Past performance is no guarantee of future success 

I had listened to this show and had been very lucky with my first investment; a Danish company making windmills since 1945, Vestas Wind Systems A/S (VWS:DC, VWS.DE), which no one seemed to have much faith in anymore. I had bought the stock at a share price of around 25 euro. The radio expert believed it was a goner, but I bought it as my first stock ever and sold it 1.5 years later for a share price of 300 euro! Not a bad gain at all. 

One win can make an investor brim with confidence 

So there I was, standing on a mountain of pride, believing that I could do much better than all the experts on Earth; the king of money, top of the heap. So the next time that the expert on the radio said don’t buy, I knew I should buy. So I went back to the radio show, heard about a stock that was very low and bought a large amount of these shares. This would teach me that I was not the king of money, not even close to top of the heap, and that I couldn’t beat the experts. Basically, I ended up losing my second investment ever. The stock was worth nothing, just like the expert had said. 

Andrew’s takeaways – Avoid these errors to become a better investor 

Only listen to experts when they’re right 

The reality is that experts are hardly any better at investing than the rest of us. There are a handful that may be skilled, but these are hard to find, and you can lose a lot trying to find them. There’s nothing wrong with getting ideas from experts, but then you’ve got to do your research to support your investment thesis. But even doing that research does not assure success, which is why it’s important to write down your risk plan. What will you do if the stock goes down? At what price will you act? 

Being contrarian only works sometimes 

It’s quite a feeling of satisfaction when you bet against the crowd, and you’re right. Or when you bet against an individual and you are right. But don’t let the overconfidence of such an experience take you over, as no one is consistently right or consistently wrong. Okay, well maybe your ex-girlfriend or wife. 

Mistakes in this story 

1. Failed to do their own research 

• Relied on the assumptions of others 
• Inadequately researched type of investment 
• Ignored a professional’s advice 

2. Failed to properly assess and manage risk 

• Assumed past performance would continue 

The post Overreliance on or Ignoring the Experts Can Both Do Damage   appeared first on My Worst Investment Ever.

Dream of joining the Net champagne set ends in defeat

I lost every penny that I invested. Although it was not the end of the world, a great deal of money had gone to my Dot Com dreams. The good part was that I still had my day job to survive, but the bad part was that I had to set aside my visions of caviar, yachts, and champagne. I had to return to basics and work my butt off for a living.

If you’re not among the smartest, don’t invest in a craze 

Before you make an investment in a start-up, you must ask yourself some serious questions. Are you smarter and luckier than Joseph Tsai (Jack Ma’s legendary partner)? If not, you should not follow a fad. If you are not an expert in the target industry or business type, you will most likely be the last investor to get on any particular bandwagon. 

You know about the target company and its industry? 

Just say no to unfamiliar investments or business plans. Do not invest in a business you do not know or about which you have little knowledge. Often, your “good” friends will put some “good” investment opportunities in front of you and you will be too kind to refuse. Be tough on each investment, treating each outlay as a completely separate venture, looking at all conditions, every time, because this is your money! 

Don’t walk into a casino if you’re not willing to lose it all 

Question the suitability of the investment to your risk appetite. Ask yourself: “Can the entire investment evaporate without putting a dent in my life? Most of all, don’t act as an angel investor in a company’s early stages unless you have more than US$100 million free cash to throw away and you love to help young people to be successful. 

Be ready to endure the long haul without reward

Look at the long-time horizon and ask yourself if you can survive without any returns for a long time. Otherwise, don’t act like a private equity investor, because it can take more than five to 10 years to have sufficient returns to exit, and that’s if you’re lucky.

Andrew’s takeaways – Avoid these errors to become a better investor 

Dreams can be very expensive investments 

Throughout our lives we will be approached by people with exciting dreams of business success. My blanket advice is: DON’T INVEST. Investing in start-ups is such a high-risk endeavor; the odds are you will never see your money again. It is an extremely rare case that you get your money back. 

Diversification is key, but you probably can’t afford it 

The best way to handle this type of high-risk investment in a start-up is to diversify. If you have $10 million, put $1 million in 10 different start-ups. If you have $100 million put $1 million in 100 different start-ups. This is a suitable level of diversification when it comes to start-ups. The problem is most people don’t have this kind of money to invest. So, they shouldn’t be doing it. 

Most people just wish they were angels 

A common angel investment story is that someone makes good money in an investment and feels overconfident and decides to become an “angel” investor (Definition: A person who sprinkles money on a start-up like an angel from heaven). The angel picks out a company that they like, and they put a bit of money into it. Within months, that start-up is gasping for money and the investor will have little choice but to add more. Most people won’t walk away from the money they have already put in (and lost) and, as a result, they put more money in and eventually lose it all. You will hear a loud thump as this angel falls to earth. However, I cannot deny that there are lucky ones; if you are one of those, please disregard this paragraph. 

