He's BackI've mentioned ex-major league baseball player Lenny Dykstra several times in the last two years, just because his ridiculous story is, well, ridiculous.
You may remember that he was a big swinging dick in the investment community, at least for a short time, entirely due to the promotion of Jim Cramer, who proclaimed Dykstra "one of the great ones in this business."
People will believe anything if you say it loudly enough.
It was obvious to anyone with any common sense that Dykstra was full of shit. Lots of people don't have any common sense, though, and Dykstra, in a brilliant bit of self-promotion, made people believe he must be making a ton of money by spending a ton of money (like buying Wayne Gretzky's California mansion for $18.5 million).
Dykstra had an "investment strategy" that was supposedly fabulously successful--he claimed at one point that his "system" was 99-1 in terms of wins versus losses. It involved buying deep in the money calls, but I never heard much else in terms of specifics.
Until today, that is, when an article about Dykstra alleged that he agreed to promote a stock in exchange for $250,000 of the company's stock.
Yes. That's bad. Very bad.
That link led to another link, which led to another, and I finally wound up here. Incredibly, it was an explanation of Dykstra's trading "system." What was it? This:
Lenny’s strategy consists of entering an order for 10 contracts (he has explained that his system is scalable for those with less capital) of a particular deep-in-the-money call option at a price below the current market price. If the trade is executed, he enters a good till cancelled (GTC) sell order at $1.00 above the price of the trade. So if a trade executed at $10, he immediately enters a sell order at $11.
So what do you do if the stock drops and the contract value drops with it? You average down--in other words, buy more to lower the average cost of each contract. And you keep averaging down until you turn a profit.
So this system explicitly limits the profit per trade, but has absolutely no limits on the loss per trade.
I'll tell you what this is called: bankruptcy.
This is not unlike the fellow who goes to Las Vegas and bets $100 on red on the roulette wheel. If he loses, he bets $200 on the next spin. If he loses again, he bets $400.
See? He'll never take a loss. He just has to double down each time he loses, and eventually, he'll wind up ahead. And this system will work great, right up to the point where our gambler goes bust. Because he will go bust if he plays long enough--it's guaranteed. It's math.
It's the same thing with Dykstra. One sharp, hard reversal in the market would wipe him out, and while I haven't seen specific details of his collapse, I'm sure that October 2008 did him in (and something much milder than October 2008 would have been sufficient). Deservedly so, because if you don't have something in place to limit losses, you will lose all your money. It's Investor 101.
Actually, Dykstra would have gone bankrupt anyway, based on his spending and his seeming affinity for refusing to pay his bills. But his trading system was guaranteed to fail, and anyone who took his advice failed with him.