A Tale of 2 Investing Styles: Foolish vs. "Trader"

In this Rule Breaker Investing podcast, David Gardner brought in some special guests to help him respond to his listeners' questions, and for this segment, it's Jeff Fischer, head of Motley Fool Pro and Options.

But, the email under discussion is less a "question" and more an archetypal narrative of enthusiastic stock trading and the ways it came devolve into gambling. With that as a launch pad, they talk greed, fear, Foolishness, and the long-term buy-and-hold philosophy that serves Fools everywhere so well.

A full transcript follows the video.

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This video was recorded on Feb. 28, 2018.

David Gardner: Now this comes from Kishore, and Kishore has written a number of times. I haven't had an opportunity yet to share on the podcast, but this is an interesting perspective, and it's kind of about mindset, Jeff. I really appreciate the honesty here, and what he shares about his investment journey. My guess is that English is not Kishore's first language, and it's written with sequential numbers in a way I can't quite reproduce, so I'm just going to do my best to read some of it and get the gist of it, and then let's think about it briefly together.

"Hi, David. I am a Fool from more than 10 or 12 years and want to be a Fool for the rest of my life, though not so sure greed and fear will again overtake my actions and my discipline may be broken. The last week has, again, reiterated the facts that The Motley Fool has been advocating. The below story may resonate with many common stock investors."

Kishore starts, "I started the Stock Advisor service. Began investing in stocks, though I was doubtful at some of the recommendations. Marvel? Why the heck does he like comic book stock? Or Apple iPods." This is, of course, back in the day. "Or Electronic Arts. Note I was also following some other newsletters, which were recommending solid companies like Boeing or Raytheon, and I was like, 'David really is a' -- small-"F" -- fool.'

"Gradually, I started understanding the thinking behind the recommendations, though, and I was like, 'OK, yeah, they're not fools,' and I became an exclusive Fool recommendation follower. But then, I couldn't understand why the Gardner brothers don't sell. I'm smarter than them. I started selling stock when it went up. Netflix up 25%. Locked. So happy I exited before the Qwikster disaster happened and the stock crashed. And then, Amazon, yeah. Yeah, man, I made 35% and the stock drops. Ha ha ha! I was so happy.

"But then I started keeping track. The Motley scorecard was a great help. I realized if I just hold them with discipline and reduce my fear and greed, the returns would be the same or better. When Netflix crashed, why didn't I buy more?" Etc. "Then the Supernova service came in." I'm skipping ahead. Kishore is putting away $1,000 every week into these kinds of stocks. "Years later, this disciplined approach just made my portfolio into something I never imagined. Thank you so much.

"However, then greed starts coming in. Rally starts. News channels only talking about the Dow. Dow up 200 points again. Dow up 1,000 points in a week. News channels making a fanfare out of it. Analysis. Interviews. All-around positivity toward equities. My portfolio adds, like, 10% in a single month. 'Wow,' I think. So, what if I added a booster to it? What if I leveraged?

"CFDs. Futures. My banker assigns me a trader and overnight I divert 5% of my portfolio." So, Kishore takes one-twentieth of the portfolio and gives it off to the trader. "First week, the returns are like 3% in a day. Again, 2% the next week. Hey, not a bad thing. I'm not saying no to Fools, but just making their approach better. What follows is addiction. Charts, technical, Fibonacci. Man, I started speaking like traders. Staying awake late nights. Checking the charts on the go. I fund the account more. Now 10% of my portfolio. Maybe this isn't bad," Kishore says. "Then comes this week." And I assume we mean the recent volatility, Jeff, is the reference I think we're talking about here.

Kishore says, "I'm leaving for my vacation. I have one open position. Just put in, take profit, and should be done. Five hours before the flight, the trader calls in. 'Hey, buddy, the market's down, but don't worry. It will be back up tomorrow. We can make more money. Let's buy more.'

"Oh, yes, I say, without realizing the risk. I'm leveraged. Three hours before the flight, trader says, 'Hey, this is not going the way you want.'" Notice the change of "we" into "you."

