4 Things I Learned About Myself Trading Fake Money

You don’t learn how to drive by pulling your Prius onto the Indy 500 oval on Memorial Day. So why do so may of us do it when we invest our money?

Maybe you are there right now sitting in front of a sleek silver MacBook Pro itching to start making money investing. Before you do, try a practice run around the track with a simulator: It’s a great way to test your skills and knowledge even if you don’t want to trade online.

No doubt about it: Online investors can tank up with some really high-octane fuel.  A few simple buttons, a few dollars commission and you have a mini-Goldman Sachs at your fingertips. The problem is that you are matching wits with Warren Buffett and all the other geniuses out there – and they have the best research money can buy and algorithms firing their trades in nanoseconds. In the hunt for bargain stocks it’s you and your slingshot versus them and their heat-seeking missiles.

There are ways to even up the odds – and doing research the old-fashioned way is step one. But you can use a bit of technology yourself. There are dozens of online trading sites that give you virtual money and let you trade for free. The results are tabulated just like real online trades with actual market data.

I gave one a test run myself and I will tell you that even after 25 years of making money investing I learned new things.  They will not turn you into the Oracle of Omaha but they will teach you the most important thing any successful investor needs: To know yourself and your limits.

Some simulators are offered by online brokerage sites as a tutorial and others by independent financial information sites as way to keep you online, which they do very well:  They are sticky, a bit addictive really. But it was worth all the time I spent. So what did I learn?

1. Keep it simple.

They deposited 100 ‘large’ (that’s $100,000 for those of you who never watched The Wire) into my virtual account, no questions asked.  My financier, Investopedia, runs an awesome site with a lot of good tutorials on everything from basic stock trading to options puts and calls and short selling. You can even train for a brokerage license or learn how to read a balance sheet.

I was anxious to get going so skipped all that and just started trading, figuring I already knew the business news and I had lots of investing ideas.  That was my first mistake. Investing too much.  For realism’s sake, Investopedia imposes some limits on trading size and bars you from unrealistic trades in illiquid stocks. But mostly they let you just go out and make your own mistakes (thought they offer to help, I just ignored it.)

Before I knew it I had a bunch of stocks and ETFs on my screen – so many that I was not entirely familiar with every one and I lost track of what my strategy for each.  I found myself signing on in the morning wondering what some of the stock symbols were and why I bought them.

By spreading myself thin I was down $5,000 the first few days without really knowing why.  The market was down – but not that far down.

2. Don’t be the hammer or the nail

The number of tools at your disposal as a small investor is mind-boggling. The law of the golden hammer says “if the only tool you have is a hammer, to treat everything as if it were a nail.”

An extension of that rule is that if you have a bunch of trading tools you might start hammering away with all of them. And so I did.  I wanted to make up for my first day losses and I started with leveraged ETFs, which really do give you the sensation of a race car driver, accelerating three times the speed of the market.

But for sheer excitement, there is nothing like options on volatile stocks. I bought some options — calls — on Akamai, which provides network services for Internet sites. The underlying stock is volatile; the options are volatility on steroids. I watched as my investment drop 35 percent in a matter of minutes. By the end of the day, they were up 10 percent. I never figured out why it went either way. Wonder why they call it gambling?

The market was falling so I thought I should try my first-ever short sale – something I’ve always been fascinated with. I just randomly chose something that seemed pricey and overdone: JP Morgan. Yes Jamie Dimon is everyone’s favorite but it’s still a bank with issues and it’s not immune to a global debt crisis.  Of course it went up as soon as I shorted it.  I covered it and gave more thought to the process. Now I was down $7,000 – on an annualized basis, that’s a 93 percent loss for the year.

3. Take a breather, and never invest under duress

I did not even look at the market for a few days after the first losing sessions. I decided not to do it until I had a good idea. When it hit a few days later, my inspiration was to make another short sale.

Research in Motion, the maker of Blackberry, had fallen dramatically on bad results and then bounced higher. I like my Blackberry fine but I think Apple is biting deep into RIM’s home base, the corporate market, and that had not really factored into the stock price. I did it in big volume — $40,000 worth. Gravity, indeed, began pulling it lower, amid more reports of just that. I made a solid gain on this one.

With RIM I had a plan, and the short sale was the way to play it. This one worked fine.  I was not the hammer and not the nail. I was the guy holding the handle.

All told I made some right guesses and ended up back where I started.  I recouped $7,000 in two days. So I was dead even.

4. You are who you are

I guess I am really boring. I was stressed from all this activity. So I went back to what I do.  I have always made money on stocks by focusing on a few picks and putting money behind them. I dove deep looking at a stock I liked, Akamai (again – but not the options like last time).  The company benefits from expanded Internet video use and the shares were still near the year’s low.  I added a South Korean ETF, because it appeared to be getting lumped in unfairly with other emerging markets and looked cheap.  Then I bought simple no-leverage ETFs on the S&P 500 and Nasdaq 100.

I dumped a few other stocks I had collected along the way.  I realized that I was holding them waiting for them to go back up. And it occurred to me that this had become my favorite excuse:  “That one is long-term,” I always tell myself when it goes down. Then I hold the rotten stock even if my rationale for buying it proves flawed.

Knowing yourself means you become your own worst critic when it comes to your money. Be brutal. Once that stock is sunk money let it sink.  That was hard for me – but once I started doing it I felt better.  I recalled that a lot of the stocks that went down in the 2000 tech stock bubble collapse have never returned and never will. Remember Webvan, the failed online grocery? I still use my delivery bins — for recycling.

The online simulator can help you develop patience and focus to find the best long-term investments, which really is the only way to beat the odds. Some argue that Buy-and-hold is dead. I don’t think so. The lesson of the 2008 collapse is that if you stay the course your can recoup your loss – as long as you buy good earnings-driven stocks.

I have only one complaint from my virtual trading spree: Investopedia was great, and I liked the idea of a service that was not trying to upsell me to use their online brokerage. But I searched everywhere and could not find a get-rich-quick tutorial on the site.  I was thinking it would be fun to make a 10-fold killing in the market, take my million and get out of the game (but this simulator really does mimic reality). Instead I got lucky and learned some things about myself that I can apply to real investing. I’m ready to get back on the live track. Yes kids, you can try this at home! In fact you should try it at home. It can actually be a good competitive workout before you join the race for real.

RJ Safra is a New York-based writer who specializes in finance and business topics.