Ep476: Mike Lung – Have a Defined Exit in Every Trade

Andrew Stotz 00:01
Hello fellow risk takers and welcome to my worst investment ever stories of laws to keep you winning. In our community. We know that to win in investing, you must take risks but to win big, you've got to reduce it, go to my worst investment ever.com and join our Facebook group to connect with our community of guests and fellow listeners. Fellow risk takers. This is your worst podcast host Andrew Stotz from a Stotz Academy, and I'm here with featured guest, Mike lung. Mike, are you ready to rock?

Mike Lung 00:38
I am. Thanks for having me on today. Great to

Andrew Stotz 00:40
have you and I'm going to introduce you to the audience. Mike lung is the director of brokerage and Allendale Inc, which is best known for specializing in the agricultural sector since 1985. Working with farmers, ranchers, merchandisers and others to hedge their risk when it comes to buying and selling agricultural product and inputs. During his time at Allendale, Mike has had to help navigate his clients through trade wars COVID, fear, drought concerns, packing house fires, and much more. These types of events drew him deeper into the commodity rabbit hole to figure out what exactly makes the markets tick. He's currently working towards a chartered market technician designation. And we'll be diving into his CFA afterwards. Mike has been quoted in articles by Reuters agricoles, Iowa agribusiness network Bloomberg, and much more might take a minute and Philly for the tidbits about your life.

Mike Lung 01:45
Yeah, so I have been director of brokerage Allendale for about a year been working while they're into building more algorithmic ways of going about our trading advice and our hedging recommendations to have a more structured approach to it all. And really, ever since COVID, have been diving further further into algorithms and what really makes them move and all the logic behind it all.

Andrew Stotz 02:11
Huh. You know, it's interesting that the whole agricultural business and ranchers and all that whole industry is so fascinating. And recently, I've been looking at corn prices going up, and then, you know, looking at what's happening with the cattle, you know, and trying to understand, you know, the consolidation that's happening. I mean, it's so interesting to see so much consolidation in an industry where it used to be pretty fragmented. And you know, there's, there's negatives to consolidations for sure. It's just such a fascinating area, the whole agriculture, I came from Ohio originally, and agricultural was all around me, but I never really paid much attention to it. But, you know, when I, when I hear you say, you know, being quoted in the Iowa agribusiness Radio Network, I mean, it is serious stuff in the Midwest, to keep track of what the heck is going on in agriculture. Why are you so interested in that whole space?

Mike Lung 03:08
It's actually twofold for me. So actually, a lot of people that come into brokerage are typically farm kids, myself, I'm not so much a farm kid as I am one generation removed from that farm kid where it's my grandma on my dad's side. And then on my dad's side, as well, my grandfather did it for CNA insurance in downtown Chicago. So building those two together, really, I guess, culminated in my fascination not only for farming, but also for it and technically based systems and how they work. So all of that really culminated into my interest into this agriculture space. And really, once you get into it, once you take that first dive into your first trade, you just get sucked in.

Andrew Stotz 03:55
That's cool. Well, it's nice to have a little contact back to the Midwest in the area where I'm from. I'm so far away from it. My father said many years ago, if you know living in Thailand, he said, if you move any further away, you'll be closer. Because he believed that the world was round. So Oh, good. Yes. Good. Having circumnavigated it, well, yeah. Now it's time to share your worst investment ever. And since no one goes into their worst investment thinking it will be take a minute and tell us a bit about the circumstances leading up to it and then tell us your story.

Mike Lung 04:38
Yeah, so it was my first year working at Ellendale. I was learning the ropes as any newbie would and at first really just falling with the more senior guys were doing what they were saying what they were recommending. And I started to build my book of business and becoming more confident with myself and my recommendations and how I was saying it. And then came this market that was just absolutely on fire. And there is no way that could go wrong. It made so much sense. And I just jumped into it. And this market was wheat. And if there's one thing you'll hear time and time again, traded the wheat market is trade wheat, sleeping the streets. It is a market that just gets you sucked in, gets really confident with yourself, and then takes it all away. So I went into it, it was a counter seasonal trend, we were running higher, you had rumors that Russia was be cutting their export program, and they were going to be increasing tariffs. And that business was all gonna come flocking over the US. So you just had to buy wheat. So I get into it. And it starts moving away from me a little bit, but I'm so confident with it. So have guys do the more on trade where you just put more of it on average self doubt, just keep buying in. And then it starts just move sideways, I felt a little confident we're building a base. And it's something that once this thing gets going, it's really just got hell off this base, and then proceeded to take $2 off the wheat market. And luckily, I didn't take the entire $2 Write down. But it did leave a big hole, it took a lot of my confidence and threw me back into the canyon of do I really know what's going on here. What was I thinking? Is it still making true is Russia still having this issue that we should be seeing this business come over to us. And the saying that was being thrown around not only by me, but by everyone that was on the wrong side of wheat that year was where there's smoke, there's fire. So we heard this out of Russia, and eventually it's gonna come about. And eventually, if you would have held on to it, you would have started making money this year. But you also would have been having to hold that for about four or five years in order to do so. So it was really something that made me take a step back and say, What was the reasoning? What did I need to look at to say, this is time to cut this trade off? This is time that I'm obviously wrong. And I used to either flip river short, or just get clean out of it. And that was my worst investment. And being with some of the other guys that gave the where there's smoke, there's fire in the moron tray. That was some of my worst investment advice.