Mistakes in this story 

1. Failed to do their own research 

• Inadequately researched type of investment 

2. Failed to properly assess and manage risk 

• Failed to match investments with risk appetite 

3. Driven by emotion or flawed thinking trust 

• Let emotions drive their investment decisions 
• Was driven by FOMO 

6. Invested in a start-up company 

• Invested in a start-up that lacked a clear business plan 

The post One of Thousands Who Followed the Herd to Big Losses in the Dot Com Era  appeared first on My Worst Investment Ever.

Lessons learned from a basic overreaction  

I let fear and short-term price movement drive my investment management decision. A rigorous review of the company’s fundamentals (financial modeling as just one tool to use in such a review) would have been a more reliable ground on which to base my actions. Furthermore, thorough analysis could have helped me to anticipate the near-term catalysts for the stock.

Andrew’s takeaways – Avoid these errors to become a better investor 

The investment that wasn’t 

Many stories of people’s worst investments are investments that the person didn’t make; often investments that they talked themselves out of. They saw Amazon or Walmart or Apple early but they didn’t buy. The particular mistake in the story above has to do with short-term thinking. I’m often amazed at how people are willing to take significant risks in a day or week or month, yet they rarely think about the long term. 

Your time horizon is much longer than you think 

The average 30-year-old person hopes to retire at 60, which means they have a 30-year investment horizon. But it doesn’t stop there; they also have another 20- or 30-year retirement horizon, a time during which they will need that money to grow. Create a long-term, diversified strategy; implement it. Let your investments grow, and you will be far ahead of most people. 

Mistakes in this story 

1. Failed to do their own research 

• Relied on the assumptions of others 

3. Driven by emotion or flawed thinking 

• Let emotions drive their investment decisions 

The post Missed Opportunity Stems from Hasty Decision on a Stock  appeared first on My Worst Investment Ever.

Ignoring expert means false bottom also ignored 

My worst investment has to be when I convinced my wife (who is also my asset manager) to buy UBS Group AG (Swiss multinational investment bank [UBSG:SW, UBSG.S, ]) shares in 2009 or so after the bank had almost gone bankrupt and its shares had tumbled from 68 Swiss francs (CHF) to 20 CHF.  

Disliked bank takes on flawed new luster 

Actually, I had never liked UBS as a company, but I had thought that its share price had hit its bottom, that such a solid bank would never go under and that it would recover quickly. My wife thought it was a stupid idea but she allowed herself to be talked into the play.

Investor shuns inner voice, cheers for wrong underdog 

The share price has never really recovered (remains at 13.64 CHF at the time of writing). Which is only half the reason why this was my worst investment. The main reason is that despite not liking UBS, I was suddenly forced to wish them well, even having to follow the news about these idiots.

What was learned 

I gained two valuable insights: a) leave financial matters to my wife (a financial professional), b) only invest in companies that I actually like (their business model, passion, image, culture and the like).    

Andrew’s takeaways – Avoid these errors to become a better investor 

Just because it’s cheap 

When I was young, my mother often said: “Just because it’s cheap, doesn’t mean you have to buy it.” Many people jump into an investment because they think it’s at a once-in-a-lifetime price. When the price is “cheap”, they ignore so many factors, such as the future outlook. Think about when you’ve gone shopping and found a deeply discounted item. It was neither exactly the right color nor exactly the right size, but the price was so low it was irresistible. This type of buying is usually a waste of money. 

Write a plan and follow it 

One of the most important steps in the process of investing is to write a plan and follow it. The benefit of writing a plan is that it requires you to think ahead about what it is you want to invest in. The plan also serves as a guide that you can compare your actions to see if you are investing the way you want. So, make a plan and follow it. 

Mistakes in this story 

1. Failed to do their own research 

• Failed to test the investment thesis 
• Ignored a professional’s advice 

3. Driven by emotion or flawed thinking 

• Let emotions drive their investment decision

The post Classic Bike Collecting Dust Is Better Than a Dog of an Underdog  appeared first on My Worst Investment Ever.

Investor puts singular belief in property salesperson

I just believed what the real estate broker told me and now I’m at risk of defaulting and losing all the down payments that I have made over the course of more than two years, which amounts to 350,000 Philippine pesos (US$6,551). 

Apparent ploy has building finished ahead of schedule 

The broker had originally told me I would have four years to pay off the down payment at zero interest, but the condo project was completed in just two years. Now the developer is demanding full payment for all the outstanding balance, which amounts to 3 million pesos.  

