10 Reasons Why I Think I Made My Worst Investments Ever
I’ve been thinking about my investment style and how it’s changed over the years.
My first few years were pretty rough. I dove right in. I put some money in a brokerage account and just started. I was buying and selling with really no real idea. It was pretty reckless. But everyone starts somewhere.
The other day I started my taxes. That had me looking back at some old trades. Some of them are just awful. But hilarious. I had to include two examples in this post (see them below). I hope by writing this all down I’ll avoid making these mistakes in the future:
1. The P/E ratio is the absolute worst metric ever. It needs to be burned off the front page of every finance website. It is a backward looking metric. The stock market is forward looking. WTF. Avoid this. If a company has a really low P/E ratio, it generally has one for a reason.
2. Stay away from any and all foreign exchange risk. If you buy stock in an ADR or a company based in a country outside the US, and that country’s currency takes a hit, your portfolio is going to feel it. Managing investments is hard enough, you should not have to also worry about currency fluctuations.
3. Picking bottoms and calling tops is Russian roulette. A stock that’s down 50% from its highs can still drop another 50% from there. A stock that’s up 100% over a year can still climb another 100% in the next year.
Here’s one trade where I tried to be the man and short NVIDIA after a massive run
And here’s another. Yes, I actually said this. I thought the tech trade was over
4. Know where you’re going to get out before you make the investment. This makes life much easier. Before you buy a stock, know why and when you’re going to cut it out of your life if it goes against you. Don’t get trapped. Don’t waste time.
5. You need to be a master at avoiding FOMO (fear of missing out). There’s nothing worse than watching a stock spike, and so you buy it. You don’t want to miss out. You just need to join in. F that. Don’t do it. Chasing a stock rarely ever works.
6. Never buy a stock because of buyout rumors or because you think it will get acquired. You want to own strong companies not rumors or theories.
7. Always know your shareholder yield. Does the company pay dividends or have a history of buying back stock? That’s money being returned to you. If there’s no shareholder yield (dividends or buybacks), you’re basically left with a bet on growth. Know the difference. It will change your timeframe and expectations for any single investment.
8. You can’t ignore the overall market. In bear markets, they say all correlations go to 1. It’s hard to find quality stocks in bear markets. Everyone makes money in bull markets so don’t let it get to your head.
9. Study the tax code. It will immediately change the way you invest or trade. Trading can be a lot of fun. But at tax time it sucks. It’s a lot of work and even more taxes. You can save up to 20% on capital gains taxes when you hold a stock for more than a year.
10. The Internet is your best friend in the world of financial markets. But you have to double check everything. There’s so much free research available. There are also so many smart people writing and sharing ideas each day. But you still need to double check it all. If you like a trading or investing idea from someone online, make sure you corroborate the data yourself.