I have made so many investing related blunders I am truly embarrassed. I used to joke I would stop “playing the markets” and develop a drug addiction to save money.
So I’ve learned a few lessons, expensive lessons, the hard way.
At the risk of looking like a complete fool and my wife taking her RSP out of my care and back to her old mutual fund advisor, I will reveal some of these painful lessons.
Get rich quick mentality
If there is one thing that has slowed (and many times reversed) my accumulation of wealth more than anything else it is a “get rich quick mentality”. The thought of hitting the jackpot and getting 10x or more returns on stocks is a temptation, like a forbidden fruit, especially once you have experienced this elation. It is something I still struggle with.
My fix
I have read at least twenty investing and personal finance books. I now understand gambling and speculating is not investing. Investing requires a get rich slowly mentality. Although difficult, I’ve learned to ignore my emotions and the evil, get-rich-quick whispers in my head. The majority of my investments now are in profitable companies that pay sustainable dividends as well as ETFs. I still follow a few speculative stocks that I think have huge potential and that I believe are undervalued. If I succumb to temptation I buy a small amount say 5% or 10% of what I would invest in a dividend stock or ETF and never in my wife’s account! Speculative stocks account for about 2% of my portfolio and I am comfortable with that.
Margin Accounts
I opened a margin account in the late 1990’s. A margin account lets you borrow against equity in your portfolio, much like a line of credit lets you borrow on the value of your home. My unrealized gains in my portfolio of stocks were much higher than my interest rate. Being young and clever, I borrowed to invest more and my portfolio grew faster. I had investing all figured out, I would cash-out before too long, extremely wealthy for my age. Then the market dipped. I wasn’t worried, I understood technology and I was invested in technology. The dip turned into a crash. I was forced to sell my stock holdings at the worst possible time. My losses were compounded by my margin buying and I had lost money on interest payments. I lost close to one year’s salary in just days. My hard earned money had vanished completely and I had nothing to show for it. Like the old Nortel joke, if I had bought beer instead of stocks, at least I could return the empties and have a few dollars left in my pocket…
My fix
I never buy any stocks on margin. I am adverse to debt, so much so I am debt free just as interest rates are around an all time low. Also with TFSAs, RSPs, and RESPs I have no need (yet) for unregistered margin accounts and their additional tax burden.
Bubbles
It is hard to know when you are in a stock market bubble, particularly the first time. I define a bubble as when stock prices lose correlation with value of the small piece of the company you own. Bubbles typically form slowly. In the technology bubble around the turn of the millennium, I knew wireless technology was going to be huge in the future. I invested in the top wireless chip makers. I wasn’t concerned about P/E (price/earning) ratios, in fact I didn’t look much at earnings or forecasts at all. My investments did very well and I continued to buy as their stock prices rose. Was I right about wireless technology? Yes, the number of wireless devices on the market now, 15 years later, is mind-boggling. Did my investments pay off? No.
My fix
As an engineer focused on continuous improvement, I rely on quantitative data and analysis to help identify issues and prove they are resolved. I now use simple quantitative analysis for investing too, focusing on P/E ratios, earnings and earnings forecasts, and dividend payout ratios. I also use Moringstar’s Quantitative Rating (offered free through my online brokerage) as a sober second though, like Canada’s senate. If a stock gets overvalued based ratios compared to historical trends, I will sell some of my holdings if I still like it long term, otherwise I may sell the position entirely. The inverse also applies. If a stock price drops very low and its value and long term fundamentals are good I’ll buy it or buy more.
Pump & Dump
When I first started trading on the markets I often bought penny stocks. I read and received information from investing bulletin boards and related email distributions. I would read some great news about a stock, the stock would take off, and typically as fast as it went up, it went down. The majority of these holdings ended up delisted (zero). I’m not sure how much of this has changed over the years. But in hindsight it appears I fell for the classic pump and dump scheme. Watch the movie The Wolf on Wall Street.
My fix
I don’t invest in speculative penny stocks anymore. The odd speculative stock purchase I may make is in Canadian companies I have heard about from reputable sources, or seen interviews with CEO and followed the stock price. I will look at the company’s website and I consider financial health, growth and take over target potential. If I have any doubts I do not make the purchase. If I do buy the stock it is a very small fraction of my overall portfolio. I do not partake in any stock related chat rooms.
Leveraged Products
A few years ago I purchased 2x leveraged natural gas ETF. It tracked the commodity price, not industries. This product was designed that for every 1% change in the natural gas price it would move 2%. I was confident natural gas prices had bottomed. As luck would have it, natural gas prices continued to fall for an extended period of time. The leverage, relatively high management fees (> 1%), combined with poor index tracking was like adding salt to an open wound.
My fix
My days of short term commodity speculating are done. I would rather buy a related and profitable industry leader, ride out commodity cycles and collect dividends while I wait. I don’t pretend to understand exactly how leveraging works and right now, I don’t need to know. But leveraged products, like a margin account, coincide with the dangerous and often expensive get rich quick mentality.
Stock Tips
I have invested blindly in stocks suggested by friends or relatives. Why? Because I thought they were successful investors. Who better to follow? In hindsight, the adage past results are no guarantee of future returns is true. I lost big on few tips. Stocks that went to zero. I lay no blame on the person who provided tips. I asked for tips and the tipper full heartedly believed they were worth the risk (and lost too).
My fix
I now know getting lucky speculating and being a good investor are not synonymous. I admit I still love stock tips. I might listen to BNN and hear the top picks and I will look at the stock. If I like it I might put it on my watch list. I like to date a stock for while before committing to it. Sometimes a stock runs away in price before I can buy it. I no longer fret when this happens. There are plenty of stocks in the markets, and more than likely there will be awesome buying opportunities in the future.
I’ve done a few things right too
Just so you don’t think I’m a complete idiot, I have learned from my mistakes and I’ve made some good investments. I saw value long term value in nanotechnology/rare earths, pipelines and energy infrastructure when these were not popular investments.
Since January 2009 (the oldest data available from my brokerage) to the end of October 2014 I have outperformed the Toronto Stock Exchange cumulatively by about 70% (166.46% vs. 96.99%) and I have even outperformed Berkshire Hathaway (124.84%) in this relatively short period of time – although I am no Warren Buffet!
I am sure I am still making mistakes, but I am optimistic the frequency and the cost of these mistakes are decreasing.
Don’t make the same mistakes!
I could have saved a lot of money (and embarrassment) if I had just done 2 things:
- Read about personal finance and investing before investing in the markets, or
- Invested with a strategy like the couch potato or my ultimate portfolio.
The good news for millennials is there has never been more choice of low cost investment products and free information available. Grow and protect your money, don’t learn the hard way if you don’t have to.
Be happy, live long & prosper. Best wishes for 2015!
engineering wealth 