Failed to look at hidden fees, developer’s reputation  

I also did not know that there would be miscellaneous and bank-processing fees that would pile up to hundreds of thousands of pesos. I have been talking to the banks but I do not qualify for a loan. I also found out recently that the developer has a bad record for customer service.  

Lack of checks can wreak havoc on a portfolio 

I was unprepared for all of these issues to arise and I have been stressed for more than two months already. If I could go back in time, I would double check all of the broker’s promises, clarify the vague statements in the contract, and ask previous homebuyers about their experience with the developer. 

Andrew’s takeaways – Avoid these errors to become a better investor 

Check the references not given 

A critical step when you invest with anybody is to check references. Your first step in this process is to ask the individual or company if they have some references to recommend. But of course, expect these references to give good recommendations. True due diligence means to try to seek out people who have dealt with this company or individual before. Ask everybody you know if they have had any experience with this company or individual. Work hard to seek out the people who have worked with them and get references from them. This is where you find the really valuable things that can better help you make a truly informed decision. 

What matters is that you have the cash at the time of transfer 

When buying a condo that is about to be constructed, it’s critical to try to understand when it will be completed. It is at that time that full payment will be due. Right from the beginning, work with the banks to make sure you have financing lined up on that day. And from this story, we have learned to make sure you ask: “What if the condo is finished early and I don’t have bank financing lined up at that time?” 

Mistakes in this story 

1. Failed to do their own research 

• Relied on the assumptions of others 
• Neglected to read contract completely 

2. Failed to properly assess and manage risk 

• Bought an illiquid investment 

4. Misplaced trust 

• Failed to review a person’s history and references 

The post Classic Case of Caveat Emptor (Let the Buyer Beware) appeared first on My Worst Investment Ever.

Thai company set up under 49/51 foreign/Thai split

He set up a company to administer the restaurant with paid-up capital of 20 million Thai baht (611,000 US dollars), which seemed more than enough for an initial investment and working capital. Because of the Thai regulations on foreign business ownership, he paid 49% under his own name and positioned his wife, Yingluck, as a 51% Thai nominee. All correct legal processes were apparently followed.

Thai wife manages chain as hubby hits the links

The day-to-day business of the outlet was managed by Yingluck while Kobayashi played golf on most days. The restaurant became very popular and expanded into several branches, all funded by the re-investment of profits.

Business, marital divorce leave proud investor with zero

Kobayashi was now very proud of his investment and celebrated by playing even more golf. This displeased Yingluck as he was not pulling his weight with any work on behalf of the restaurants. Disappointed with Kobayashi’s laziness, Yingluck sought a divorce, aided by her lawyer, Somchai. Somchai insisted that, in line with the registered shareholdings, 51% of the business should go to Yingluck, and 49% to Kobayashi. Of course, he was unhappy as Thai law supported Yingluck.

No one helps once-happy restauranteur get any return

Now he is left wondering when and how he can sell his 49% shareholding to someone willing to buy. Since the divorce, no one has come forward to buy his shares. No dividends have been paid to him. Rather large bonuses have been paid to directors, but he is now not a director. Meanwhile, the restaurant chain has gone from strength to strength in profitability and size. It turns out Kobayashi’s investment risk, inaction, the legal framework in which he was operating, and the lack of a path to sell his shares will leave him waiting for his return on the investment forever. To rub soy sauce in his wounds, his heirs might even be levied an inheritance tax on his holdings.

Andrew’s takeaways – Avoid these errors to become a better investor

Don’t start a business that’s illegal from the start

Many countries, including Thailand where this story occurred, have limits on the foreign ownership of companies. You may find it very common for foreign investors to set up structures suggested by lawyers to overcome these laws. But no matter how safe they may feel; the reality is that most of these structures go against the intent of the law. Of course, many people operate these kinds of businesses for decades with no problem. But if things go wrong, such structures can fall apart. In this situation, the structure was legally snatched away from this golf-hungry Japanese investor.

Nobody’s going to make money for you forever

You may find yourself in a situation where you are investing with someone who is doing a great job with your money. When faced with such a situation most people stop monitoring that investment. And eventually, things go wrong. In the above story, the investor felt comfortable and confident that his business partner (his wife) would be looking out for his interests, but eventually, things turned sour.

Be careful about doing business in a country you don’t know

It may seem exciting, and the opportunity may seem great, but doing business in a foreign country can be disastrous. Without deep knowledge of the language and the culture, things could be happening around you that you don’t even understand. It doesn’t mean it’s impossible to be successful, I have had my share of success in Thailand, but it means the trust between business partners is even more critical. Trust is probably the most important thing needed to be successful in a foreign country. Make sure to surround yourself with people you trust.

