BIO: Edward McQuarrie is Professor Emeritus at Santa Clara University. He writes on market history and personal finance, and his research has been mentioned in columns in the Wall Street Journal, Marketwatch, and Barron’s.

STORY: Edward opened an account to trade naked puts. When the financial crisis of 2008 hit, he thought it was a good time to sell his puts. He ended up losing almost all the money in his account.

LEARNING: Keep your play money small. Never trade your treasury bond until maturity to avoid losses.

 

“I find intermediate treasuries to be superior to total bonds, especially for new investors.”Edward McQuarrie

 

Guest profile

Edward McQuarrie is Professor Emeritus at Santa Clara University. He writes on market history and personal finance, and his research has been mentioned in columns in the Wall Street Journal, Marketwatch, and Barron’s. His papers can be downloaded from SSRN.com, and he posts as McQ at Bogleheads.org, where you can view some of the charts mentioned today.

Worst investment ever

Years ago, Edward gave himself a small play account to keep his hands off the money in his 401(k) account. In that play account, which he opened with a broker, Edward began to trade options, and more particularly, he began to sell naked puts.

Then the great financial crisis of 2008 hit. Edward had been trading puts and calls for four or five years at that point. By November 2008, the Lehman Brothers had already gone bust, and the markets were going down, so Edward thought this was an excellent time to sell a naked put.

At that point, Edward had $21,000 in his play account, and his maintenance requirement was only $11,000. A day later, he logged into his account and found a balance of $11,000 and a $21,000 maintenance requirement. This meant Edward was $10,000 short. His best option was to take the loss and reduce the maintenance requirement. So after 30 minutes of frenzy to position covering, Edward still got a margin of about $2,000, which he had to cover with money outside the play account.

Lessons learned

• Keep your play money small.
• Always have a lifeline in case you totally screw it up.
• Nobody holding a US Treasury to maturity loses their money nominally. It’s when you trade them before maturity that you can lose significantly.

Andrew’s takeaways

• Always have a backup plan to survive.
• Get into a short-duration bond when you think that bond prices will fall. On the other hand, invest in a long-duration bond if you think that prices will rise.

No.1 goal for the next 12 months

Edward’s number one goal for the next 12 months is to write as much good stuff as he can pump out the door.

Parting words

 

“Own the total stock market, just like Andrew said.”Edward McQuarrie

 

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• How to Start Building Your Wealth Investing in the Stock Market
• My Worst Investment Ever
• 9 Valuation Mistakes and How to Avoid Them
• Transform Your Business with Dr.Deming’s 14 Points

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