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While it can be painful to reflect on less-than-perfect decisions, it’s almost always less painful than making the same mistakes over and over again. That’s why it’s important to take a moment to reflect on your mistakes, especially in the context of investing. Other people That way, you don’t have to make it yourself and pay expensive tuition fees in the process.
So without further ado, here are my three worst investing mistakes. I highly recommend reading and learning these lessons the easy way, not the way I did it.
1. Double your losing positions
In the timeless and surprisingly simple words of famous investor Paul Tudor Jones, “Losers are average losers.” What Mr. Jones meant was that it’s often foolish to buy more and more stocks as their prices fall further and lower over time in the name of lowering the average price paid.
The short-term psychological relief of lowering your cost base with each new purchase comes at a high price, as it involves greater losses overall. Jones thought this lesson was so important that he literally wrote his three words in large letters on a piece of paper and kept it behind his desk at work.
Why is Jones’ immortal quote important to me? Because I didn’t take his advice to heart when investing. in mode (INMD -0.24%) Of course, the share from the past few years. After initiating the position in early 2021, I was excited to see the value of my stock explode.
I bought more and more as the stock rose, the steady drumbeat of strong earnings reports, the company’s positive outlook as it moves into major international markets like China, and the company’s collection of minimally invasive medical aesthetic technologies. Driven by my belief in its usefulness, I kept buying more and more. .
After the value of InMode stock started to fall, I justified it as a phenomenon related to the broader bear market that was beginning to bite at the time, and even though the growth outlook worsened multiple times, I continued to look at it from time to time until mid-2023. I kept buying. Currently, my losses over the past three years are about 48%, even though the stock itself has only shrunk by 6%.
That valuation may have contributed to my loss being even greater. When I bought InMode, its price-to-earnings (P/E) ratio was close to 40, which I justified as a good high-growth stock. In hindsight, the high valuation should have made us even more reluctant to start buying more shares when prices fell.
Remember: Losers are average losers. Please think carefully before committing further capital to an underwater position.
2. Caught in a speculative frenzy
Irrational exuberance in the stock market can take many forms, and as we have seen in 2021, the crypto sector certainly has what should be a classic example of a market bubble. I got my own piece of the action a few years ago when I bought it at the end of 2021. Shiba Inu (SHIB -0.63%) That price was just on its way to the moon. Now worth only a fraction of what I paid. He may recover, but he’s not holding his breath.
The fundamental problem with my investment is that Shiba Inu is a stupid dog coin meant to make memes and make jokes. It’s not long-term wealth building. It’s not even a useful product for any practical purpose. What’s more, I knew all this at the time of purchase. Unfortunately, my days of greed led me to make bad decisions.
The lesson here is not that cryptocurrencies are a bad category of assets. That is, in the speculative frenzy, the fear of missing out on big profits is particularly appealing. The problem is that by the time you hear about people making money, the party is likely to be coming to an end rather than escalating. So be aware that what rises quickly can fall even more rapidly if nothing other than hype drives investment prices higher.
3. Selling winners too soon
After purchasing shares of AbbVie (abbreviation 0.42%) My roadmap for 2020 was relatively simple. I would choose to hold the stock for no more than three years and sell it once it becomes clear that the market has priced in the success of the first phase of the company’s strategic plan.
Under the plan, the company’s blockbuster drug Humira would lose manufacturing exclusivity protection in 2023 and its profits would be quickly eroded by generic drugs. Concerns about future losses led to low stock valuations in 2020, with a P/E ratio of nearly 19 times.
However, according to the plan, the overall sales impact of the loss of Humira will be felt primarily in 2023, with the introduction of a pair of new drugs called Rinvok and Skyrizi targeted at most of the same markets as Humira, and shortly thereafter. Growth will recover. And then it accelerates.
In late 2021, it was too early to tell whether management’s plan was working. The main hurdle was Humira’s genericization, which was inevitable but had yet to happen. However, quarterly sales increased as two alternatives to Humira gained traction in the market. Additionally, in regions outside the United States, where generic drugs were approved more quickly, the decline in revenue has been rapid and appears to have almost stopped.
Combined with the company’s rising stock price, I thought this meant the market was interpreting AbbVie’s transition to new revenue streams as successful. So I sold the stock and made a small profit of about 30%. If I had held out, it would have gone up over 100% by now.
The lesson here is to run your winners as long as possible unless you have a very good reason to do so. Everything went according to my investment vision, but once it became clear that things were going the way the company intended, I should have dreamed bigger.
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