Jeff Fischer: Not good.

Gardner: Which was all caps in this note. "I get panicky. I check the account on the phone -- 50% down. What? The Dow was down only 2%. First day of vacation ruined. Second day, worried. Third day, tense. Fear, fear, fear. Holiday ruined. Mentally became a manic, checking phone all time. Charts. Hedging to cut the agony. Short five days. Just wiped the account."

Fischer: All 5%.

Gardner: Although I think Kishore had ratcheted it up to 10%, but I realize there's a flurry of facts here. So that's the story. It closes with, "I am a" -- small-"F" -- "fool. No matter how you see it, still can't get over it," and that's how it ends.

Now, it feels like kind of a sad ending. A lesson learned. The good news, I think, is that it was with a real minority of Kishore's portfolio. Jeff, before I go to the actual question I have for you, what are your thoughts about that?

Fischer: So many great thoughts, David. I love the honesty. I love the self-awareness. And we have to recognize that we all have learning experiences that make us better in life and as investors. Almost everyone, initially, that I have known has thought that they could do better by trading in and out. That once a stock goes up a little bit they should sell it and take their gain. And it's only through the perspective of time that we realize if you hold something, like an Amazon, and it does well over many years, you're going to be rewarded by such an enormous degree greater than you would have by taking that 20% gain.

But don't beat yourself up about it for having taken it in the past, because you didn't have that experience to begin with. It's only through time that we can now say, "Look at Stock Advisor. It's 15 or 16 years and look at these returns." We can point members to them and say this is how it works. Without having that to show them, we can tell them but that's two different things.

Gardner: A really good point.

Fischer: That's one thought. The second thought is that the trading bug -- I think everybody has been afflicted by that at one point or another, and in my experience it's usually when you're quite young, or it's right when you start investing, whatever age that is. You think, "I can use some leverage. I'm smarter than everybody else." But if it worked consistently, you would hear of people who are successful investors because of leverage. Well, you don't hear about those people, ever. You hear about the Warren Buffetts, the relatively few, who have bought and held on for decades.

So, you have to keep in mind there's nobody else out there doing this that you have heard of and that has succeeded, and there's a reason for that. I'm glad they only risked 5% and then 10%...

Gardner: While Kishore says, While I am a small-"F" fool, it was actually pretty wise to -- if you're going to speculate, just make sure it's with a real small slice of your nest egg.

Fischer: Right. And that's still a lot. If you still have the bug to speculate -- I don't think you will, anymore, but just 1%-2% should be enough, because you're using leverage, after all.

A final quick thought just on greed and fear, in general. The ideal for a stock investor is to eliminate those two emotions by only owning companies that you truly want to own. They're almost a part of you. You cannot imagine selling them anytime soon, and by that, I mean for years, so that even when the stock falls, when the market falls, selling doesn't even enter your mindset. It takes a while to get to a portfolio that is made up that way, but you can get there, and it's through learning experience.

Now, every year you may find some losers that you want to sell at year end for taxes, or you just may buy something and realize you're not quite comfortable with it. What I do is I start each new position generally small, add to it as it succeeds, so that it grows, and I add to my favorite winners; and what ends up dominating the portfolio are things that I really have no inclination to sell anytime soon.

Gardner: Really good organic thinking. It's built out of your own experience, and it accords with mine too, Jeff. I pretty much do the same thing. So, to close Kishore, thank you very much. It was my pleasure to read your story. We appreciate your honesty. I think that you're in a good place, and Jeff's point about feeling good about the companies or investments that you own, and gaining greater knowledge in them, and then just getting greater wisdom along of that. Forget about the actual names of the stocks or companies. What's your approach to investing? How do you react when the market goes up or down? Those are really important aspects of becoming a better investor. So, thank you for sharing.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. David Gardner owns shares of Amazon, Apple, and Netflix. Jeff Fischer owns shares of Amazon, Apple, and Netflix. The Motley Fool owns shares of and recommends Amazon, Apple, and Netflix. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.