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.

I invested in a company operating in a dominant position of its segment within China’s processed–food chain. I liked the investment idea based on the theme that processed food consumption typically rises alongside a country’s rise in income and urbanization. We see this play out when branded products on the shelves of the modern food retail networks replace wet markets, butchers and greengrocers (produce markets). 

Business model in one country may not work in another 

This investment theme had worked very well in Europe around 20 years earlier. Back then it was more about industry consolidation and increased raw-material-pricing power. China appeared to have a massive, organic market for the taking.  

Long list of good reasons for investing can make investors blind to the bad 

The main points on which I was basing my investment were: 

• The company was already operating in its home market with scale advantages and market share in the early stages of the industry’s development. 
• Its position relative to customers was on the comfortable side of one-to-many. There were even benefits of customers consolidating their own industry in a massive conversion of traditional localized players to a modern branded and national platform. This rapid modernization accelerated the drive to reach every urban wallet in tier one and tier two Chinese cities.  
• The company was hitching a ride to a more expansive distribution channel. Its move could hardly be better. It could let the consumer brand owners deal with growth, brand goodwill, and marketing expenses. All it seemed to need to do was budget for expansion to match its customers’ volumes and keep the product quality good enough not to be rejected. 
• Its position relative to suppliers was also favorable. It was the main buyer from several producers of what was largely a by-product or discarded waste product. 
• There were no competitors using its technology in the domestic market, certainly none at the same scale, so the company had major market advantages. 
• Already operating in China, it was running at the lowest point of the international cost curve. Foreign competitors entering the market would have to be prepared to subsidize their China ventures for years to gain serious market share.  What did it matter?   
• This company was trading in the stock market at a very low price-to-earnings ratio (PE) multiple. If the international players drew attention to their activities in China, this company would only be undervalued. 
• The company clearly had growth, but its margins were super impressive: EBITDA was more than 40%, especially when compared to the low-capital-intensive production and the low volatility of demand from consumer growth. Consumption per capita was tiny compared to every other country at higher levels of per capita income. 

The positives outweighed the doubts  

This stock was one to buy and lock away, for sure! Well, that’s not how it turned out. With so much in the future looking so favorable, it was easy to overlook the high proportion of variable costs, especially fuel.  Sales were up, margins were high, so why be concerned with operating leverage?  

After about two years on from listing, management appeared to be delivering consistently. Enough in fact to overlook murmurs of the controlling shareholder and chairman dabbling in property ventures and the loans to directors that were rising over time. Other investors by this time had been reacting favorably to the story. There was a nice re–rating of the PE multiple. Earnings and price had favorable momentum and the brokers who covered this mid-market company loved the stock. 

But then, the momentum broke. 

Penny drops as management’s dark deeds and subsidiary failures hit main company  

The main shareholder had been more than dabbling in other business activities and more than just borrowing funds from the company. Furthermore, other company ventures were rapidly becoming liabilities and infecting the core business.  Worse still, material parts of the company’s business simply did not exist. The auditors, it turned out, had been complicit and, for whatever reason, chose not to speak truth to power, or in this case, patron, and went along with the deception. 

Amid tainted-food scandals, clean firms flourish but buyers walk from this one 

Meanwhile, the branded food processors were derailed by Chinese food-tainting scandals. The trends in consumer income, urbanization and modern distribution networks all continued to grow in quantum leaps, but this company’s products and share price were no longer rising in line with those complementary conditions. The trend could continue happily without this company or its suppliers. Consumers always have the ability to change their tastes and preferences. 

The stock went from a home run to only one cent on the dollar. It can happen so easily when you’re busy doing other things. 

Emotional about stock, investor ignored ‘lover’s’ flaws 

When we fall in love, we are willfully blind to the defects in the object of our affection. Picking stocks or owning companies can never be a love affair. There can be passion but only if it is a metaphor for our determination to be thorough in our research and mindful of the shortcomings of our own assumptions. But even then, a single company is rougher territory than the maps we draw in our minds of macro trends. 

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

Corporate governance damage can come out of nowhere 

Corporate governance events, where managers or owners act against the interest of minority shareholders, can happen with any company. There are two main types of corporate governance situations. The first is where the market is already aware that the company has poor corporate governance. This knowledge would come from observing the actions of the owners and management. The second case is when corporate governance events surprise and come from out of nowhere. 

