Advanced Personal Finance

Investing Mistakes I’ve Made and What I Learned From Them

I’ll admit it - like a lot of people, I sometimes got swept up in the hype of the late 90s stock bubble. I thought I knew what I was doing because I did some investing things right. Hey, I’d read books. My investments were up. I was a genius.

Except I wasn’t. I was a dumbass and I have the stories to prove it. Here, in no particular order are some investing mistakes I’ve made and what I learned from them.

I invested in a high-performing mutual…right when it stopped being high-performing.

I don’t remember the year but it was around ‘98 or ‘99. I used one of those super-duper mutual fund screeners to pick where I should invest my money. You know the ones. Highly technical. For skilled investors only. Free, too!

Then I pulled the classic bonehead novice investor move - I picked the one with the best returns and invested in it. I remember it like it was yesterday - Safeco Growth was the fund. I’d like to give you a graph of where I bought in (the top) and where the fund is today. But I can’t. The fund doesn’t exist any more. Hey kids, look! A classic example of survivorship bias!

What a jackass.

Lesson learned #1: Past performance has absolutely nothing to do with future performance. At all. Really.
Lesson learned #2: Don’t buy actively managed funds.

I bought a stock the day of its IPO.

Believe it or not, I did this twice - successfully. I don’t say that boastfully, but sheepishly - I’m not at all proud of it. Once again, I thought I was super-investor. I was going to get a piece of the IPO action! I operated on the ‘greater fool’ principle, intending to sell the stock in a few days or weeks when it inevitably skyrocketed. It was ‘Flip This House’ for stocks.

The two stocks were Net2Phone (no listing because the stock no longer exists) and Etek Dynamics (ditto). Net2Phone ended its IPO day with a market cap of $1.26B. It was later acquired by IDT for $26.1M in 2006 (yes, that’s several orders of magnitude lower). Etek was bought by another company for a ridiculous price about a year after it went public.

Even though I made money on both of these, I started to wake up to the fact that continuing to do what I was doing was stupid. Shortly thereafter…well, you know the rest.

Lesson learned #3: Don’t buy a stock on its IPO day with the intent to sell it shortly thereafter.
Lesson learned #4: Bubbles always pop. You don’t want to be there when they do.

I bought a stock based on a tip…from a complete stranger.

Same timeframe - mid-2000 or so. I’m in a training class for work when, during a break, the conversation turns to the stock market (as all conversations eventually did during this time). Someone in the class asked the instructor’s opinion about stocks in our sector. He named a name. I bought the stock.

Keep in mind, I don’t know this guy from Adam. And based on his say-so, I bought a stock. To my credit, I actually did look into the company and do some rudimentary research.

The stock cratered.

Lesson learned #5: Don’t take stock tips from strangers (or family members, or people on CNBC, or your barber).
Lesson learned #6: Twenty minutes of looking at a company’s website and one 10K doesn’t constitute ‘research.’

So there they are. Now that it’s all typed out, I feel even more stupid. But I wasn’t wiped out and I did in fact learn from the experiences. I guess that’s what it’s all about - learning from my mistakes and not repeating them.

mutual fund survivorship bias

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This entry was posted on Tuesday, May 29th, 2007 at 8:27 am and is filed under Investments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.