Andrew Stotz 07:46
And so let's just talk about it for a moment. You know, what, what lessons did you learn? I mean, I'm kind of curious too, about lessons that you learned about risk management in that whole space of trading.

Mike Lung 08:03
Yeah, during that timeframe, it was something that I learned not only that going into something, especially if it's on a speculative basis, that you need to have a defined exit point that if it's going against, you need to just be out, but also how to be using futures and options in tandem with each other to protect that risk, where I can buy a futures. And I can be long the market, but I can also buy a put to cover that risk and be able to hold on to it for a longer period of time and not watching that margin just a wrote, as with futures, as opposed to stocks. That's something where a lot of people come into the commodity market, and it's really a learning curve to realize I'm on a leveraged contract. It's something I do have to pay up if I start losing.

Andrew Stotz 08:49
Mm hmm. And is the is really the only way to succeed in this space is to use futures or are there any people that just are good at buying and selling the movements in the market? Or is it really important that to use futures in the trading,

Mike Lung 09:08
which should give you the most bang for your buck. But you can also use options to accomplish the same thing. You'll have time value erosion, things along those lines, but there are different ways to go about it. To measure your risk, especially with where the market is at certain times like that year, we were kind of seasonally rallying and seeing that this could turn around any moment, I need to look to adjust how I'm going about attacking this market. Maybe I do want to go in with a bull call spread, as opposed to just a straight out futures.

Andrew Stotz 09:39
Yep. And from what I know, the Chinese, the Indians and the Russians are really the biggest wheat producers. Is that right? Where does America and American wheat fit in there? And like what are the dynamics of wheat when you're trading? Are you really trading price movements? or Are you trading kind of let's call it fundamental of understanding the crops and the yields and all that. I'm just curious like, whether it's yourself or others in that space, what matters there.

Mike Lung 10:12
So what matters currently with the wheat market is going to be more of a world based picture after the 80s. And after Russia really started taking over as the number one producer of wheat, everyone started taking their hand at it, you got Australia that produces not nearly as much as Russia, but they export a heck of a lot of what they actually produce, I think it's about 70 to 80% of what they produce, they ship out. And you have, obviously Russia, you have French wheat, that's a big player in the Black Sea wheat. You have South America, just about everyone is growing wheat, and it's harvested all the time. So typically, there is always a supply there, which is makes it very, very closely tied to international relations, anything that happens in those regards. And unfortunately, a lot of rumors, who's been cut off, where's their problem is Australia going to be on fire for three years straight. and things along those lines. So while it used to be a US based idea where a lot of these fundamentals were coming from now, it's going to be more so worldwide, and reading technicals as especially now as we've approached deeper and deeper into electronic trading, and pits really going away? Very quickly, watching those technicals as well, to get a little bit faster grasp on it,

Andrew Stotz 11:41
right. And the top wheat producing states in America, like I don't know, Kansas. So what are the top? Where's wheat coming from in America these days, do you know,

Mike Lung 11:52
I do. So you have a majority of wheat that is grown Kansas, that could be your hard red winter wheat that's grown, it's actually starting to be planted right now, as they take corn and beans out of the ground, they're gonna put that wheat in there, it's gonna go dormant over the winter and spring back up in the spring. And then you got up north like North Dakota, South Dakota, Minnesota, they will be growing your hard red spring wheat, and things along those lines also, as you get up into Canada, and then you'll see some spring we contract or contracts spring week round throughout the US but very minimally for the software and spring wheat things along those lines.

Andrew Stotz 12:29
Mm hmm. Interesting. I mean, having having lived outside of America for 30 years, more than I live in America, it's just so fascinating looking at, for instance, the, you know, agricultural production and an understanding that like, you know, the importance of, let's say, the Ukraine and the, the all those different places that are producing wheat and in different agricultural products. It's fascinating. All right, so let me share a little bit, I think, you know, my, my biggest takeaway from your story, is the idea, you said, have a defined exit. And that is such a great, you know, saying really, because it's the same thing, when you go into a crowded place, have a defined exit, if there was an emergency, if there was a fire, you know, if you go to a hotel, you know, it would be wise of you to look around where are the exits, you know, have a defined exit in case of emergency. And in the markets, when you're investing guaranteed, there will be an emergency, you know, every single thing that goes up, will come down. And sometimes they can come crashing down. And so I think the big, big lesson for the listeners out there is have a defined exit, that could be a stop loss that's automatically executed. It could be a number that you decide, at that point, I'm going to reevaluate at that point, I'm going to talk to my buddy, who's also a trader, or who's not a trader and say, Here's my original thesis. Now, this is what's working against me, you know, but the point is, have a defined exit anything you'd add to that.

