5 Mistakes I’ve Made Investing/Trading

• Improper Risk Calculation

When I make trades/investments, assessing the risk associated with each position is critical, especially as these profiles evolve over time. A pertinent example is our handling of gamma exposure when shorting call options. This risk becomes magnified when the underlying stock volatility increases, requiring frequent adjustments to our delta hedging strategies.

Trade Recap

I bought a risk-reversal position on NVDA to short call skew (as I saw the options board had positive skew on NVDA) right before earnings as a way to make a play on volatility skew (based on fundamental opinion) as well as hedge away some deltas for my long underlying position. However, as the stock exploded on earnings, my gamma exposure kept getting bigger thus causing my short deltas to exceed my long delta position on the underlying before the earnings event. I received a margin limit warning and was forced to exit my short call position due to not correctly anticipating how large my short deltas would get during underlying upticks from holding a large short gamma position. De-eventing was fast, and I closed the position to end on flat P&L for the NVDA event, however with better assessment and decision making prior to the event; it would have been much more profitable. 

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• Failure to Cut Losses When Investment Thesis Plays Out

Often, you need to accept that you are wrong and that whatever investment thesis you had previously was incorrect; and you should close your position rather than remain emotional about it. 

Trade Recap

This happened as one of my first trades when I had just turned 18. I bought into Appen due to their AI narrative and “hype” (I have now learnt that this is not a legitimate thesis). I had made decent gains on stock from strong sentiment, however as the market soon realized the problems with the company, sentiment had shifted towards being more negative. Instead of selling stock, I kept holding even though my original reason for buying had already played out and I had no reason to hold anymore other than the fact that I didn’t want to have a loss on my record. Over the course of the year, I had lost over 50% on this stock and I had learnt a tough lesson on not letting emotions get in the way of investing. 

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• Investing with no catalyst

Even a great, absolutely amazing company needs a catalyst (reason) to start a bull run. Investing with no catalyst is like picking the best sailing boat and assuming you will be fast even if there’s no wind. Obviously, this depends on investment style; if you are a long term investor and don’t care for trading then this does not apply as much.

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• Confirmation bias (just because a stock pick went well, doesn’t always mean I was right)

A profitable outcome in trading does not necessarily indicate a well-executed trade. This concept mirrors the unpredictability of golf: sometimes, a technically excellent shot may not land as expected, while a less perfect swing might surprisingly end up on the green. In both scenarios, the player must proceed from where the ball lies. This analogy extends seamlessly into the realm of trading.

In investing/trading, I emphasize the importance of +EV decisions, which systematically enhance the likelihood of profit over time, though not every individual decision will result in a gain. Market fluctuations can lead to outcomes where a well-analyzed and logically sound trade does not pan out profitably due to unforeseen variables; akin to an unexpected gust of wind altering a golf ball's path. Conversely, a less calculated decision might fortuitously yield profit, much like a poorly aimed golf shot that ends up in an advantageous position due to the same unpredictable elements.

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• Anchoring, not adjusting to new information properly

Anchoring in decision-making is a significant challenge in the trading world, where rapid assimilation and response to new information are crucial. This issue often stems from the intrinsic ego that characterizes many successful investors and traders. Recognizing the need to temper this ego is vital for adapting investment strategies effectively.

When fresh data or news emerges, it can fundamentally alter the market's landscape, converting what was once a bullish outlook into a bearish one, or vice versa. For instance, an investor might initially purchase a stock based on its growth potential, but upon new revelations of financial instability or poor leadership, the logical response would be to reevaluate this position. However, anchoring to our initial analysis can prevent such necessary reassessment. The propensity to cling to our original assessments without accommodating new, possibly contradictory information can severely hinder performance.