Investment Mistakes – How to Lose Money in 11 Easy Steps

I tend to hang out with positive people as invariably they make me feel good, whether it be guys that are capitalists like me, entrepreneurs building businesses or people that appreciate similar things in life to me such as fitness and sports they’re all positive people. I made a pledge to eliminate negative people from my life some time ago. Think about it. How on earth is an entrepreneur that is negative about the world around him ever going to succeed? The odds are so heavily stacked against them. With a positive attitude comes another element that I thought about recently. Positive people like to talk about positive happy things. It’s human nature to try to forget about the unpleasant events that smack us in the face from time to time. There is a positive to everything negative though, and with that preamble today I have collated some stories of negative outcomes in the hope that you and I can avoid such screw-ups in our futures.

The first one comes from yours truly.

1) Letting success go to your head.

I was very young, 19 to be exact, and had been researching the oil market extensively. I had also educated myself as to the mechanics of the futures markets. It was late 1998 or thereabouts and oil was trading around $15 per barrel. The Asian crisis had scared many into believing the demand for energy was not as robust as previously hoped. I felt the fundamental case for oil was solid. I took most of my life savings of about £3000 and bought a bunch of $20 Crude Leaps. I sold when crude hit $24 and I had roughly two months left on my contracts. Time erosion and “in the money” calls netted me a small fortune. My timing was near perfect and naturally it was clear to me that yes I was a genius. To my credit I was worried that I would do something stupid and lose the money I’d just made. I never even told anyone about it since all my friends were still pouring pints of beer at local pubs and it just seemed completely out of whack. I knew that my interest in the markets and researching them was completely out of whack with my then peer group so it never made any sense to talk about any of it. I was rich in contrast but spending the money was the furthest thing from my mind plus I was not prepared to change my lifestyle. I “invested” 50% of the money with a broker (see lesson #4) and proceeded to trade the balance. Since I was so successful I neglected to put in the amount of research and work that I had committed on the oil trade, instead of trading in and out of all sorts of sectors that I knew only smatterings about…most of which I picked up sound bytes from CNBC (see lesson #2). All in all I lost almost the entire amount in my trading account and the broker that I had invested with turned out to be a boiler room operation and I’ve never heard from them again. I was pretty much back to zero. I’m truly grateful that I learned this lesson early on.

2) Don’t Take Advice from CNBC

This one comes from a good friend. Don’t take advice from CNBC. Remember TV is actually just a distraction industry and it’s designed to entertain you more than it is designed to provide good advice. It’s complete hit and miss territory and if you don’t’ have a fundamental understanding of what is being discussed you are subject to playing the lottery. If you have any disagreements about this just watch Jim Cramer for 10 minutes and you’ll see that taking advice from CNBC can be a really really bad idea.

3) Failing to Assess the Fundamentals

Investing in something you like on a philosophical level but failing to assess the fundamentals. A friend of mine is a barista and nothing excites him more than coffee. He also loves healthy eating and the philosophy behind it. As such he followed his passion to open a juice bar in a location that he really wanted to be in. He had some of the ingredients for success, namely passion for his business and products, but his location and product line was completely out of sync with his clientele. A nice location visually didn’t matter since he had no clients that were interested in his product. His demographic was completely out of whack with his product. Unfortunately his business failed and he lost everything he had invested.

4) Trusting your Capital to Well-marketed Salespeople

No need to elaborate on this one. Watch out for Armani loafers and well-coiffed hairstyles.

5) Delegating Responsibility

This from a friend of mine. In his own words, “I Lost pretty much my entire share portfolio by switching to a managed account where a broker, who happened to be a friend and client of mine, used some sophisticated trading strategies. I trusted the “stop-loss” strategy, meaning I shouldn’t have lost more than 25% but I lost more like 80% due to complex reasons probably involving negligence – decided not to sue as it’s easier to make a new fortune than fight over lost ones. Still I can’t tell you how much that cash could have been useful over the last few years. Other mistakes – and I’ve made many – involve poor clarity and documentation in business relationships. Ironic that I’m a lawyer whose specialty is drafting clear-English business agreements, but also common for lawyers to not bother documenting their own affairs. I have lost too much by being slack in managing business relationships.” Ok, maybe not just one lesson here but a few.

6) Leveraging

You might wonder how I managed to lose so much money trading my account mentioned in lesson #1. Leverage combined with lack of knowledge will absolutely decimate your wealth. Count on it. Using margin to trade the majority of your portfolio is simply not a good idea. Let me rephrase that. Its a shockingly bad idea. Using margin to hedge positions makes perfect sense to me and incorporating leverage as a very small percentage of your overall portfolio occasionally makes sense but using margin consistently in order to provide higher returns is a bad idea. You might get lucky but eventually you’ll blow up. In full disclosure I have used substantial leverage to build wealth previously but this should in my humble opinion only be done where the fundamentals are so heavily in your favor that your risks are significantly mitigated.

7) Selling a Bull and Buying a Bear

This one comes from another dear friend of mine. In the midst of the current bull market in precious metals he sold all of his positions in both physical metals as well as stocks leveraged to the price of the metals. This was 3 years ago. He bought in late 90’s so he had enjoyed a good run but sold after a strong run anticipating that he would buy back in lower. He’s been waiting ever since and is now too scared to buy back in as he is fully aware that he could lose 20 -30% of his capital in the blink of an eye in a market correction. He sold a bull market. Buying a bear market presents the same issues. Just because something is cheap doesn’t mean it can’t get cheaper and just because something is expensive doesn’t mean it can’t get more expensive.

8) Hot tips

While I’ve not experienced this particular one up close and personal I know from the plethora of spam that goes around that this has to be a big one. Let me be clear however that hot tips can come from anyone and not just spam. Your brother, cousin, broker, banker, or some fella in Nigeria who has some secret sauce to sell.

