Learning from Failure

While visiting family over the holidays, my cousin mentioned he most enjoys my blog posts about my pain, discomfort or failure. I’ve noticed a theme here. When others tell stories about their pain, the normal reaction is sympathy, but when I experience pain or misfortune, my friends and family have a good laugh and quite enjoy it.

To keep my readers happy, the stories below highlight at least some modest misfortune on my behalf.

Stock Market Lessons

Early in my career as an engineer, I became acutely interested in finance and the stock market. To learn more, not only did I read everything I could about the market,¹ I borrowed $10,000 from my parents for the sole purpose of buying stock. I reasoned that risking real capital would be a much better teacher than just reading about the market or taking finance courses. Turns out, I was right about this.

I had a thesis that technology stocks would be the growth engine of the economy going forward (I was also right on this point). It was the late 1990’s. The stock market had been on a tear and HP was leading the pack. So, I bought $10,000 of Hewlett-Packard,² the hot tech stock of the day. And, I had worked at HP in Boise as a Summer intern a few years back, which clearly made me an expert on the company. I remembered saying… actually saying aloud to my wife,

“The worst-case is a 20% loss”.

Right again!

That’s precisely what happened within a week of my purchase. I should have bought more at that time, but the shock to my system prevented me from being contrarian. And there was the other point about having no more money to invest. What a great education I was getting.

Earning an Education

A work colleague of mine earned a similar education.³

One afternoon, several of us were eating lunch at my desk.⁴ Not unusual, we were discussing stocks and investments because the first dot-com boom had the market shooting up like a rocket. One colleague was bragging about his brilliant investments and asked me to look up [some ticker symbol that I have long since forgotten], which I did. He looked at the price and then uttered a beautiful, quotable line that we repeated for months:

“When did that split?”⁵

It hadn’t.

The price had just dropped in half that morning. The look on his face was priceless.

Trying Things

Trying new things inevitably leads to mistakes and failures. It’s the nature of learning. A small financial loss for me and an undisclosed loss for my friend taught us valuable lessons while the stakes were still relatively small.

We should all want to make our mistakes and learn when the consequences are survivable. It’s for this same reason we allow our kids to do things that may scrape their knees. It’s how we learn to maneuver and navigate the world.

The lesson here is…

Sometimes the best teacher is an early failure.

Years later (circa 2010), I would re-learn this lesson.

Trading Futures

I thought I would try my hand at trading financial futures – on the mini-S&P – because trading seemed considerably easier than real work.⁶

I watched the real-time, level-2 quote data stream across my screen and quickly realized I had no idea how to predict which direction it would move next. Fortunately, the engineering side of me knew the rational thing to do was to close the session and get back to work…

So, I bought an S&P 500 futures contract to see what would happen. Three seconds later, I was down $100. Sell! Sell! Sell!

Wow. That happened faster than I thought it would.

Hmmm…

I watched the live charts some more, perhaps more intently, and once again concluded I had no clue what I was doing. Undeterred, I decided to make another trade, Vegas-style.

Aside: It’s interesting when we don’t obey our own internal traffic signals. You’re now envisioning a yellow cautionary traffic light, perhaps red. No. This was the alternate blinking red lights at the railroad crossing. The red/white striped arm is lowering and I’m thinking, “Punch it. I think we can make it.”.

This time, I shorted the S&P 500… mostly because that’s the opposite of what I did moments earlier when I lost money. Within seconds, my stop-loss tripped me out and I lost another $100.⁷ This solidified in my mind that I was not going to consistently make money from this random number generator.

Apparently, some lessons need to be learned more than once. Back to (pseudo) work.

Retrospect

I have often thought it fortunate to experience failure in my initial futures trades. Profiting a few thousand dollars on these trades would have undoubtedly propelled me to unfounded levels of confidence. To a young man, the obvious logic flow is:

1. This is so easy!
2. I am a rock star.
3. [P a u s e…] [… …] [Lightbulb!] I should wager more! (Wager being the appropriate term.)

This leads me to my second point…

Sometimes an initial failure is the best outcome.

If the downside is capped to prevent catastrophic failure, new experiences and subsequent failures lay the foundation of learning upon which we may build wisdom. The key is to construct these foundational lessons before we scale beyond knee scraping consequences.

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FOOTNOTES:

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1. Reading from actual library books. The internet still wasn’t a wealth of knowledge at this time.
2. I paid $75 to my stock broker for this transaction. A ridiculous amount ($120 in inflation adjusted 2018 dollars). But back then, you had to actually call a stock broker and put your order in and he would make the trade. Electronic trading would come shortly after… reducing commissions to $10/trade.
3. “Earned” rather than “learned” because we actually paid for it.
4. When you are young and can’t afford to eat out every lunch, you eat packed lunches together, often around someone’s desk. If you have a clean desk with available space, your desk becomes the go to destination for lunch. This was the case with my desk at GE. (I still keep a clean desk.)
5. This phrase took on a whole new meaning and became synonymous with “I-just-realized-I’m-totally-screwed”. For example, if someone mentioned they were meeting with the boss later that afternoon, one of us would reply “When did that split?”. In other words, “You’re hosed.”.
6. Incidentally, “real work” is what my brother does on the ranch raising cattle… as opposed to my work, which mostly consists of sitting quietly thinking and looking at a computer monitor. Pseudo-work.
7. Some credit is due here for actually placing a stop-loss, even if it was too tight. A short position, in theory, has unlimited risk. At least I had the foresight to protect my core assets while I experimented and learned about trading futures.