Much less is lost when bad corporate governance is already ‘in the price’ 

If a company is already known for its poor corporate governance, then we can say that this is “in the price”, meaning, bad corporate governance in the past has depressed the price of the stock. Many investors would avoid this stock, but some would be willing to trade on the belief that the price cannot go any lower. They believe that investors have overly punished the company’s stock price and there is a chance to make money with the stock going up. 

The corporate governance event that matters is the one you won’t know 

But the corporate governance event that will hurt the most is the one that happens at a company where nobody expected it. This pain is because it will have the most damaging impact on share price when that event hits the market. This type of situation is almost impossible to detect before it happens. And you cannot always rely on financial professionals to warn you. There are various reasons why they may not raise a red flag, even if they start to get suspicious. 

A stop loss is one option to protect against corporate governance events 

Though most long-only fund managers are not interested in stop loss as a risk management tool, it does have some value in the case of corporate governance. One idea is to set a stop loss that’s deep enough that it would only be triggered by a serious bad corporate governance event. In my case, since I view stocks more quantitatively these days, I am okay with putting on a stop loss on each stock when I buy it. When the stock price hits the stop-loss price I sell; it doesn’t matter to me whether it is a corporate governance event or some other negative factor. 

Mistakes in this story 

2. Failed to properly assess and manage risk 

• Failed to consider cultural issues (in Asia, saving face, fear of giving bad news)  
• Lacked influence over management 

3. Driven by emotion or flawed thinking 

• Let emotions drive their investment decisions 
• Got too emotionally attached to an investment 

4. Misplaced trust 

• Failed to review a person’s history and references 

5. Failed to monitor their investment 

• Failed to review investment strategy regularly 

6. Invested in a start-up company  

• Expected idea from other country or region to work 

The post Single Stock Not Best Choice for Long Position on Macro Trend 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.

In early 2013, I had invested in another Swath OSV subsidiary, “Cruise Limited” (Cruise). At the time, Victory was a dormant subsidiary of Swath.

Between early 2013 and October 2013, the share price of Cruise appreciated substantially, the company continued to win new contracts, financial performance improved quarter-on-quarter and the financial position was sound, though the company was taking on increasing levels of debt.

In October 2013, Swath signed a deal to sell its majority ownership in Cruise to a private equity firm. The acquisition immediately required the private equity firm to buy all remaining shares. The private equity firm offered a 15% premium to the 15-day volume weighted average price prior to the offer date. The sale was completed in December 2013.

Success arising in parent company fuels overconfidence in subsidiary

Overall, the investment in Cruise resulted in a return for me of around 125% for a 10-month investment (or absolute profit of about 250,000 Singapore dollars [187,000 US dollars]), and I was brimming with confidence of course at the prospect of such returns continuing.

In November 2013, having finalized the sale of its stake in Cruise, Swath’s management decided it would invest the profits from the sale into Victory. Following the announcement of that investment in Victory, to turn it from a dormant subsidiary into a going concern, Victory’s share price immediately appreciated, further egging on my desire for similar gains.

Failed to act decisively to take an opportunity when its time had come

In early December 2013, Victory entered into a JV with a major Middle-Eastern OSV company. Following this announcement, Victory’s share price appreciated further. In hindsight, if I had invested in Victory in early November 2013 instead of early March 2014, I would have made a very handsome profit in a very short time (about 300%). However, I hesitated, I guess out of fear of the risk to what I had put in. Nonetheless, after reading about the future expansion plans for Victory in March 2014, I decided to invest.

Then came a long list of warning signs amid lack of due diligence

At the time, I did not do sufficient due diligence to review the financial position and performance of Victory, Swath, the history of the JV partner, nor the current projection/forecast surrounding the oil and gas sector.

In essence, I decided to invest due to (a) confidence that the parent entity had sufficient prior success in developing a subsidiary in the OSV sector to repeat such success, and (b) overconfidence that the oil boom would continue. Up to that point, the oil and gas sector had been through a significant boom for nearly five years, with oil prices booming past US$100, major projects being announced, and large contracts being awarded. However, in early 2014 there were numerous red flags that the good times were coming to an end.

Six months of flat or negative growth raises no alarms

In early March 2014, I invested in Victory with an amount equal to about 40% of my original capital investment in Cruise. From March 2014 to August 2014, the share price of Victory generally stagnated (rising 10% or declining 10% but across the period, generally flat).

