No investor sets out to lose money, but some past examples really set the standard. If you are looking to join the list of infamous investment losses, the following investors may have some lessons to offer.

Small beginnings

How to turn a small lump sum into a crippling debt

The first two stories are from last year about young, amateur "traders" using the online platform Robinhood. They each shared details of their strategies online prior to execution. The investments they purchased are incredibly complicated so I won't go into too much detail.

The first anonymous trader, posting online under the name 1R0NYMAN, started with $5,000. The strategy he used is called a box spread. It involves taking out a number or derivatives (contracts agreeing to buy or sell investments now or in the future) which, 1R0NYMAN claimed, couldn't lose.

In January, he put his plan into action. A few days later, his account was worth nearly -$58,000, a return of about -2,000%. As with most "no-risk" strategies, the idea didn't hold water. You can't make a return with no risk in this world.

The reason for the loss is a bit too much to explain here, but the other trader, going by ControlTheNarrative, followed a slightly more straightforward path. His strategy relied on a loophole to gain potentially infinite leverage.

How did he do this? Starting with $2,000, the platform allowed him $2,000 in debt. He used the total of $4,000 to buy shares and then, using covered calls, agreed to sell them at a later date at a set price. These covered calls offered a premium paid immediately.

Here is where the loophole comes in. Robinhood saw the cash in his account from agreeing to sell the shares but still included the shares themselves in their estimate for account value. So ControlTheNarrative went back to step one, taking on more debt, used it to buy shares, agreed to sell those shares, took on more debt... Until he had $25 debt for every $1 he started with.

He used all of this money to bet Apple shares would dip at the end of the week using another contract. They went up instead and his account fell to about -$60,000 within minutes.

These two traders pretty clearly illustrate how to lose money with highly leveraged, complicated strategies and the dangers of derivatives. But they aren't experienced traders, surely Wall Street professionals wouldn't be so bold?

Upping the Ante

How to turn a big lump sum into a potential financial crisis

If the idea of losing tens of thousands isn't exciting enough, we have good news. Start a hedge fund and you could lose billions in months! 

Amaranth Advisors started 2006 with US$7.4 billion in assets. By August, it was at $9.2 billion. And a month later, the fund's value had plummeted to $3.5 billion before liquidation. What was the recipe for this disaster?

Amaranth were placing large bets with high leverage, just like the two young traders. Their bets were made on the price of natural gas rising and were leveraged 8:1. So when natural gas prices fell, their losses were huge.

Another investment manager, James Cordier, incurred huge losses with natural gas bets in 2018. His strategy involved contracts to sell natural gas, of which he owned none, at a certain price in the future. When the price rose 20% in a single day, he was forced to buy high and sell low to cover his contracts.

James Cordier lost all $150 million invested by nearly 300 clients in one day. Tragically, after losing all their capital, some clients were actually left with a debt owed, because the contracts were in their names.

Taking the cake for losses on Wall Street is Long Term Capital Management (LTCM). Their strategy was focused on bond trading, where margins were small but believed to be consistent. LTCM maintained leverage of 25:1 (!) to take advantage of these small margins.

In 1998, the Asian and Russian financial crises obliterated their balance sheet. Losses were approaching US$4 billion. To make matters worse, other Wall Street firms were so invested in their fund, the Federal Reserve believed LTCM's collapse would bring on a financial crisis.

The Fed, with support from other major investment banks, organised a $3.625 billion bailout for LTCM in late 1998.

If you want to lose as much money as possible, instigating a financial crisis must be the loftiest goal imaginable. Yet, with the right strategy, even that is achievable.

A Recipe for Disaster

Takeaway tips for a DIY money sink

So what do these examples teach us about losing money? First thing you want to do is take on as much debt as possible. Leverage your initial capital as much as you can. You could take the fraudulent route, such as ControlTheNarrative, or start a hedge fund, like our friends from Wall Street.

Once your debt level is terrifying enough, use all the funds to buy risky derivatives. Don't diversify or hedge your bets, this will reduce the potential losses in your account. Also, if possible, make your strategy as convoluted as possible to stop anybody (including yourself) from understanding it.

Now you've created your time-bomb, wait for your bets to turn sour and your account to become worthless. If you are leveraged enough, you may even turn that capital into debt!

And if you aren't interested in losing money, maybe avoid derivatives, leverage and get-rich-quick schemes entirely, including those who specialise in them.