The dangers of risky investing

I have a number of interests, of which writing about technology is just one of them. One of these interests is finance and the economy so I thought I would share an article about that today. 

There are two main ways to invest in shares.

You can be long, which means buying shares and expecting the price to go up. This is the normal way for a long-term investor to trade, and in the worst case you will only lose the amount of money that you have put in.

Conversely, you can be short, where you are expecting the price to go down. This means that you borrow the shares, sell them and hope to buy them back at a later date for less than you sold them for.

Being short isn’t necessarily that risky most of the time, when prices only move by a few percent per day, however a recent case shows how risky it can be. 

Joe Campbell has just started a GoFundMe campaign after waking up this morning to find that his E-Trade account was $106,000 in the red.

This has been devastating for him, after having $37,000 yesterday and -$106,000 today, a total loss of over $140,000.

At the moment not only is my $37k gone, but I now owe Trade the negative balance of over $106k. I always knew I could blow up an account and I was financially able to “afford” to lose the $37k. Never in my wildest dreams did I imagine that Etrade would NOT have some sort of stop or circuit breaker in place that would automatically cut a position if the account went to $0

This happened when a stock that he had been short in went up about 800% overnight. This is obviously an unlikely event, but unlikely things happen all the time. This is the premise of Nassim Nicholas Taleb’s book The Black Swan.

If you’re going to do risky things, at least be aware of all the risks. This man wasn’t fully aware he could lose more than 100% of his money and it has cost him dearly.

Update: looks like the GoFundMe page has disappeared but here is a MarketWatch article about it.