3 Investing Mistakes I Made So You Don't Have To
In 2016 I opened a trading account deposited $3,000 and bought shares in Resapp (ASX:RAP) and Fastbrick Robotics (ASX: FBR). RAP & FBR were companies supposedly spearheading innovation in their respective industries - RAP had developed new technology to diagnose and manage respiratory diseases, and FBR created the world’s first fully automated robotic bricklayer. Over the following months, I watched in horror as the share prices fell and wiped out most of my money.
This certainly wasn’t what I expected, and I didn’t understand what happened.
Faced with a screen of red, I was not only frustrated that I hadn’t made any money on what I believed to be promising investments, but I was also completely discouraged from investing altogether.
When I spoke to friends and family about what happened, I was met with remarks of share trading being akin to gambling.
I cashed out whatever money was left and deleted the app.
I had, in retrospect, just learnt the most sobering lesson of all: investing is not a get rich quick scheme, nor is it as simple or as easy as the financial media headlines tout.*
I returned to the market this year, determined to give it another shot. After a 3-year hiatus I was ready to reflect on the investing decisions I made in 2016: where had it all gone wrong? With the benefit of hindsight, I believe that these are the three mistakes I made back then, and below is how my thinking has since evolved on each:
- I got swept up in euphoria
It’s very easy to get overwhelmed by how little you know when you first invest in the market, and to automatically accept that those who write about investing must know what they’re talking about. I mistakenly turned towards the market to guide my investing decisions – using price action and momentum as a signal of quality - thinking that if I followed the crowd I would make a profit because everyone invests with the same goal in mind, right?
What I hadn’t appreciated back then is that the market is much like a storytelling device; when a share price increases, people are telling positive stories about that company and when a share price decreases, people are more negative about that company.
Every investor is making decisions based on their varying knowledge and experience, and we all operate with a level of uncertainty. Unfortunately, every single one of us human investors is wired to be emotional, and thus the market is often driven by irrational fear and greed rather than by calm analysis – even impacting experienced money managers with many years of experience. When people are really positive about the market, they are driven by greed and when people are negative about the market, they are generally selling out of fear. Listening to the market is just about the worst thing you can do as it often traps you into buying high and selling low.
I invested in companies that had favourable coverage and publicity, and a growing crowd of increasingly enthusiastic investors. Some wisened investors say that by the time a company appears in the press the “easiest money” has already been made and that early buyers will use the opportunity to sell at rich prices to the newcomers. At the point where investor frenzy peaks, chances are that even the most optimistic expectations have already been built into the price. So unfortunately, I invested during the All Time Highs for both companies. You can guess what happened next: the price inevitably came crashing down when market sentiment changed.
Listening to the market and not developing your own reasons for investing in a company puts you at risk of not understanding why/when market sentiment changes and leaves you exposed to more irrational decision-making when the market swings. Invest in companies and understand the potential catalysts for future share price upside, not because you think the market is going to go up. Furthermore, as investors, we need to know precisely why we are invested in a stock and what we expect to happen – so that we can be ready to sell if things don’t turn out as expected.
- I invested in longshot companies
As a bright-eyed rookie wanting to do some good and maybe help change the world, I was sucked into investing in multiple longshot companies.
The profile of a longshot company is often like this: it is on the brink of solving a big universal problem and the solution is normally complicated beyond measure and impressively innovative. No other company has achieved this before. The longshot company is marketed in a way that grabs news headlines and appeals to our emotions. It makes sense why investors flock to invest in longshots: deep down, we all have this desire to make the world a better place, right?
Longshot companies with new tech/drugs typically have extensive clinical testing, approval & regulation hurdles to pass which can take years. This also means there’s no guarantee the solution actually works, and a long development process can often mean multiple capital raisings which continually dilute long-suffering shareholders. If a long shot company (and its management team) has no established record of innovation or products in market, it’s possible that shareholder funding is not being used in the most optimal fashion and that there may not even be a world changing technology or drug at the end of the rainbow!
I can now confirm: I did not change the world but I did lose money. Unfortunately, changing the world comes at a cost if it doesn’t work out, and it’s often at the expense of the retail investor.
The market values usually companies based on two things: growth and profitability. Longshot companies are normally so early in development that they have neither, and so the market then ascribes a speculative valuation based on potential – which is more fluid than hard science and can be inaccurate by orders of magnitude. This means it could take years for investors in early stage companies to ever see their company begin to generate meaningful profits, and if you happen to buy into one of these longshot companies near a share price peak, it could take years to see a meaningful return on capital. Longshot companies are by definition inherently risky as an investment proposition, especially if you have little understanding of the solution and industry.
Yet it’s hard not to get swayed by the alluring story and dazzling prospectus of a longshot company. FOMO starts to creep in and the desire to be a part of The Next Big Thing (read: it almost never is) takes over any rational decision-making. Some recent examples of this on the ASX include lithium, fintech and payment solutions, and cannabis. When I feel the early stages of FOMO myself, I put the company on a watch list and patiently wait to see a record of earnings. Sure, I might miss investing in the company at a lower valuation, but waiting for earnings minimises risk, protects my cash and allows me to focus on other opportunities in the market. As many people have said, stocks are like buses – miss one and another opportunity will be along shortly!
- I didn’t have a clear strategy
There are unlimited opportunities in the market and many different ways of making money. Not having a clear idea of where I wanted to focus my attention and money left me at the mercy of emotional & irrational decision-making every time I checked the share price. I was trigger-happy; ready to buy and sell shares every time a new announcement appeared on my screen. On top of this, I was investing in industries that I had no knowledge or competence in. We all know how that ends.
Investing is an art, and art is all about selection.
Take advantage of what you already know and use this as a starting point to refine your own investment strategy. The beauty of investing is that there is no single ‘right’ way. Finding an approach that compliments your psychology is instrumental in future successes.
The uncomfortable reality of investing is that every single person makes mistakes and loses money. Even the best investors make mistakes, and sometimes repeat the same ones over and over. Part of the challenge is accepting this, and viewing mistakes as learning opportunities.
Self-reflecting on my mistakes is the single most important tool to help me continually refine my own investment process and make more informed decisions. It has added structure to my approach, enforced discipline and helped uncover blind spots.
And hey, hopefully reading about my mistakes and my subsequent learnings can help inform your investment process further.
*In reference to those viral tweets that do the rounds every year telling us we all could have been millionaires by now had we only invested $1,000 in Amazon/Apple stocks in the 90s and held for 20 years though the tech bubble, the GFC and general market swings. So easy, right? As many authors have noted recently, it is very unlikely that there are many original Amazon investors left from the 1990s – given the ~90% share price plunge following the Dotcom crash, it would have required extreme intestinal fortitude and nerves of steel to hold onto your AMZN shares when so much of the financial media was predicting its doom at the time! So I’ve learned to take such articles with a grain of salt…
Disclosure: the author does not own shares in Resapp or Fastbrick Robotics.
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This article does not take into account your individual circumstances and contains general investment advice only (under AFSL 501223). Authorised by Claude Walker.
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