Every once in a while it’s good to take a pause and look back at mistakes we have made to make sure we are not repeating history. This can be applied to work, relationships, and of course, investing. I have certainly made my share of mistakes, but lucky for me, many of them were made when I was new to investing and the dollar amounts involved were relatively low. Some of these mistakes occurred when I was speculating with little bits of money, hoping to hit it big on the cheap and neglecting to use stop loss orders. Others were made when the market environment was euphoric, and the signs of trouble were not so clear. The biggest error I made was that I was in a trading frame of mind instead of investing.
Learning from these mistakes, I have moved away from attempting to trade stocks and I now focus more on buying businesses with strong fundamentals and a long track record of paying and increasing dividends. I knew this was a good strategy back when I was speculating, but I was younger then, and caught up in a booming economy and the moderate successes I had trading the stock market. Fortunately I was using ‘play’ money in small amounts most of the time, and I continued to invest in companies like Coca-cola, Chevron, and Verizon, stocks that easily survived and are thriving today. Also the investing mistakes I made did not prevent me from traveling the world extensively in my 20′s, as I had saved plenty of cash to guarantee that trip would not be affected by bad trades or margin calls.
Notice that I am keeping this list to mistakes I made prior to 2009. Unless you shorted Netflix or thought Blackberry would make a sweet new smart phone to leapfrog the iPhone, you have had great success investing in the stock market since March 8th 2009. Keep in mind we are all making mistakes today, it’s just going to take a while until we find out what they are. With that, I give you my Top 10 Investing Blunders Countdown:
Mistake #10 – Sold Air Products in 2006
On 9/12/2005 I purchased 20 shares of APD at $55.29 plus commissions. On 04/26/2006 I sold them for a quick buck at $68.12. I profited $235.57 on this trade after fees for a 34.41% annual return, plus a few dividends. I had to pay short-term taxes on this profit however. At the time I probably thought I was a slick trader to make this decent return so quickly. This past Friday, APD was trading at $110, and the company has paid about 30 dividends since the date I sold, growing the distribution each year. I do not want to calculate the amount of money I missed out on here, it is too depressing. Today I wish I owned APD at a decent price, but I do not. Lesson learned.
Estimated Loss – $0
Estimated missed gains – I don’t want to calculate that number, it makes me sad.
Mistake #9 – Did Not Take Profits in Oracle
I actually made an excellent purchase of Oracle in 1999 on a big dip after a disappointing earnings report. I bought 20 shares in April of 1999 at about $24, and a few months later it split, and split again. Good times. I now had 80 shares at a cost basis of $6. Then in early 2000, the stock suddenly catapulted to a high of $46 in the course of a few months. I had a 500% return on my original investment, 20 years of decent returns that I made in a very short period! Did I sell near the peak? Not I did not. I let it ride, taking nothing off the table. I finally closed out my position in September of 2005 for a 100% profit. However looking at the stock today, maybe I should have held on to some of it.
Estimated Loss – $0
Estimated Missed Gains – $3000
Mistake #8 – Sold Apple for $68 a share in 2006
This headline should remind you to read this disclaimer; you should not take investment advice from me. Sure enough, I sold 20 shares of Apple on 08/04/2006 at $68/share, then 20 more on 10/05/2006 at $74.75. The nimble trader that I thought I was made a quick $500 dollars on these trades, having bought the stock at an average price of $58 in March and June of that year. At the time, rumors swirled about something called an iPhone. Just two months after I sold the stock, Apple showed off one of the most innovative products of all time. Had I held my shares, they would be worth about $20,000 today. I did not lose any money on this trade, so it comes in at number eight.
Estimated Loss = 0
Missed gains = $17,600+
Mistake #7 – Bought Exodus Communications
Exodus was a web hosting company during the dot-com boom. Their customers were dot-comers, and when they all went bankrupt, Exodus followed. Some of Exodus’s projects were actually precursors to what we now call cloud computing, but when they were operating, what they really needed was a precursor to profits. I bought 45 shares of this stock for just $1.21, hoping it would turn around. I then, believe it or not, road it all the way to zero because I was traveling and not paying attention, and wrote it off as a bad memory. For years after, this stock was shown in my brokerage account as delisted. It served as a reminder to always sell when the company is headed for broke, and to never buy a penny stock in hopes of a turn around.
Estimated Loss $54 + commissions
Mistake #6 – Bought Webvan
CNET called Webvan the most astounding dot-com flop of the era. This was also a favorite of Fucked Company, a web site formerly dedicated to the epic dot com failures of the early 2000′s (now defunct). Webvan was supposed to be the Amazon of grocery stores. Buy your food online, and have it delivered to you at your home at your convenience. Finally an alternative to Domino’s and Chinese food! Webvan, which by the way was a terrible name to begin with, built massive warehouses storing groceries, borrowing hundreds of millions of dollars for facilities and perishable inventory. The grocery market was a huge one, so investors were salivating and saw this company as a major disruptor.
The now obvious alternative to this business model is for existing grocery stores to buy a truck, like Giant’s Peapod. Groceries is a tight margin business to begin with so taking on huge amounts of debt to build out a whole new infrastructure was inevitably doomed. Yet I still thought this one was a winner. Ironically, Amazon has now attempted to get into this very business with Amazon Fresh, and Webvan.com now operates as “part of the Amazon.com family”. Time will tell if that venture works, but at least Amazon has other viable businesses to keep the company from going bankrupt.
