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Dodge these Investment Pitfalls...
Plus: Warren Buffett's punch card method, investing land mines to avoid, and rules for successful day trading.
Jordan Belfort
March 29, 2024
How You Can Avoid Investment Pitfalls 🕳️
If you invest like a spray-and-pray machine gunner, you’re inevitably going to step on a land mine and blow your portfolio up. In the next 5 minutes, we’re going to tell you how to avoid the common pitfalls many rookie investors make.
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Today’s Rundown
How My Brother-in-Law Lost $97,000 🤑 (Story)
Land Mines You Can Easily Avoid đź’Ł (Insight)
Warren Buffett’s Punch Card Challenge 💪 (Action)
How My Brother-in-Law Lost $97,000 🤑
(This section contains a business story that you need to know)
From the Desk of Jordan Belfort:
INCREDIBLE! I thought. My brother-in-law, Fernando, has got the Midas touch…in reverse! Every investment he touches—every stock, every option, every coin, every token, every bloody NFT—every last one of them turns completely to shit!
I was going through his brokerage statements, when that sad realization came bubbling up into my brain: his portfolio was a disaster. Through a series of bad trades and ill-timed investments, Fernando had lost 97 percent of his equity over the last two months, leaving his current account balance at a paltry $3,000. The rest of his money, just over $97,000, had simply vanished into the air, like a fart in the wind.
Even worse, the losses had occurred during a time of relative peace and stability in the stock and cryptocurrency markets, which were the two main places where the investments had been made. The implications of this were undeniable and obvious: My brother-in-law had no one to blame but himself.
As I scanned through the account statements looking for clues, I felt like a homicide detective going through a crime scene. The only difference was that, instead of wading through a sea of blood and guts, I was wading through a sea of red ink and despair.
In fact, with the exception of a handful of winning trades over the first seven days, where he…
Bought Bitcoin at $41,000 and sold it four days later at $45,000
Bought Ethereum at $2,900 and sold it one week later at $3,350
Bought Tesla stock and Tesla options and sold both of them a few days later for a combined profit of over $20,00
…everything he touched had turned immediately to shit.
Even worse, his trading activity had increased each day, to the point where he seemed to be fancying himself a day trader. His reverse Midas touch had worked its evil magic and as his equity dipped below $50,000, I could see his desperation in the form of oversized bets on speculative penny stocks and worthless shitcoins (the crypto equivalent of penny stocks).
By the end of week six, it was over; he hadn’t made a winning trade in over a full month, and the balance in the account was under $10,000, on its way to $3,000. How could one person be so consistently wrong? I wondered.
Here's the reality for most day traders: Most people do lose money in the market, and a lot of them end up getting wiped out, the way Fernando did. Buuuut—and this is a very big but—not everyone loses money in the market; there’re a lot of people who make money in the market, and I’m not just talking about professionals; I’m talking about amateur investors too. To do so, however, you must avoid the land mines…
Key takeaway: If you make trades like a loose cannon rather than a by-the-book sniper, you are gambling, not investing.
Land Mines You Can Easily Avoid đź’Ł
(This section teaches business insights to implement into your life)
👉 INSIGHT: Day trading is a gamble. Buy and hold is an investment.
Most day traders lose BIG (up to 100 percent in 12 months!)
Financial firms dominate the market with high frequency trades
But every now and then, a day trader wins BIG (think Gamestop)
It’s impossible for an amateur investor to make money when they’re trading in and out all the time. And that goes for both the stock market and the crypto market, although they’ll usually get wiped out even quicker with crypto, because there are a ton of scams out there.
So, unless you know exactly what you’re doing, you’re gonna end up stepping on a land mine, sooner or later, and blowing yourself up. It’s a mathematical certainty.
Thankfully, Fernando paid $97,000 so we can learn these lessons for free:
Most day traders are just gambling addicts in disguise.
A study published in the Journal of Gambling Studies found that over 58% of day traders exhibited “problematic gambling behaviors.“ They’re hooked on the adrenaline rush of the trade, even when they’re losing their shirts. Don’t confuse the dopamine hit of a lucky bet with real investing skill.
The “dumb money” always arrives late to the party.
By the time a stock or crypto is the talk of Reddit and Twitter, the “smart money” insiders have cashed out. One study found that individual investors consistently underperform the market by chasing attention-grabbing stocks at their peak. If you’re not at the table early, you’re on the menu.
Most technical analysis is modern-day snake oil.
Think you can divine the future from lines on a chart? A comprehensive study of over 5,000 technical trading rules found that none of them consistently outperformed the market. Drawing triangles and squiggles might feel scientific, but it’s no more reliable than reading tea leaves or goat entrails.
Sorry, but HODL is not an investment strategy.
Crypto diehards love to parrot “HODL” (hold on for dear life) as prices plummet. But clinging to a falling knife is not a sound plan. Research shows that even long-term holders of Bitcoin have experienced multiple 80%+ drawdowns and extended periods of negative returns. Have an exit strategy, or risk becoming a lifelong bagholder.
As Charlie Munger quipped, “The big money is not in the buying and selling, but in the waiting.“ Day trading is a siren song that lures overconfident, undisciplined investors to their ruin.
Avoid the lure of quick riches and stick to the boring but profitable path of patient, fundamentals-based investing. Your future self (and bank account) will thank you.
You Can Use Warren Buffett’s Punch Card Challenge 💪
(This section provides actionable tactics you can apply right away)
You’ve probably got some sandwich or coffee punch card in your wallet. The idea behind these are loyalty to a local restaurant of coffee shop. But, according to Warren Buffett, this is also how you should think of investments.
In many of the master’s Berkshire Hathaway letters, he discussed the idea of a punch card with only twenty punches. Each punch represents a potential investment decision throughout your lifetime.
Here’s how to think about investments for your punch card:
Thoroughly research and understand the investment
Focus on quality over quantity with your investment
Exercise patience and discipline for the long haul
If you only had twenty punches in a lifetime, what is worthy of a punch? This method helps to maximize outcomes by simplifying the art of investing. Buffett believes this type of thinking would lead you to “get very rich because [you] would think very hard about each one.”
Wolfy Memes of the Week 🤣
BITE-SIZED READS FOR THE ROAD đź“š
[Read] Unlock all of the secrets that make up Jordan’s investment portfolio in The Wolf of Investing.
[Read] Full Report: Do day traders rationally learn about their ability?
[Read] “The King has Spoken.” Check out the official Gamestop thread.
Enter Feedback for a Chance to Win 🏅
Publisher: Jordan Belfort
Editors in Chief: Brock Swinson and Davis Richardson
DISCLAIMER: None of this is financial advice. This newsletter is strictly for educational purposes and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.