It rarely makes sense to go into business with your wife

It’s not impossible, and I’ve heard of success stories, but success in business with your spouse brings a whole new level of pressures and stresses on your relationship. The emotional roller coaster of business can be amplified by the personal emotions experienced by both of you. My advice? Enjoy your time in business and enjoy separate time with your spouse.

Our CoffeeWORKS story

How we made a partnership of friends work

Against all odds my best friend Dale and myself together built CoffeeWORKS. We are proof that doing business with friends can sometimes work. Three things helped us stay together: that we were in a foreign country so we really had to rely on each other, that from the beginning we said we would put our friendship above money, and finally that we agreed to place “principles before personalities”. This last point meant that if we were in a discussion about the strategy for the company that we agreed it was not all about one of our opinions winning. We both accepted the fact that we would be better off in the long run if we were able to compromise rather than try to “win” in a discussion. Over the years, our staff has witnessed our heated debates, but they always heard us say that we place “principles before personalities”, and therefore they saw us stop and come to a final agreement each time.

Mistakes in this story

1. Failed to initially research

• Inadequately researched type of investment
• Lacked knowledge of regulations

2. Failed to properly assess and manage risk

• Failed to diversify
• Bought an illiquid investment
• Lacked influence over management

5. Failed to monitor their investment

• Abdicated responsibility for their financial future

6. Invested in a start-up company

• Invested in a start-up that lacked a clear leader
• Invested in a start-up that lacked various sources of funds
• Invested in a start-up that lacked a clear business plan
• Invested in a start-up that lacked adequate financial controls

The post Silent Restaurant Partner Finds His Voice Too Late After Too Much Golf appeared first on My Worst Investment Ever.

In theory, it should have been a good idea to invest in the company I worked for

As part of my 401(k) plan, I was given the choice of different funds in which to invest my retirement contributions, along with the choice of investing some of my retirement in shares of the company at which I worked.

Note: In the United States, a 401(k) plan is the tax-qualified, defined-contribution pension account. Under the plan, retirement savings contributions are provided, and sometimes matched, by an employer, and deducted from the employee’s paycheck before taxation.

Giant company operated across generations ends up in bankruptcy court

Tragically, even though my company had been around for generations, it eventually went bankrupt and my shares in the company became almost worthless. And by almost worthless, I mean, I eventually received a check stemming from the court proceedings about six years later for about US$2.75.

Don’t put all of your investments in one basket

Investing your retirement money into the same company where you work is a terrible idea so a dividend reinvestment program offered by your own company may sound nice on paper, but you are only making others rich and are not properly diversifying your personal risk.

Andrew’s takeaways – Avoid these errors to become a better investor

Invest in the company you work for with caution

Many companies offer employees stock-ownership opportunities. If you can buy the company’s shares at a discount to the market price or if the company matches your investment, it could be very valuable. If that’s the case, it could be in your best interest to put as much money as possible into it. Just don’t stay invested in that stock forever.

Try to avoid concentration risk

Many stock-ownership plans require you to own the shares over a long period. In such cases, you are locked in. So, if you put your maximum amount into the program and you’re locked in for a long time, you will be very exposed to this one company. Of course, we all like to think we know that this company will survive and thrive, but in reality, nobody knows. Your best solution is to maximize the contribution that makes you the most money but to try to exit portions of that position as soon as you reach the time that you are allowed to sell. In this way you capture part of the benefit that the company is giving you, but you don’t get yourself overexposed to that one stock.

Mistakes in this story

1. Failed to do their own research

• Relied on the assumptions of others

2. Failed to properly assess and manage risk

• Assumed past performance would continue
• Failed to diversify
• Invested in the company they worked for

5. Failed to monitor their investment

• Failed to review investment strategy regularly

The post Always View Yesterday’s Successes Through Today’s Glasses appeared first on My Worst Investment Ever.

Don’t buy a home unless you really want to live there 

After I acquired the land, my parents lived in the area for a few months on my suggestion because I thought it would be best for them that they get a feel for the area before building the house; it ended up being a good decision because they didn’t like the area at all.  

Basic questions to ask yourself before a cent is spent  

In an ideal world, I would have let my parents experience the area before buying the land in the first place, but it was a good lesson. Nowadays, before making an important decision I ask myself two simple questions: “Is there any way to test it first before committing?” and “What would I recommend my best friend to do, if he was making the investment?” Other great questions I like to ask are: What don’t I know? What don’t I see? And what assumptions am I making that may or might not be true?  

What don’t I know? What don’t I see? 

To emphasize the importance of these questions, a friend of mine started a business that sells nitro coffee* from small mobile vans around Bangkok. He made the assumption that he would have few competitors due to the time and expense of getting started. Almost immediately after setting up his company, Starbucks started selling nitro coffee!  