9) Using Mortgage Money to Invest

Closely related to leverage but not exactly the same. An acquaintance of mine actually mortgaged his home in order to participate in a seed round financing of a highly risky real estate development. The development is coming along however the timeframe envisaged was far longer than anticipated and my friend lost his home after cash flows from his business took a downturn.

10) Not Investing Sooner

This one comes from an elderly gentleman that I’ve had the pleasure of getting to know recently. Investing and compounding wealth is a tried and tested means of accumulating wealth. If you don’t invest in something you will never be wealthy. That something can be your own business, it can be a bunch of rental properties, commercial buildings, a stock portfolio or whatever but waiting to do any of this is no strategy to accumulating wealth.

11) Failing to Act

Researching and coming to a sound decision but failing to act. The old “I knew I shoulda”. I know of way too many people who do this. Good ideas are like grains of sand on the beach but the ability to implement those good ideas is what’s critical. Most people coulda, shoulda, woulda all over themselves. Don’t do it. Develop the skills to make decisions.

What have I missed??

Chris

“We experience moments absolutely free from worry. These brief respites are called panic.” – Cullen Hightower

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Matthew
Matthew
10 years ago

Chris

I’m delighted that you’re discussing a topic upon which I have had much experience!

I would qualify number 7 “Selling a bull and buying a bear” by saying that chasing prices higher through additional or new purchases is a dangerous act (“re-buying a bull”?). Newton sold and then re-bought in the tulip mania. I sold silver, only to watch it climb higher. I must be learning as I refused to buy in to a parabolic looking spike.

To your list I would add valuation as a key to losing money. Whatever the appropriate method for valuing an investment, it has to be grounded in reality and that grounding anchor is the valuation. Not stopping to consider the possible other uses of capital when making an investment can quickly lead to the dog chasing its tail in ever higher valuations.

Finally I would add complexity to my list of favourite ways to lose money. For example, for most of the time trying to make a call on which stock index will rise more relative to another is tough. There are so many variables. Unless there are specific and obvious (to you, not the market in general) variables which will impact the outcome, its hard to figure out macro calls. Picking one company versus another is easier as there are less moving parts to trip up on.

I could add to this post after finding other imaginative ways to lose money!

Thanks for another great article.

Jon
Jon
10 years ago

Chris,

Thanks for that list. I can really relate to a couple of those on your list. Your #1 bullet point hit right at home for me. In fact, I was also 19 when I heavily began researching the gold and silver markets. I knew the fundamentals were incredible and I was wondering why so many people didn’t see what I saw. I began buying physical metals and then drifted into jr. mining companies. I was making good money on the metals and was lucky as shit on some jr. mining companies I picked out. I was a passionate 19 year old with a fascination for accumulating uncommon wealth by investing and eventually owning successful businesses in the future. Anyway, I attended a conference that year and met a small scale gold mine operator. I understood the fundamentals of gold and silver but knew nothing about the mining side. Two months after meeting this guy, I invest 20k with him to become a part owner in a open pit gold mine that I never saw in person (stupid on my part). In addition, we didn’t use lawyers to draft an agreement and did it on our own with a simple word document and hand shake. I am now 24 years old and my money is still dead. He basically decided to hide some information about that property from me and he also got washed away financially during the bubble collapse with some other properties he held. I believe he speculated with my money and hoped to sell the property quickly instead of executing the plan we discussed. Basically, he was highly leveraged with all his properties and failed to meet the agreements when the real estate bubble collapsed. I’m still in touch with the guy every now and then but I have no control with the property. Basically, I got screwed. I may get the money back someday but I’m not counting on it. The moral of the story is don’t engage in a partnership unless you really know and trust your partner. Do your due diligence regardless, how good the deal looks on paper. As a young man, I was very impatient and this was a huge weakness of mine. Also, make sure you are protected if possible before engaging in a deal. Understand your circumstances and all your possible risks before executing. I must add that I learned so much through this process so I’m fortunate this has happened to me at a young age since it has helped me grow as a businessman. I won’t make that same mistake again. I still believe that if my partner would have been a good guy and he agreed upon our plan, we would both have made a killing on just the production alone. Our original goal was to sell the gold mine outright since we both envisioned much higher gold prices in the future. We planned on operating the mine during summer to provide cashflow and sell the property as turnkey when the opportunity arised for a large capital gain. You win some and you lose some. Just try not to make your losses gigantic losses. Cheers!

P.S.

I’m 24 years old and I have had an incredibly hard time trying to find like minded people to discuss like minded issues with such as entrepreneurship, finance, and anything business related. This has been a huge issue for me since I was 18 years old. The only times I could engage in these types of discussions was when I was with much older gentlemen. Do you have any recommendations of how I could start building a network with other like minded individuals as myself? You sound like a fascinating person and it sounds like you have a lot of friends who are like you.

JP
JP
10 years ago

My comment will be directed at “doing nothing, instead of [always] doing something”. I’ll caveat this by saying that I heard this somewhere, probably Jim Rogers. This relates directly to #11 above “failing to act”, but let’s not get confused. It is the decision to “do nothing” that sometimes is the best answer.

Entrepreneurs, type A people, etc. tend to be always doing something, sometimes reckless things. While I whole heartedly agree that we need to take action to get results, for there is no other way, taking action can sometimes mean intentionally sitting on the sidelines. One can sit on the sidelines to observe for a pattern, to learn a new skill before “suiting up”, not buy at the height of a frothy market, do due diligence, etc. there are hundreds of reasons.

Like playing jazz music particularly, it is what you don’t play, that is just as important as what you do play.