Issue #21 - Don't make the same investing mistake I did

Jun 07, 2024

Read time: 3 minutes

Hey Friends,

Today I'm sharing a story about a major investment mistake I made (I've made many). Hopefully, the story helps you with your investing strategy so that you don't make the same mistake. 

 

1. Personal Finance

Frequent readers of the Goodwill Investing Journal are getting a taste of my mindset: don't be an effing Gazelle all the time. 

That said, I do need to remind everyone that I'm a human as well, and like most normal human beings, sometimes I want to buy stuff that makes me happy, even if it's totally unnecessary.

Like that Nintendo 64 I bought a couple weeks ago. Unnecessary? Yes. Helluva lot of fun? Also yes!

So even though we are typically in Lion mode, being conscious about our spending, creating good savings habits, and investing every month no-matter-what the news says, sometimes being a Gazelle is good, too. 

So don't get too down on yourself if you make an impulse purchase once in a while. 

Just keep a lid on it, spend less than you earn and invest the difference.

 

2. Stock Markets

I made a huge mistake in my early 20s buying a small stock. 

I was riding high after making $30,000 on a stock pick that 10x'd my original $3,000 investment. 

Then I found another stock, appealing little company, solid cash position, high margins, in the digital education business, and in my opinion, it was heavily undervalued. So I took the $30,000 and sunk it all into this new play. I was going to be rich!

Well in the midst of increasing expenses as it targeted more growth, it lost one of it's key contracts in the process. Revenue collapsed as fixed costs went up. 

The stock cratered 97% and never recovered. 

OOPS!

Couple lessons:

  1. Small cap stocks are extremely risky.
  2. Position sizing is incredibly important. Doubling down is never a good idea.
  3. "Knowing" the management team or chairman of the board IS NOT AN INVESTMENT THESIS. 
  4. Cash on hand is as deadly as idle hands. You become antsy to redeploy, rushing to catch the latest trend or the highest yielding stock you can find (high yield means high risk, btw) and mostly what happens is a permanent destruction of hard earned capital. 
  5. What you read in the latest financial report is 'what happened', not 'what might happen', and even less so 'what is certain to happen'.
  6. Overconfidence bias is extremely dangerous. We all have susceptibility to it. It leads to dangerous overweighting and blinds you from seeing the risks at play.

Despite a huge loss, one major benefit was that I learned a huge lesson, thankfully, early in my investing career. Imagine I had done this with another 0 attached to the investment. 

At the end of the day, don't fart around with your retirement portfolio. Unless you are in the investment business, or are in the industry of the stock you are analyzing and have some sort of edge, picking individual stocks usually isn't a winning strategy.

The average stock picker's results are 3.4%, compared to the US and World Stock Indices that average 8-12%. And we all know that most professional money managers underperform the market over the long term anyway.

Seems like a small difference, but over a lifetime, it will amount to millions and millions of dollars in differences to your net worth. 

So don't get caught up trying to buy into NVIDA after it's already quadrupled or GameStop now that Whispering Pussy, ahem, Roaring Kitty, is back on Twitter. 

For everything else, there's ETF investing. Not sure where to start, or need to add some financial guardrails to your investing strategy? I built a course to show you exactly how to do it.

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3. Real Estate

Elevator up, stairway down. 

The Bank of Canada dropped their key interest rate by 0.25% this week. 

Welcome relief to variable rate debt holders for sure. 

But let's not forget, 0.25% isn't much compared to the 4.75% increase since 2022. 

So while it's nice to see some progress on the inflation front, interest rates are still elevated. And don't bet the farm on rates going back to pre-2022 levels any time soon. 

In fact, don't make bets on interest rates in either direction.

You might be right, but for the wrong reasons.

More likely wrong, for no good reason at all. 

 

1 Quote

"You gotta control your smiles and cries, because that's all you have and nobody can take that away from you"

- Training Day

 

A Question

What is the worst investment decision you ever made?

 

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Thank you

Eddie Gudewill, CFA
 

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Easy and actionable ideas to take you from Good to Great Investing.


Every Friday you’ll get three ideas from me, one in each of these areas: personal finance, stock markets, real estate.