—————— 

*Nitro coffee – Cold-brew coffee infused with nitrogen gas is released through a pressurized valve with tiny holes. As high pressure forces the brew past a disc, it creates a creamy, stout-like effect. 

Andrew’s takeaways – Avoid these errors to become a better investor 

Try before you buy 

Land is usually a very illiquid investment because when you want to sell it, it can be very hard to find a buyer, especially at the price you want. Therefore, it makes sense to do a considerable amount of research, but that research should be done before you buy the land, not after. 

Mistakes in this story 

1. Failed to initially research 

• Inadequately researched type of investment 
• Failed to test the investment thesis 

The post ‘Try Before You Buy’, If at All Possible appeared first on My Worst Investment Ever.

As an excited 17-year-old who had saved up a little more than US$2,000, I wanted to buy some stock. I held small amounts of two other stocks at the time, so I purchased Coca-Cola shares with the money I had saved.  

Ignorance is not bliss when missing big future interest 

I don’t know what I was thinking when I sold the Coke shares around six months later, ignorant of the importance of “buy and hold” investing and the magic of compounding interest. I lacked any education about the market and would have to learn as an adult about compound interest and “buy and hold” or “passive” investing. 

Could have made 4,000%+ with investing know-how

It was a major error to sell the shares. Using a compounding calculator, that US$2,100 would be worth US$99,880 today. As another illustration, in 2012 Coca-Cola reported that just one of its $40 shares purchased in 1919 (with dividends reinvested, meaning compound interest comes into play) would be worth US$9.8 million today. 

Ignoring compounding means broader portfolio loss 

At the time, if I had known about the power of dividends and compounding them back to reap interest, I would have amassed a decent-sized portfolio a lot sooner, which means more time over my lifetime for compound interest to work its magic.  

I recommend that all “newbies” read the top books on investing, as well as more simple sources, such as Kiplinger’s Personal Finance, and Money magazines, to educate themselves. 

Andrew’s takeaways – Avoid these errors to become a better investor 

Not investing can be as big a mistake as investing 

Probably the most valuable lesson in investing is to stay invested over a long period. Give the compounding effect time to work in your favor. Most people get this wrong. They fail to realize that the benefits of compounding start to accrue only after 20 years. Very few people see their time horizon in decades; most see it in days. 

The importance of education 

Most young people are not taught the principles of compound interest and therefore never take advantage of it. Our society would be much better off if we just invested $10,000 into a passive fund at the birth of every child. At 8% per year, this would grow to be $1,000,000 by the time they are 60 years old. Kids around the world would be millionaires upon retirement. Unfortunately, very few people have that foresight. If you don’t read this, you could end up living “in a van down by the river”. 

Mistakes in this story 

1. Failed to do their own research 

• Inadequately researched type of investment 

2. Failed to properly assess and manage risk 

• Had no exit strategy for when things went wrong 
• Failed to set a stop-loss and follow it 

3. Driven by emotion or flawed thinking 

• Failed to invest in a familiar, good idea 

The post Hard Lesson About Compounding – Could Have Been Better with Coke appeared first on My Worst Investment Ever.

In early 2017, I was shown an opportunity to invest in a US$6.5m simple agreement for a future equity (SAFE) note issued by BuildDirect.com Technologies Inc., a $1bn Canadian e–commerce company. 

All of business’ facets looked solid 

My client had made previous investments in the company and had a strong conviction in the team, the company, the market and this “new marketplace” opportunity. The company sells heavy construction supplies, such as tiles and granite, to contractors and home-improvement enthusiasts. 

Confidence builds when following ‘the smart money’ 

BuildDirect claimed to have developed an intelligent system to pre–position products in hubs around the country to cut the costs and time of delivery.  We were also confident because we were supposedly following “the smart money” – a major Canadian pension fund and other Silicon Valley venture capital firms were also investing. 

Many factors point to a ‘sound’ investment 

We were excited about the model; its artificial intelligence (AI) platform and the business opportunity and history of the company, which was 16 years old and had been grossing more than C$150m (US$120m) a year in revenues. We also had clients that used the company’s services.  We made the investment, which was around US$650,000. Within a few months we were notified that, as expected, our debt had been converted to equity. 

Ten months later, we learned that the CEO had been fired/asked to resign. He was the architect of the whole “marketplace” idea. Weeks later, we learned that the company had entered into receivership. It appears now to be a total loss. 

Even good ideas can lead to a premature fall 

Established companies can fail swiftly and dramatically. This company developed a very clever online marketplace, however they were utterly unable to execute it and ended up angering and losing their existing and long-standing vendors. 

