Recently, I managed to lose a lot of money. But I’ve since learned a great deal—and discovered some sympathy for Irish bankers
by Andy Davis / February 23, 2011 / Leave a commentPublished in March 2011 issue of Prospect Magazine
One morning, a few months ago, I woke up to discover I had turned into an Irish bank. This came as a surprise. I had no more seen my financial crisis coming than had the other Irish banks, and like them I found it acutely embarrassing. Unlike them, unfortunately, I had incinerated a pile of my own money rather than torching someone else’s savings.
I did this spread betting—which, I must stress, is a fun and potentially very profitable activity. They say that in investment, your mistakes teach you far more than your successes. If so, then spread betting offers unparalleled opportunities to learn.
It’s easy. All you do is deposit money in an account and start betting on whether a huge range of securities will go up or down in price. If you bet £10 that shares in Company A will rise, you win £10 for every penny they go up. If you’re wrong, you lose £10 for every penny they fall. What could be simpler? The twist is that, whether or not you realise it, you are boosting your betting power with borrowed money: your £10 bet will comprise perhaps £7.50 provided by your spread-betting firm and just £2.50 of your own. This is the genius of spread betting, and also the curse. If all goes well, you’ll make many times the amount you have staked. If not, the opposite will happen and the next thing you know, your depleted sliver of capital is supporting a vast deadweight of bad debt. Hey presto, you’ve turned yourself into an Irish bank.
Smart people mostly use automatic stop losses when spread betting. These will close a failing bet once the loss hits a certain level and so prevent things getting out of hand. I now realise they’re a great idea. But this was a lesson learned the hard way.
On went the bet, a large wager that shares in a particular company would rise. I was so confident I was right that I didn’t set a stop loss. I was backing a British company, but it might as well have been a Dublin property developer. You don’t see what you aren’t looking for: if you don’t think that property prices are going to fall, you don’t worry about how to protect yourself if they do. Over-confidence, combined with easy borrowing, can lead you into a dark corner whether you’re a bank with a room full of risk managers or an opinionated punter.
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