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Investing Advice From Lucky Hans

The Brothers Grimm are little read these days: children's books have moved on, and TV and video have taken over the role of books to a large extent. Besides, some of the material is politically incorrect, to put it mildly. Nevertheless, the tale of Lucky Hans is worth a read for investors who trade frequently.

Hans, having served 7 years as an indentured servant, asks for his wages, in order to return home with them. His master gives them to him in the form of a lump of gold as big as his head. Hans ties it up in a handkerchief, slings the handkerchief over a stick, puts the stick over his shoulder, and heads for home.

For you gold bugs out there, assuming Hans' head was of normal average size, that was lot of gold at $1,700 an ounce.

Gold is heavy, and Hans began to sweat and tire, lugging his burden along the road. A stranger came by on horseback, and Hans, wishing to ride in style, traded the lump of gold for the horse, even up.

It's all down hill from there - Hans trades, in succession, for a cow, a pig, a goose, and a grinding wheel. The grinding wheel is heavy, and he finally kicks it into a well, heading for home much relieved to be rid of his heavy burden. I'm sure his mother welcomed him with open arms.

As a frequent trader, I sometimes think of Hans' journey. How about those shares of IBM I sold for in February 2009 for $92? Or the Carbo Ceramics I sold for $35 in September 2009? According to my notes, I was going to use the proceeds of the IBM sale to buy some financials, where I thought I saw opportunity. Details of what I intended to do with the proceeds of the Carbo sale are not available.

I won't put you through the exercise: if I wanted to, I could trace the last of the proceeds of the IBM sale to the purchase of some out of the money calls that expired worthless. As a practical matter, some strings of trades deadend in losses, while others multiply trivial amounts into meaningful sums - rapidly.

The moral of the story, for traders, is that sometimes you pick up treasures very cheap. It's a good idea to think carefully before you discard them for the next momentum idea that comes down the line.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.