Andrew’s takeaways – Avoid these errors to become a better investor 

Don’t blindly follow the smart money 

Just because big fund managers are buying into a company does not mean that those fund managers are right. They could just as much be wrong. Don’t take any comfort that you are investing with the “smart money”, meaning the professional investors. They are often under career pressures and other pressures that can lead them to bad decisions. If you want to invest, take the time to build your style and plan, and then follow it. An individual has considerable advantages compared to the pros. 

Have an exit plan 

No matter how good the investment is, no matter how experienced the others who you are investing in are, and no matter how much research you have done, always have an exit plan. Investing involves too much uncertainty; having an exit plan allows you to pre-plan what you will do when things go wrong. 

Mistakes in this story 

1. Failed to do their own research 

2. Failed to properly assess and manage risk 

• Assumed past performance would continue 
• Bought an illiquid investment 
• Lacked influence over management 

3. Driven by emotion or flawed thinking 

• Let emotions drive their investment decisions 
• Were driven by FOMO 

5. Failed to monitor their investment 

• Failed to review investment strategy regularly 

6. Invested in a start-up company 

• Invested in a start–up that lacked various sources of funds 

The post How Poor Execution Turns a Great Idea into the Worst Investment appeared first on My Worst Investment Ever.

Throwing good money after bad was an exercise in sunk cost and saving face

And the reason it was a bad investment was that after I started investing, I got into a cycle of giving them more money when they were desperate. And, it ended up being an exercise in sunk cost and the social difficulty of saying “no”, an exercise that ended up being quite expensive.

Andrew’s takeaways – Avoid these mistakes to become a better investor

Fundamental questions to ask about a start-up before investing in it

To avoid the above story when you look at investing in a start-up, I suggest you put it through the following test. But, don’t do it alone! Because you will be overly optimistic, I suggest that you test it with your most skeptical friend, oh, and write it down. If you get a “No” answer as you move through these questions just drop the whole idea (I learned this from my own losing start-up investments!) Question 1: Do you trust the person/people running the start-up? 2. Is the idea good? 3. Can this team execute the idea?

Ensure there is more than one funding resource behind a start-up

It is too easy for a start-up to rely on the original person who brought money to the deal. Sometimes the money source thinks that they can hold a larger share of the business if they don’t bring in other investors. But this thinking can lead to the trap of being the sole supplier of capital. Before you put money in a start-up, work with the founders to identify the next sources of funds. Then require the management team to pitch to these sources, go with them, see how it goes, then use that information to determine if you will invest.

Mistakes in this story

1. Failed to do their own research

• Failed to do their own research

6. Invested in a start-up company

• Invested in a start-up that lacked various sources of funds

Learn about the six ways you will lose your money and how to avoid them here.

The post Being the Money Man for Friends appeared first on My Worst Investment Ever.

Serious case of following the bitcoin herd

This trade was 100% driven by fear of missing out as the price of Bitcoin (BTC), Ethereum (ETH), and Ripple (XRP) kept surging higher. I started to feel dumb as I watched the price of BTC go from a few hundred to many thousands and then to 16,000 dollars, and I had yet to take any action.

So, I waded in. I remember the intensity; by the end of that day I had learned how to set up an account on a crypto exchange, how to deposit money in that account, and how to create and use the “wallet”. By that evening, I had sizable investments in BTC, ETH, and XRP.

Inadequate research about type of investment

Only then did I start researching about crypto-currency’s utility and encountered many articles and charts about the similarity between the crypto craze and “tulip mania” (when speculators during the 17th Century’s Dutch Golden Age traded tulip bulbs for extraordinary sums of money until, without warning in February 1637, the market for them spectacularly collapsed).

Fear over holdings leads to loss of sleep

I think you can see how lucky I was. That BTC price level I mentioned was near its record high. A couple of weeks later, that price started to tank. I began checking the prices almost every hour and had trouble sleeping. So, at the end of week four from the first day of my investment in the currency, I sold everything.

I took a loss of about 20% in BTC, but the huge gains in ETH and XRP saved me. I may be wrong many years from now, but now I can sleep again! Today, I still have some positions in these coins, but they’re so small that I think of them as lottery tickets rather than a proper investment.

Too fast, too furious and caught up in FOMO fever

To recap what I learned was not to be swept away by the fear of missing out, realize that fast decisions are often wrong decisions. I realized how lucky I was and learned from this only when a good friend of mine lost a couple of million on his XRP investment a couple of weeks after I exited. Finally, always do thorough research!

Andrew’s takeaways – Avoid these mistakes to become a better investor

Take the time to use your evolved and informed brain, rather than your base feelings

To be successful in investing means to accumulate wealth over a long period. When you are driven by fear or greed, you overlook things and don’t have time for thoughtful analysis. Slow down and invest right, take the time.

