Pikering Around in Pikerville

Let’s say you have an idea for a trade—a really good idea. You’ve done all the work. This is a can’t-lose proposition. You think you will make 5X your money or more. So, you buy the stock, you wait a couple of months, everything happens as planned… and you make $3,000.

Now, $3,000 is considerable money to a lot of people, so I am not going to denigrate that. But let’s say your brokerage account is worth $2 million. Does $3,000 really make a difference to you? It is 15 basis points of your portfolio. I mean, if you were that sure of the trade, you should have sized it a lot bigger, and you should have made a lot more. $3,000 will buy you… two suits? A transmission fluid change on your car? You can’t take a vacation for $3,000 (unless you are camping or staying in very cheap hotels), you can’t buy a watch, and it is not really going to make you any happier. If this potentially awesome trade wasn’t going to change your life, what was the point of putting it on?

True story: I once had a winning trade that paid for a down payment on a house, with some left over. That was a good house—I lived in it for nine years.

What I am referring to here is the phenomenon of being a piker. Look up “piker” in the dictionary—it says that a piker is a “cautious gambler.” Now, when I go to the casino, I am the world’s biggest piker. I play the table minimum, usually $15 if I can find it. But in the stock market, I really swing it around, and I know some other people who do too.

I heard the story of someone who bought a million shares of Fannie and Freddie the day after the election. If he still holds that position, he is up several million. This is a person trading for their personal account, not for work. That is a trade that will change your life—there are few problems in the world that $10 million can’t solve.

That is my threshold for putting on a trade. If it turns out to be a winner, is it going to change my life? You know what would change my life? $100,000. I could buy a car for $100,000, and that would change my life. The number is going to be different for different people. Maybe you are a college student and $3,000 really will change your life. Great! If you are worth $100 million, you should not be getting out of bed for less than a million.

The Early Days

I spent most of my early life pikering around. I made money trading stocks—just not a lot. If I made $7,000 on a trade while I was working at Lehman Brothers, that was a big deal, and I was strutting all over the trading floor like a peacock. Really, my brokerage account was just for pikering around—trying to scoop up some nickels here and there, and not for investment.

Things changed when someone pitched me at one of the big brokerage firms to move my account there. I would be paying full-service commissions. Well, if you’re paying a minimum $125 commission, it makes sense to trade in extra-large size. So, I started trading in extra-large size. The commissions are a subject for another newsletter, but I am a big fan of paying commissions—they tend to reduce overtrading. That habit has continued to this day. I actually think that the free commissions at the online brokerages encourage people to piker around.

Pikering around usually leads to trouble. You have a number in your head that you want to make—$3,000—and you will truncate your gains at $3,000 but accept losses up to $10,000. Part of not being a piker is being willing to let your winners run. If you take small gains and large losses, your trading career will be very short and not a lot of fun. Taking profits early is one of the worst things you can do. You should be willing to accept losses of $10,000 but gains of $50,000.

The one thing I think about every time I put on a trade is asymmetry of gains relative to losses. Risk a little to make a lot, not the other way around.

What You Can Do with the Money

On rare occasions, I will have a winning trade, and you know what I will do? I will wire the profits out of the brokerage account and buy something. I figure I earned it. Actually, I didn’t earn it. I won it. And money won is sweeter than money earned. That trade I did in 2015 where I bought the house—that was the best feeling in the world. That’s not to say that I’m buying fad stocks or tech stocks all the time, looking for big gains. If I buy something that pays me $100,000 in dividends over three years, that’s the same thing.

I encourage you to think bigger. Investing is a hobby for most people—it’s fun to punt around stocks and pick up a few bucks here and there. It feels good to win. But you know what’s better than winning? Piles and piles of money. You can pay for renovations on your house.

I forgot to mention my favorite non-piker trade of all time—I bought $80,000 worth of bitcoin in 2019 and sold it for $310,000 in 2021. Paid the taxes and bought a Corvette. I still have the Corvette, and I love ripping around in that thing all over town. It changed my life.

That is the threshold for putting on a trade—if it goes your way, is it going to change your life? No? Then put it on bigger. If you are uncomfortable with the risk, then be disciplined about losses.

Jared Dillian, MFA

P.S. Speaking of changing your life, don’t forget to pick up a copy of RULE 62. At $19.99, it is the best investment you will ever make.