I’ve been doing a lot of workshops and webcasts on investing recently, and with so much market volatility, and the less than spectacular Facebook IPO, participants have been asking me for my personal opinion on how to invest. One thing I tell everyone is that when it comes to investing, I’m no different than many of you. I’ve had my share of winners and losers, and even though I’ve spent 18 years of my career in finance, that does not bestow upon me some secret gift when it comes to investing. What it has done is convinced me that there are sound, fundamental investment principles that we should all learn to stick with, but at the risk of self incrimination, here is the worst investment decision I’ve ever made:
My worst investment decision occurred in 1999. The stock market was going gangbusters, everyone seemed to be making money in the stock market hand over fist, and with the help of the Internet and online trading, anyone could get in on the action. As a bonus, the Roth IRA had just been introduced a year earlier, so not only could I be the next dot com millionaire, but I wouldn’t have to pay any taxes on the gain. It was a foolproof idea, or so I thought. I opened my Roth IRA through an online brokerage firm, and then proceeded to make the maximum contribution, which was $4,000 that year. With it, I bought five or six companies, including egghead.com, because anything with the name dot com at the end would triple in value overnight.
Well, so much for that theory. Within the next few years, I saw every single investment go down the drain, and in 2001, with my tail between my legs, I closed my account, then worth a few hundred dollars. Not only did I lose my shirt, but I couldn’t write off the losses. As painful as it sounds, it may have been the best thing that could have happened to me, because as a result, I’ve learned to trust the basic principles of investing that have been around for many years. While they may sound boring and old school, I’m a believer simply for having experienced the alternative. Here are the lessons that I learned from this experience:
1. Don’t get caught up in the hype.
Dot coms were all the rage, and you couldn’t go anywhere without hearing about it, but there was a reason why seasoned investment professionals like Warren Buffet steered clear of them. The unspoken truth was that no one really understood what they were, how they worked, how they made money, or why they would make good investments. They just knew how quickly the stock prices seemed to go up, and that attracted investment dollars, including mine, that should have been invested someplace else.
When I heard about the Facebook IPO, I couldn’t help but remember what happened the last time there was this much excitement about an IPO, and drawing on my experience, I was more than happy to forgo the opportunity to participate. I would imagine that for many that did participate, they would have benefited from this simple principle: don’t get caught up in the hype.
2. Have an exit strategy.
Have you ever heard the expression “once bitten, twice shy”? Well, I still invest in individual stocks on occasion, but now when I do, I’m sure to place stop-loss orders on each position so that if I wake up the next day and see the face of the CEO of one of the companies I’m investing in on the front page in handcuffs, I won’t be too concerned.
3. Diversify, diversify, diversify.
You’ve heard it before, and you’ll hear it again, but if I had listened I might still have my Roth IRA. Even with a relatively small investment like $4,000, I could have chosen a well-diversified mutual fund or index fund. Instead, I went for the fast money, and instead I became quickly broke.
4. Stay in for the long haul, and know when to cut bait.
Perhaps the biggest thing I was guilty of was trying to make a quick buck, and that is the antithesis of investing. I tell people today that you really should not be looking to invest in the stock market unless you truly have a long-term outlook, and by long-term I mean at least 10 or more years. That’s because things can move quickly and violently in the short term, but the true value of an investment should prove itself over the long term.
When you are looking at investing today, you shouldn’t be thinking of it as a way to rapidly grow wealth in a short period of time. Instead, you should always be thinking “will this be a good investment 10 years from now?” If your answer is no, you need to think about offloading it.
Well, they say experience is the best teacher, and when it comes to investing that has certainly been true for me. I’ve since recovered from my $4,000 debacle, but having learned from this relatively small mistake, I’m sure it’s helped me avoid larger ones. Hopefully, my experience may help you avoid some of your own.