Investing without research is like jumping off a ship without knowing how to swim

Of course, if you follow what everyone else is doing, without question, you won’t even know where you’re going. You don’t have to act against the herd, but you should do your own research to understand where the herd is going and why. Through this research, you also want to understand what factors would drive you to break away from the herd.

Investing is hard. I can’t tell you the number of people who have sought my advice about investing. When I asked them how many books they had read on investing; the answer was zero. When I asked them how many academic papers they had read, the answer was zero. Or, how many courses they had taken, zero. Investing without doing research is just playing with fire; with gasoline and fire!

Plans are needed as much for exiting an investment as entering

The most important part of planning is planning for when things go wrong. When things go wrong with an investment, it usually means the price is falling. Set your plan about what you will do when that happens. It will be hard to stick to that plan, but if you have no plan, you will just be driven by emotion.

Mistakes in this story

1. Failed to do their own research

• Inadequately researched type of investment

2. Failed to properly assess and manage risk

• Failed to set a stop-loss and follow it
• Had no exit strategy for when things went wrong

3. Were driven by emotion or flawed thinking

• Let emotions drive their investment decisions
• Were driven by FOMO

Learn about the six ways you will lose your money and how to avoid them here.

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Sometimes great investment ideas are close to home and daily life

If something is great, and you use it and love it, and everyone loves it, maybe you should invest in it. I started using Amazon.com early on, say around 1998. I liked it so much I became an Amazon Prime (paid) member in June of 2006 and have been ever since.

But sadly, we miss these chances of returns that are staring us in the face

If I liked it so much and so did everyone else, why did I not buy a few shares of the stock? Now it is up 4,000% since 2006. I’ve never owned a share in the company, but I pay for the service. I then think of the old fortune-cookie wisdom – “Many a false step was made by standing still.”

Andrew’s takeaways – Avoid these mistakes to become a better investor

Sometimes the best investment opportunities are right in front of you

Learn to be aware of investment opportunities around you but keep things simple. If you’re using a product or service, and you like it, always ask the question: “How can I invest in this?” But, remember too that having a good product or good service or being a good company does not mean that it’s a good investment. That is because the share price already reflects this good news. The risk then is that you would end up buying it at a price that is too high. There are some cases in which you know of a good opportunity that you’re thinking about how to invest in it. You may even have money available to invest, but because of fear you don’t make a move. Failing to do so can be a big mistake, and of course, acting in the wrong way can be also.

Keep it simple and ‘don’t get emotional about a stock’

Emotions and long-term investing mix like drinking and driving. This is one reason why it is good to make an investment plan and stick with it because it removes some of the emotion from investing. One of the big emotions is fear of missing out (FOMO). Take a lesson from Warren Buffett, who explains that being an investor is like being a baseball batter, except that with investing you’re not penalized for not swinging. So, wait until the investment is right and you’ve done your work on it and then swing.

Mistakes in this story

1. Failed to do their own research

• Let things get too complicated

3. Were driven by emotion or flawed thinking

• Failed to invest in a familiar, good idea
• Let emotions drive their investment decisions
• Were driven by FOMO

Learn about the six ways you will lose your money and how to avoid them here.

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Ignoring major corrections in the industry

A year later, I revisited the stock after it had fallen from its highs. “This is a good company,” I thought. “It will continue to be a great investment.” I was heavily biased and ignored the research coming out about the revolutionary shale industry.

Pitfall revealed in misguided over-reliance on analyst coverage

Moreover, I was relying heavily on third-party-analyst coverage that was screaming “BUY!”, even as the stock was falling daily. The obvious thing to do? Average down of course! In my mind, this stock was a winner and the share price would surely rebound.

‘Past performance is no guarantee of future results’

However, that was sadly not to be the case. After enduring a 30% loss on a very averaged down position, I had to accept the reality that it would be a tough road ahead for this company, so I took the loss and sold my whole position in the stock. The fact is, the stock did not owe me anything. Just because it did well for me in the past, did not mean the industry or fundamentals could not deteriorate.

Sometimes you must kill the darling of your investments

So, the upsetting lesson for me was that a stock does not know that you own it or what it cost you to buy it. Avoid falling in love with any of the securities you own – they are only tools to help you achieve your investment goals. Try to approach your investments with as much objectivity as you can and recognize the limitations of analysts’ reports and price targets.

Andrew’s takeaways – Avoid these mistakes to become a better investor

Industry conditions can and do change, and specialists will respond faster than you

One major risk of investing in any individual stock is the risk that something major changes in the industry in which the company is operating. These changes can start small at first and can seem to have little impact, but they can gather steam. Also, professionals who follow an industry for a living, as well as company insiders, will almost always move faster than you.

