I Lost $400,000, Almost Everything I Had, on a Single Robinhood Bet

This is my reaction to a recent article on Vice about a 26-year old retail trader who lost nearly all his life savings on a single Alibaba call option.

“I put chump change, like three grand, into crypto, when I only had five grand to begin with in 2017, and I lost all of it. But I was seeing everybody making money hand over fist, and I wasn’t. I work in tech, and a lot of my colleagues were worth, like, $10 million.”

The price of bitcoin fluctuated in 2017 from around 900-19,700. If he had bought bitcoin or any other cryptocurrency, even at its highest price, and just held it, he would have at minimum, a 150% gain today. Anytime someone says they “lost it all” in the stock or crypto market, ask that person specifically what they did. If you get a clear answer, what the trader did had nothing to do with long-term investing or just the classic buy and hold strategy. This trader made a high-risk leveraged gamble.

This trader referred to three grand as “chump change.” I personally would never refer to three thousand as chump change. With the power of compounding interest, or just appreciation, 3,000 can easily turn into 10,000-20,000 in a short matter of time. This is one of the most fundamental rules of finance, respect money. The most powerful thing about money is that it gives you the ability to gain control over your time. A trade like this does not show a great deal of respect towards money.

My job involves a lot of researching companies and trying to understand business and economic models. I like to read a lot, and there’s a lot of books on investing. 

What he did had nothing to do with investing so maybe he is confusing investing books with books on trading or options strategies? For most investors, the best books on investing are more psychological/philosophical based. A lot of the strategies involving technical-based analysis investing are not applicable for the average person. It is geared more towards short-term trading, too complicated, or once again, not related to fundamental long-term investing.

Long-term investing has been lumped in with day/swing trading, which is unfortunate. They have become interchangeable terms. Investing is a powerful tool to create wealth. Trading mimics gambling. Each requires a different skillset/mindset. Many of the principles of trading stocks run counter to long-term investing. It is important to know the difference. You could not say you are a vegan and then start eating meat. A lot of traders say they are investing, which is not true.

It didn’t start with Alibaba. It started with a $5,000 bet on AMC. Then the $5,000 became $15,000 when I bet on something else, then it became $50,000 when I bet on silver. And that’s when I was like, Okay, I’m done with this. Now I want to buy a safe bet. And the safe bet was Alibaba. Then I just went all in on this one single stock option: The $200 strike price call option on Alibaba. ​​I would describe a call option as a leveraged bet on an underlying stock, which helps you increase the upside (or downside) of the bet you’re trying to make. I initially invested $300,000 in February, basically every single liquid asset in my account. 

Buying a call option is quite different from buying the underlying stock. I am not an expert on options trading; however, it is something a beginning trader should not dabble into. Even if you have experience in the market, options trading should only make up a small percentage of your portfolio.

With investing, you have time on your side. It is one of the most powerful forces in investing. It can make small investments grow big and make big mistakes fade away. When buying call options, you lose having time on your side. If your call option cannot get above the strike price before the expiration date, you lose your entire investment. Often when you have time pressure, your ability to make a clear decision can become foggy.

The one thing I really hate about buying call options is that the trader could be right about Alibaba and the price of the stock going higher. However, he has to be right about the price in a certain timeframe, otherwise, he’s toast.

“So I was like, Hey, this is gonna rebound. And as my salary came in, I saved another $100,000. So in July, I put in another almost $100,000. I basically transferred all the liquid cash that I had and maxed out my account. If my company had not paid me at the end of July, I wouldn’t have made my rent payment on August 1.”

This trader made some obvious mistakes that all investors can learn from. One is not taking a risk that can wipe you out completely. Gains are important however you must survive to succeed.

I like to think of investing as gambling, but with the odds in your favor. Imagine making a $1,00,000 bet that the Dallas Cowboys will win at least one Super Bowl with a twenty-year time horizon vs making a $1,00,000 bet that the Dallas Cowboys win at least one Super Bowl in the next two years. One bet gives you a much higher probability of success and is less risky.

“I sold and shut down my Robinhood account in October, right before my birthday. I decided I don’t want to have this hanging over my head. [Editor’s note: He walked away with under $20,000.] The day I sold it, I was like, You know what? I ****** up. It was a mistake. But clean slate, dust yourself off and move on. I felt better when I sold, much better actually.”  

One positive aspect of this article is that this trader learned from his mistakes. It does not appear he has a six-figure income yet was able to save nearly $400,000. Now that is impressive. He is young enough to recover from this however I will not mince words, this was a bad mistake that will likely set him back a few years or more.

I do believe right now Alibaba is an undervalued stock. The actual value of the stock is probably around 190-210. It is a company with strong fundamentals, a healthy cash flow, and consistent revenue growth. In 5-10 years, I can easily see the stock price being in the 600-800 range. If he had just bought and held the underlying stock, this would be potentially a million-dollar missed opportunity.

LESSONS TO BE LEARNED FROM THIS:

• When you have a net worth of roughly $100-500K, you have wealth, but you are not actually wealthy yet. At this net worth bracket, it really is not the time to be buying a Tesla or Rolex. It also is not the time to be making wild leveraged bets. Remember, this trader did not go all-in on a single stock, he went all-in betting on the price of a single stock in a given timeframe. This is a type of bet someone with a net worth of $100 million can make without losing sleep. This trader had an easy path to become a millionaire at a young age, and now is kind of starting from the bottom again.
• Don’t use Robinhood as your main brokerage account. Brokerages like Robinhood gamify investing. It makes it feel like a game rather than real-life. Take this seriously, you are using real money. Treat managing your portfolio like an actual job. It makes it feel more real and less like a game.
• Be Like David Puddy. Famous investor Mohnish Pabrai was recently interviewed about what it takes to be a great value investor. He said great value investors are people that like to watch paint dry or look at the back of an airplane seat for long periods of time (like David Puddy). Patience is the most important trait to be a successful investor and unfortunately, most people lack this ability. They need stimuli or action. For most people, investing is boring despite it being a proven way to become extremely wealthy. Gambling is more exciting and attracts more people despite it being a proven way to lose your money. One analogy I would make is farming vs hunting. For most people hunting is far more exciting than planting a few rows and tending to them carefully however farming has been proven in the long-term to be a more efficient way of producing food.
• Find the order within chaos. Friedrich Nietzsche once said “Whoever fights monsters should see to it that in the process he does not become a monster. And if you gaze long enough into an abyss, the abyss will gaze back into you.” I have said this many times however I will repeat myself again, investing is psychological. The market will eat you alive if you have the wrong mindset. Focus on being an island of stillness in a flow of treacherous waters.
• There is no need to pile on this one trader. There is a famous quote from Ian MacLaren, “Be kind, for everyone you meet is fighting a hard battle.” He made a mistake but seems to have enough self-awareness to learn and grow from this. These painful lessons can be viewed as teaching moments. It is better to learn a “lesson” like this now instead of blowing 4 million on a single-stock call option in the future.