, had I not lost the $300,000 now, I would have thought Hey, this is something within my circle of competence, which I absolutely know now it is not. What if I had waited another three years, and it had been $2 million instead of $300,000?
When I lost the money, the things that I regretted were actually not losing the money. I realized I just had no other passions at all. For three years now, all I've done is work. I can't think of one weekend when I was just having fun. How stupid is that?
In response to the retail trader’s story, a Robinhood spokesperson repudiated the idea that it had helped gamify stock trading, issuing the following statement to Motherboard:
As a self-directed brokerage, we’ve invested heavily in stability, educational materials, and customer support so that we can meet our customers wherever they are in their investing journey. Over the past year, we’ve made a number of improvements to our options platform, including more rigorous eligibility requirements for customers who want to trade options. We’re constantly working to provide an educational options experience so people can make informed investing decisions. Our platform is designed to make investing intuitive, approachable and more accessible, and it's important not to conflate that with gamification.
The spokesperson additionally said the company’s design and business model are industry standard and that Robinhood “continue[s] to refine our options approval process.” It has recently “implemented more rigorous criteria for customers’ eligibility,” which includes some revised financial and experience requirements, the spokesperson added.
“In addition, the onboarding experience now walks approved customers through the foundations of an options spread before upgrading from Level 2 to Level 3 options trading,” the spokesperson said. Robinhood also monitors customers’ eligibility to trade options on an ongoing basis.
(Sources: Vice)
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