Mike Lung 14:14
Yes, if you are going to be using that point that lie in the sand where you're not placing an order that will be picked up regardless if you're awake or sleeping. Make sure you really stick to your guns because having a place a line in the sand and then watch Nicole by and say I don't think it was that great, is just as bad and making sure it really is defines you actually take that stick and draw the line in the sand and not just kind of point there and say yeah, that sounds about right.

Andrew Stotz 14:46
Yeah, I think one of the one of the ways to make sure that you do that and we do this with our strategies in stocks in particular is you just have to realize that if you use stop losses as as we Do basically you have to realize you're going to lose on many of those stop losses, you're going to stop out, and then it's going to bounce back. And, and you have to understand that your objective is to lose, you know, to lose less money over time. Now, stop loss isn't for everybody, some people are saying, I'm a long term investor in a particular industry, and if it goes down, I'm gonna buy more fine. But for those people that are employing stop losses, you have to understand that it's going to bounce back sometimes, and you just, it's part of life. So that's kind of a big lesson that I've learned is just to accept that it's going to come back, you know, and the main thing is, you're just trying to prevent catastrophic loss in particular,

Mike Lung 15:46
whatever said,

Andrew Stotz 15:48
that's the key. I mean, you know, Warren Buffett's you know, saying is never lose money. Rule number one, never lose money. Rule number two, never forget rule number one. The whole point is if you start losing your capital, you got nothing, you got nothing to invest with. So it's valuable. And I think it's a valuable reminder. So based upon what you learned from this story, and what you continue to learn what what action would you recommend our listeners take to avoid suffering the same fate?

Mike Lung 16:17
I would recommend writing down and having a plan of action, your plan of attack your trading strategy on paper, before you enter anything, there's a book, it's called Building reliable trading trading systems in South by Wiley. One of the first paragraphs says something along the lines of year one, your goal should not be to make money, your goal should be to lose the least amount of money as possible. And it's really, probably some of the best advice you can have. Because going into something, especially if you've never done it, you can't expect to be the best. And if you are expecting to be the best, that's where the weak story comes into play. And it just wrecks. Yeah, so having that plan of attack and doing your research beforehand. And really knowing what you're getting yourself into is going to be probably the best advice and the first action you should take before entering your trade.

Andrew Stotz 17:15
Hmm. Interesting. And I see a book called Building reliable trading systems tradable strategies that perform as the back test and meet your risk reward goals. Is that the one? It is okay. I'll include that in the show notes. So if anybody's listening want to follow up on that one, we'll take your advice. And also, we'll have links in the show notes, ladies and gentlemen, so that you can connect with Mike and learn more about what he's doing. Alright. Last question, what is your number one goal for the next 12 months.

Mike Lung 17:49
Our number one goal for the next 12 months is to pass that CMT chartered market technician, test two will be on in December, and test three will be out in June. So getting those passes will be number one focused.

Andrew Stotz 18:03
Exactly. That's exciting. I mean, I know with CFA, I passed it many years ago, but I didn't pass level two on my first try, because I just didn't have time to study. And it really comes down to setting aside the time, I was privileged enough to be president of CFA society in Thailand and represent the industry, which was like my honor of my lifetime. So I really know what it means to focus on the type of certification on that type of charter. And get it my last time of doing that was getting my PhD at the age of 50, which took a tremendous amount of focus energy, much, much harder than in the early days. So I know that feeling, and I feel for you, and I'm excited for you and I look forward to following your journey. Well,

Mike Lung 18:54
thank you very much,

Andrew Stotz 18:55
listeners. There you have it, another story of loss to keep you winning. Remember to go to my worst investment ever.com and join our Facebook group to connect with our community of guests and fellow listeners. As we conclude, Mike, I want to thank you again for coming on the show. And on behalf of a Stotz Academy, I hereby award you alumni status for turning your worst investment ever into your best teaching moment. Do you have any parting words for the audience?

Mike Lung 19:26
Don't put any more in trades.

Andrew Stotz 19:29
Bingo. And that's a wrap on another great story to help us create, grow and protect our well fellow risk takers. This is your worst podcast host Andrew Stotz saying. I'll see you on the other side.