Investing Blunders, We’ve All Made Them
Hey there. You may get the impression from reading personal finance blogs that authors are infallible experts and know everything there is to know about topics x, y, and z. While I probably know more about investing than the average person, it’s because I’ve made and learned from various investing blunders.
Read below to identify what these common mistakes are and learn how to avoid them!
As much as it pains me to say this, I’ve made a few of the following investment blunders in my life. I have invested my personal portfolio for almost 20 years. I have also, as an investment professional, put over $1 billion of capital to work in various investments.
This level of experience doesn’t come without some knocks. Thankfully, I’ve WITNESSED a few of these errors professionally and had the privilege to learn from other people’s mistakes. That said, I made many of these errors in my personal portfolio when I was younger.
3 Root Causes of Investing Blunders
After I wrote out the list of investment blunders, a pattern emerged: these mistakes all have common causes.
These causes are lack of expertise, lack of discipline, or lack of humility. Many of the mistakes overlap and have two or all three of these causes, but I’ve simplified everything below.
The causes for your potential investment errors are all caused by a lack of something. Thankfully, the Market is a fantastic teacher.
Lack of Expertise
If you’re kinda old but not really like me, you may remember people getting wiped out financially during the Dot Com bust. A lot of that was because inexperienced people were putting their life savings on the line and trying to play the action of the stock market. “Pets.com is going to the moon!” Day trading is highly risky and extremely tax inefficient, so avoid doing it.
Everyone’s heard a hot tip at work or from friends. Ignore them. People like to talk about this stock or another “having a lot of room to grow,” but NOBODY knows what will happen. At best, you can have a well-educated guess. If someone does know precisely what’s going to happen, there’s a good chance that’s insider trading.
It’s effortless to buy Amazon stock when it goes up consistently, right? The thing about momentum is that it usually takes months to gain steam but ends within a few hours. You probably don’t know when that is going to stop, so don’t leave yourself exposed by trading on momentum.
In the hedge fund world, a “crowded trade” is one that is a company that has several high-level institutional investors in it. You can see what’s a crowded trade by perusing the 13Fs of various substantial hedge funds. If this sounds interesting to you, let me know, and I’ll put together a comprehensive guide for this. For now, check out this example to see how to see if your trade is crowded: https://finance.yahoo.com/quote/PKX/holders?p=PKX
Lack of Discipline
Investing Without an Emergency Fund
I’m guilty of this. When I was a wee lad, I slept on the floor and spent my mattress money in Google stock when it IPO’d. I made a high return on Google (Alphabet), but unfortunately, I sold it years too soon. Why? I had shitty spending habits and had to sell off my stocks to pay my bills. Do you know how much my Google stock would be worth now? I don’t look because it’s depressing. Have an emergency fund, so you don’t have to sell off investments at the worst time!
Investing While Having High-Interest Debt
Do you have any high-interest debt that exceeds the IHR? Then you have no business investing outside of your company 401(k) match. Even if you’re a genius investor and can crank out a 15% annualized return consistently (and I doubt that), you’re still getting poorer if you have maxed-out cards with a 22% interest rate.
Lack of Due Diligence
I’ve invested on a hunch before. I understood the company business model and competition well. Sometimes it worked out wonderfully for me, other times I had stocks that lost 30% or more. Why? I didn’t bother doing my research. Unless you know how to read financial statements, you’re also not thoroughly doing your due diligence. Learn some accounting and understand the language of business before you start investing in single stocks or you’re like a dizzy blind man playing darts. Proper professional-level due diligence usually involves 100-300 hours of work per company. I don’t have that kind of time, do you?
Is XYZ stock up 50% this year? Are you trying to squeeze in before it’s too late? Don’t do it! Trading for fear of missing out (FOMO) is almost a guaranteed recipe for disaster. Ask Bitcoin traders who first started getting into the cryptocurrency at $19,000. Who knows where they’ll end up long-term, but I bet it stung when Bitcoin crashed. Investing in cryptos also is related to the point above, lack of due diligence. Unless you have a deep understanding of what it is you’re buying, give it a pass. Few Bitcoin investors I know can tell me much about distributed ledger technology or how proof of work works.
You know those funds you can choose in your 401(k)? Did you pick the index funds with the lowest fees? Chances are, you may have selected the cool-sounding ones like “mega-cap total return growth fund.” While these funds do indeed sound impressive, they almost invariably have ridiculously high fees. Investing aimlessly into high-fee funds is a mistake that hurts more over the years as those fees compound.
Lack of Humility
Timing the Market
You can’t time the market. I can’t time the market. Warren Buffett can’t really time the market. Get it out of your head that you’re unique and different. You are in a “she’s got mad crocheting skills” way, but you’re not unique for being able to time the market. How do I know? You wouldn’t be reading this blog; you’d be throwing $100 bills into the engine of your G5 for the hell of it. I’ve tried to time the market for years, and I’m ALWAYS wrong. I’m still waiting for the market to fall out of bed, and I’ve been waiting for over three years now.
Catching a Falling Knife
This is a common expression amongst value-oriented hedge fund investors. You think you found a radically undervalued company? It’s trading at 50% adjusted book value, and once the world sees what you see, it’ll double? A lot of hedge fund managers have gotten annihilated by hubris associated with following company valuations down to almost zero. Ask Bill Ackman. Not to pick on him, he’s brilliant, but he’s had a bad run lately. Let the falling knife go, or it’ll cut you.
Typically, if you invest $100, the most you can lose is $100. However, if you use margin, you can have $100 of equity invested, lose it all, and owe more money! Also, you accrue interest for the privilege of losing your shirt! Using margin is adding risk on top of an already risky asset class (equities). Margin cuts both ways, and even professionals rarely exceed around 30% leverage in their portfolios. You’re probably not a professional, so leave margin alone.
Shorting is one of the most, if not most, difficult skills on Wall Street. “Shorting” basically means you’re betting on the company value to go down. It’s nefariously hard to master. Your thesis has to be correct, one. You can only make a 100% return at most, two. If a large investor decides to go against you, you can get caught in a massive short squeeze that suddenly requires you to post a lot of money to retain your margin ratio (the same margin from above, still not cool).
As you can probably tell, I don’t think most people should invest outside of index funds. I can build fancy valuation models and read financial statements like second nature, but even I rarely invest in single names. I also know I don’t have the time available to get comfortable with most trades, so I don’t do them.
While index funds force you to buy shares of guaranteed money-losing companies, the returns of the S&P 500 index are still almost impossible for most professional fund managers to beat. So instead of paying 2 and 20 (a typical hedge fund fee structure), pay your 0.07% or equivalently low annual fee and get on with your day.
I hope this list of investing blunders helps you to identify some potential blind spots in your investing. Learn from my mistakes and those of professional hedge fund managers and keep your nest egg secure!