Financial advisers don’t always put investors’ best interests first

One of the big lessons of my career is that financial professionals are driven by many different factors outside the one that you wish they cared about most – the performance of your investments. I prove this in my Ph.D. research about the lack of accuracy of sell-side financial analysts. You can never eliminate conflicts of interest in the world, and particularly in the financial world, which is why you want to choose financial advice from people who disclose their conflicts of interest. Also, it is often the case that brokers are cheerleaders for stocks rather than thoughtful analysts.

Overconfidence can make an investment’s decline even worse

One of the toughest risks you will face is what to do when a stock price is falling. When you buy a stock at 100 and it goes to 110 you feel great, but when it goes to 90, according to Daniel Kahneman’s and Amos Tversky’s Prospect Theory, you feel about two times worse than you felt great when it went up 10. This will cause you to make mistakes when prices are falling. Often, we are overconfident in our investment decisions, and therefore when the share price starts falling, we think if we liked it at 100 we should like it even more at 90.

However, a clearer way to think of this is that maybe your analysis was correct but that you just bought the stock at the wrong time. Some of my research shows that, over a year, if a stock falls by 20% to 25%, in most markets, you would be better off selling it and holding cash. But, no matter how you might handle this situation, make sure you have thought ahead and written down what you will do when the share price falls.

Even top stocks can take a hit so if fortune’s winds change, take action and let them go

Sometimes we like companies and their management so much, we know them so well, that we think they will always be successful and be a good investment. But things change for companies; industries get tougher, senior management changes. Remember that the success of the past will not guarantee success in the future.

Mistakes in this story

1. Failed to do their own research

• Relied on the assumptions of others

2. Failed to properly assess and manage risk

• Assumed past performance would continue
• Bought more as the price went down

3. Were driven by emotion or flawed thinking

• Got too emotionally attached to an investment

5. Failed to monitor their investment

• Failed to review investment strategy regularly

Learn about the six ways you will lose your money and how to avoid them here.

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CEO and board dysfunction prove damaging

The investment appeared to promise a potential 500% return over three years. Two years later, it was looking as though we would be lucky to recoup any of our capital. The company had a dysfunctional board that lacked diversity and was very confrontational. There was also a bad decision made over the choice of chief executive. This CEO had invested in the business but worked part-time and blamed everyone else for his failings.

Poor marketing, resourcing, and grasp of legal landscape

Moreover, there was no clear marketing strategy or resourcing, which had an impact on sales. The final straw was the company’s failure to anticipate regulatory changes driven by an attack on the company’s after-hours business model by the day clinic/general practitioner political lobby group.

It was all very sad but with it came a big lesson. To avoid failure in the early stages of starting a business, make sure to put the basics in place.

Andrew’s takeaways – Avoid these mistakes to become a better investor

Putting money in is not the problem, it’s getting it out that can be trouble

Investing in unlisted private companies poses a unique challenge because it is very difficult to exit when you are no longer satisfied with management.

A minority stake in a company means when it comes to the crunch, you have no voice

Another risk in owning a minority stake in any company is that, as a minority, you do not influence the way the business is run. When you are an employee, there are times when management will offer for you to earn shares in the company instead of pay. My advice is generally to avoid such an offer. This is because you will have no control over the management of the company, you will have deferred your compensation, and, if things go wrong, there may not be a buyer for your shares.

In this story, the investor suffered because they had no control over the board or the management. An exception to my advice on not owning shares is if an established company offers additional compensation through shares as an incentive program; particularly when the company sells those shares to employees at a discount. But in such a case, be careful of building up too much of your wealth in one investment; if things go wrong with your company you could lose your job and your wealth, a double whammy!

Ability to depend on the expertise of a company’s leaders is crucial

Another risk to consider is that of the changeover of management. This was risk arose in this case when new management took over a family-run business. In such cases, investors expose themselves to the risk that the new management is unable to make the business successful. The lesson is to stick to proven management if possible.

Avoid investing in people you just don’t know

Another danger in this story is the risk of investing in people you don’t know, the new management. Be very careful in situations in which you are investing in people you don’t know. If you insist on doing it, make sure to do your research on the peoples’ past decisions and relationships.

Mistakes in this story

1. Failed to do their own research

• Lacked knowledge of regulations
• Let things get too complicated

2. Failed to properly assess and manage risk

• Bought an illiquid investment
• Lacked influence over management

4. Misplaced trust

• Failed to review a person’s history and references
• Were overconfident in an unproven management team

Learn about the six ways you will lose your money and how to avoid them here.

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