Estimated Loss = $160
Mistake #5 – Bought Clearly Canadian
This one is for my Canadian readers. What do you think aboot this stock, eh? The first ‘trade’ I ever made was the purchase of a stock called Clearly Canadian, a beverage company traded on the NASDAQ for about $2 at the time. I liked the products, and coming fresh out of the Peter Lynch school of buy what you like before everyone else learns about it, this was a stock that I became interested in. The company was on a serious downward slope at the time, on its way to failure. But I saw a cheap stock price, and a catalyst that I thought could produce a turnaround. I went through the yellow pages, called a broker and bought 100 shares for about $200 dollars plus something like a $50 commission. The broker mailed me the certificate a few days later with a friendly note attached, “Good Luck”.
The catalyst I deemed worthy of my funds was a new product release called Orbitz. No, not the travel booking web site Orbitz, this Orbitz was a new drink with gravity defying sweetened goo-balls. My sister came home with a bottle of the stuff and I thought it was cool. It was, but cool does not guarantee stock returns. Upon release, the product got some good PR and aired some commercials, but it never really took off. It was a novelty, and not product that consumers would become addicted too like coffee, tobacco or Diet Coke. Orbitz was not enough to turn the company around and it eventually stopped floating. I did manage to get the certificate notarized and sold it when it was worth about $50 before the stock went to zero. It appears on their web site and Facebook page that they are attempting some sort of comeback for any fans out there.
Estimated Loss $200
Mistake #4 – Bought Ameritrade Leaps
Having gone through the pain and fees of buying stock through a real broker, I thought the online stock broker companies were the future of trading for individuals. I was 100% correct. But when I started trading the stock, everyone else buying it thought exactly the same thing. We were all right about that! But the valuation at the time was way out of wack, although not as bad as many other companies who did not have revenues.
Since I was so sure Ameritrade was a winner, I bought some call option LEAPs with a expiration date 2 1/2 years away, paying about $250 each for 2 contracts. The strike was something like $10 off the price where the stock was trading, so it was a long shot. That money sat idle for nearly 2 1/2 years. When all was hopeless, I finally sold the options for a next to nothing. Had I bought the shares at around $5 instead of the options, it would have been a great long-term buy. But I chose the losing strategy in this case.
Estimated loss = $500
Mistake #3 – Bought Global Crossing
Global Crossing was a company that was investing in the future of high speed communication. This internet thing is the future, and these guys are going to own the international networks is what I probably said at the time. That is all well and good, but how is their balance sheet? That was a dumb question, nobody cared about balance sheets back then! When the tide goes out, you see who is swimming naked, as the Oracle of Omaha says. Or in Global Crossing’s case, who is swimming in debt. The company borrowed hundreds of millions of dollars to develop this global network. A lot of big money from private equity was behind this company, and when the market turned sour, they did what private equity firms do best, they restructured the company through bankruptcy. My purchase of GX was a classic case of catching the falling knife. The road to bankruptcy took my shares from the teens down to pennies, and I eventually sold them and took the capital loss on my tax return. Many connected investors out there made money on this company (like this future Governor), but I did not. In 2011, a reemerged Global Crossing was taken over by Level 3 Communications.
Estimated Loss = $805
Mistake #2 – My iStar Financial Debacle
I started buying this stock after I read an interview with legendary hedge fund manager Julian Robertson of Tiger Asset Management who recommended it. I opened a direct investment and dividend reinvestment account, and also bought various shares and options in my brokerage account over the years. I accumulated a decent number of shares in the REIT, which paid a very consistent and growing dividend. But this SFI was more of a financial company rather than real estate, and looking back, I did not really understand the business model. Expecting a looming real estate downturn of some kind, I should have lightened my positions early. But oohhh that sweet dividend!
Over time, I received nearly $1000 in dividends on SFI, all of which I reinvested. But then the stock plummeted and they discontinued their dividend during the housing crisis, and those dividends I had reinvested were gone forever. The company who was known for producing beautifully designed, award winning glossy annual reports, was reduced to printing the 2008 report almost entirely in black and white (gasp!). I managed to sell some of my holdings in the $30′s before it really plunged, and sold the rest as tax losses toward the bottom to save face. But this was a roller coaster ride I would rather forget. The company did manage to stay in business, but has not paid a dividend since July 2008.
Estimated Loss = $2200
Mistake #1 – Bank of America
The irony of my number one investing blunder is that I still hold the stock, and I am a believer. I dripped into BAC shares from summer 2004 through summer 2008 at an average price of about $45, reinvesting all of my dividends. BAC aggressively consumed smaller banks and was growing internationally despite its name. You already know the rest of the story; the housing downturn, Countrywide, Lehman debacle, Bear Sterns etc. But Bank of America survived, and they picked up Merrill Lynch on the way. In a move to create some capital losses for tax purposes, I sold a big chunk of my shares at $7, but retained about 40% of my holdings from prior to the crisis. I then started buying shares in the really pathetic days, when the stock was trading at $3.50 a share. Dripping again, I built up my holdings in hopes that eventually they will one day pay a growing dividend and the company will clean up its non-core businesses. Today I am actually in the green on my current holdings after the tax loss sale, and things are looking better. In the future, I will keep a closer eye on my bank holdings because they seem to go through these crises every 15-30 years. So we may be due for another when my retirement date comes along. If it does, I will surely be more diversified.
Estimated Loss = $2800
All told, my top ten investing mistakes cost me around $7000, give or take. This amount is certainly less than my degree in Finance cost, but my blunders and investing experiences have taught me much more than I learned in college. I did have plenty of successes in the years prior to 2009, and more mistakes than I have written about here. Those wins and losses taught me some valuable lessons about risking money in the stock market, lessons I keep in mind every day when thinking about financial independence and retirement.
Did you own any dot-com bombs? What mistakes did you make prior to 2009?
Disclosure: Long AAPL, BAC