Lessons From Joe Lewis’ Loss In Bear Stearns
Do you know Joe Louis? I’m sure some of you boxing fans know who he is. I’d be willing to bet that a few of you’ve heard his matches broadcast on the radio. Joe is known as the greatest heavyweight boxer of all time.
He was nicknamed the Brown Bomber, and he successfully defended his title 25 times. Amazingly, Joe held the heavyweight boxing title from 1939 to 1949, still a record to this day. To say Joe Louis was a successful athlete would be a gross understatement.
The other Joe Lewis.
There’s another Joe Lewis many of you don’t know. He’s a bit reclusive. This Joe’s a British financier and a billionaire. He’s reported to be one of the 16 wealthiest men in all of Britain and ranks 369th in the world. Needless to say I think he’s successful.
Joe spent his early career expanding his family’s catering business. He then started selling luxury goods to tourists. His fortune really bloomed when he started currency trading. Joe’s lasting legacy is the Tavistock Group, his private investment vehicle. Through Tavistock he owns more than 170 companies in 15 different countries. This is what puts his net worth in the billions.
So why do we care about some exclusive British financer?
Because he can teach us something very important. Give me one minute and I’ll explain.
I like talking with people about their trading experiences. More often than not most people want to brag about a big win. Everyone has a big trade that quickly doubled or tripled their money. Even better stories are from people who sold a stock just before it fell.
What really interests me however are losses.
Strange I know. Think about it for a moment. How often do you look back on a trade and analyze what went right? For your winners you probably do it all the time. How often do you review your losers? If you’re like most investors the memory of a trading loss gets tossed into a trash bin and forgotten about.
That’s a huge mistake.
Some of the best investors spend more time studying their losing trades than anything else. Losing trades are really important to review. If you look at them the right way you’ll get a great insight as to what went wrong. More importantly, you might be able to figure out how to avoid these mistakes in the future.
So back to Joe Lewis – the British billionaire.
Joe made a huge mistake. It cost him more than $1.1 billion. It’s bad news for him but great for us. We can learn from his mistake and it won’t cost us a dime. So I know what you’re thinking, “What was that mistake?”
Joe decided to double up on a trade that was moving against him.
Instead of cutting his losses and revisiting the trade later, he put more capital behind a trade that was going horribly wrong.
Back in September of 2007 Joe spent $860 million. He bought the stock of a company that had fallen from highs of over $170 a share. He was buying in at the bargain price of $100 per share.
Then much to his dismay he watched the stock continue to fall. Over the next few weeks the stock lost another 20% of its value. Joe had paper losses of more than $100 million. He should have cut his losses and sold the stock, but he didn’t. He bought more and more. Eventually he spent more than $1.1 billion buying this stock.
The company he was buying so aggressively – Bear Stearns.
You don’t need me to finish the story – but I will. Bear Stearns collapsed and his shares lost more than 90% of their value in a few short days. Joe lost billions because he doubled up on a trade that was moving against him.
This is a tough lesson that every investor needs to learn. Cut your losses short and let your winners run. It’s the sign of an experienced trader. And if you ever see Joe Lewis you might buy him a drink . . . I’m sure he needs one.
Category: Stocks