Sector also signals ‘danger ahead’

In August 2014, the oil sector edged toward the cliff. Regardless, I held on to the notion that “it’s only a correction, and it will come back”. However, the warning signs of a major collapse were flashing. In the same month, after a correction in Victory’s share price following a slide in oil prices, I invested another amount, around 10% of the original investment I had invested into Cruise.

Stands and watches oil prices burn but again fails to act on losses

In late September 2014, oil prices went over the cliff to below US$100, then US$80 and so forth. As the price declined, I simply viewed it as a great chance to average down and grab a bargain in Victory. I had totally ignored the sector’s problems, the flow-on impact to upstream-related sectors and financial performance and position of Victory.

Refusal to set or obey stop loss stems from denial over false bottom

Rather than put in a stop-loss position and decide to accept the many losses and move on, I persisted with averaging down concluding falsely that the bottom had been reached every time a rebound occurred at a resistance level.

Between September 2014 and January 2015, however, the share price kept falling and I kept averaging down to the point that I had reinvested all my original Cruise capital.

Unable to let go of investment despite all evidence

At this point, I stopped averaging down or investing new capital. Even so, the share price continued to fall. In hindsight, I should have sold out my entire position regardless of the losses. However, I continued to hold, refusing to accept the losses, and due to the incorrect presumption that “everything will get better and I’ll get money back”.

False hopes and hurt pride prove a dangerously unprofitable mix

My overconfidence, unwillingness to own up to the loss through hurt pride, and false hope that the sinking ship would at least stay at the surface, all combined to blind me I suppose, and my fingernails remained dug into these investments.

Between January 2015 and September 2015, the share price of Victory stabilized, though it was down more than 60% from initial investment levels. In October 2015, the parent entity of Victory, Swatch, filed for bankruptcy. Accordingly, the share price of Victory fell 50% the day after, and continued to fall until November 2015.

Since, November 2015 oil prices have been on more of an upward trend, but the OSV sector has remained significantly depressed. Accordingly, while oil prices have increased, Victory’s share price has continued to decline and is now 80% down on the level it was at during my initial investment. Despite all of this, I have refused to sell, unwilling to accept I made a mistake, and still feeling a recovery is due.

The investor who hung on like a legendary bulldog

Relative to other OSV companies, Victory has achieved stronger final performance than competitors, undertaken a successful refinancing exercise and boosted its order book. However, given the extent of its prolonged losses, the amount I invested, the length of time I invested in a company with a very poor share price, and my stubbornness to abandon the position, I conclude that it the worst investment I ever made.

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

The toughest question to answer: ‘When should I give up?’

In the world of traditional, fundamental investing, it is hard to take a loss. This is very different from traders who set up stop-loss points for each of their trades. The difficulty for fundamental investors is that they have devoted their life to trying to find good companies with good stories. They work hard to research these ideas and then they invest. When the share price goes down, the traditional fund manager will think that they see something that the market does not. But truthfully, who knows?

One way to solve this dilemma is for the traditional investor to say to himself: “My idea may have been right but maybe it was the wrong time”. A next question to ask would be: “Knowing what I know now, if I didn’t own this company today, would I buy it today?” If the answer is “No” then it is a good sign that you should exit the position.

Consider using a stop-loss as a money management tool

Assume a trader buys a stock at 100 and puts a stop-loss at 80, if the stock falls to that point the broker is supposed to sell the stock. By planning your future action, you take your emotion out of the investment. A typical fundamental investor abhors such behaviour because it would imply that he is not confident about his research conclusions.

Avoiding loss is critical

When considering long-term returns, some of our research has shown that avoiding large loss is more important that getting high returns. This is like saying that to be a successful batter in baseball it is more important to not strike out, rather than to hit homeruns. Preserve your capital by accepting that the share price can move against your position for a long time.

Mistakes in this story

2. Failed to properly assess and manage risk

• Bought more as the price went down
• Failed to set a stop-loss and follow it

3. Were driven by emotion or flawed thinking

• Failed to invest in a good, familiar idea

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.

The post False Hope, Poor Due Diligence Blinds Oil Industry Investor 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.

The post Investor Paid the High Cost of Inertia appeared first on My Worst Investment Ever.

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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