Money to Brains Ratio

Years ago, I had a client named Bill who took our “Ultimate Training Course.” We did some personal coaching sessions as well and, frankly, he became an excellent trader. I was very proud of his accomplishments. He was an intelligent, 40-something-year-old, executive-type family man who seemed to be very much in control. He could take $2,000 and effortlessly ramp it up to $20,000 with no trouble at all.

Then, he would make some boneheaded move and knock his balance back down again to about $2,000. Determined to not let the market beat him, he would focus and take his account back up to $22,000 again, usually very quickly, only to get cocky enough to lose it all again.

This behavior happened several times before he contacted me to discuss how this could have happened. He desperately needed a solution to get past this threshold of the low $20,000s. It was almost comical. And the errors he was making were so elementary that, under normal circumstances, Bill would never have made them.

It turns out that his father instilled in him at a very young age how money is the root of all evil and that somehow, he should not ever become wealthy. It seems like, subconsciously, as an adult, he had trouble accepting that he could be deserving of great wealth. Thereby, he continued to sabotage his own success. All he was conditioned to do was work hard all his life. I, on the other hand, taught him to work smart so he didn’t have to work so hard.

Bill and I developed a viable solution to his problem. I suggested that when he hits $20,000, he should transfer $18,000 into his bank account, where it belongs. He was excellent at making money but just could not keep it. By knocking his trading balance down while building his bank account up, he locked in his total gains.

His objective was to work on building his trading account to $20,000. No more. Then, he could transfer his funds out to his bank account and do it again and again. Needless to say, his bank account grew immensely, and he was a happy trader. I’m not sure his father would be happy, but I doubt he could be anything but proud of his son. After all, Bill had a couple children he had to put through school. This is no easy task, financially.

I call this my “Money to Brains Ratio.” For whatever reason, people seem to lose their brains as they accumulate more money. Traders seem to get careless, arrogant or lazy, and the cash disappears quickly. Maybe these folks are motivated by the chase rather than the reward — I have no idea. It is not until they lose a good portion that they get back into  serious mode and pay attention.

This behavior transcends all demographics across the board. I have come to accept it as a human condition. A windfall of cash often leads to financial and personal ruin. Google “lottery winners who went broke.” The internet is littered with these regrets. You will be astounded when you search out Hollywood’s riches to rags. Surely these people are not all stupid. Do you think it can’t happen to you?

Think again. Some get a lucky windfall off of the market and suddenly think they are experts and can do no wrong.

As you progress with your trading, you must keep this in mind to avoid the same catastrophe. Many people can make money but seemingly few can keep it. It happened to me years ago and almost everyone I know. Personally, I felt invincible when I enjoyed win after win. Then, I’d go all in and take a major hit. Very humbling, indeed. Even the mightiest are humbled on the stock market.

In all my years of trading, not a single soul has addressed this behavioral issue. But we did in our Trading Room. Just recently, we discussed this very human condition with the hope that it can be contained as quickly as it was discovered, lest any of our DayTradeSPY’ers succumb to its despair.

If you know what calls and puts are, you belong in the Trading Room. Ahren and I host this every morning, 9:20 to 10:30 a.m. ET, discussing everything to do with day trading SPDR S&P 500 ETF Trust (NYSEARCA: SPY) options. These interactive sessions are informative, engaging and even entertaining.

If you never heard of options, join us Sunday night for our Intro to Trading/Week in Review session at 8 p.m., ET.