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.

A Few Things I Learned Watching a Hedge Fund Manager Lose $4 Billion on One Trade

Maybe you also followed this story. Or maybe not. But basically a really big hedge fund manager, one of those guys who people quote and probably talk about at Harvard Business School, placed a super big bet on this company called Valeant.

Valeant is a pharmaceutical company trying to cure problems with skin and infectious diseases. They actually also own Bausch Lomb so that means they have a giant eye care business.

This hedge fund manager made a bet that Valeant would keep growing their business, diversifying, and acquiring. He once even called them the next “Berkshire Hathaway.”

This thesis turned out to be wrong. Like really wrong. The company crashed. People started to call Valeant out for jacking up the prices of their drugs. They also were apparently doing some dicey bookkeeping things. Just Google “Philidor Valeant scandal” if you want to learn more about that.

The end result looked like this:

So what did I learn from this story? Are there any interesting takeaways for you? I think so. And by writing this I hope I won’t make the same mistakes. Maybe now you won’t either. Here are a few things I learned from witnessing one of the worst trades ever:

  • Risk management is everything. No single investment or trade should ever be able to wipe you out. You want to play this game forever. In 2015, this hedge fund manager had $12 billion in assets under management. He poured $4 billion into Valeant. So he essentially risked a third of his clients money on a single outcome.
  • Don’t ever average down! This hedge fund manager did not cut his losses when the stock started to crash. Instead he averaged down. He bought more. Then he played the options market. Just cut your losses if it’s not working anymore. Get out. Paul Tudor Jones said this best:
  • Humility is everything. If you are going to make a trade like this, at least do it quietly. Don’t go on CNBC and tout it. Or promote it. When everyone knows about it on the way up, they’re also going to know about it on the way down. It might make things even worse. The media and people will turn on you for entertainment, clicks, and laughs.
  • Social media is your friend. There are some seriously smart people on social media. The Valeant ($VRX) stream on StockTwits is filled with conversations, charts, and debates at all times. Don’t ignore that. Or even the bloggers. A few investment writers totally nailed it. They’ve been writing about Valeant and its problems for years. To this day it’s free and open on their blogs.
  • It happens to everyone and it will happen to you. No one makes great investments 100% of the time. Everyone gets hit here and there. Even Warren Buffett admits to this. He wrote about it in his latest letter to shareholders. Like that one time:

“I made one particularly egregious error, acquiring Dexter Shoe for $434 million in 1993. Dexter’s value promptly went to zero. The story gets worse: I used stock for the purchase, giving the sellers 25,203 shares of Berkshire that at yearend 2016 were worth more than $6 billion.” — Warren Buffett

  • Narratives are fun, but you also need to see the data yourself. What’s really amazing is how this hedge fund manager lost a ton of money. His brand and skill is being questioned and criticized around the globe. But someone recently showed me something interesting. The following chart shows the price of Warren Buffett’s Berkshire Hathaway vs. this hedge fund manager’s company Pershing Square. Yes, by this metric he’s outperforming Buffett! As a spectator, it’s fun to get into big story lines and narratives. But always make sure you corroborate the data: