One reader shares the investing mistakes that cost him tens of thousands of dollars
Today’s post was originally published on PeerFinance101 from Robert, a reader from Kentucky that wanted to share his story after reading two recent posts on investing. Robert relates investing mistakes that cost him a lot of money to some of the investing basics we talked about in our Top 10 Investing Basics and some of the stock market basics that are the focus of this blog.
He wanted to share his story so other readers could avoid the same investing mistakes. Reading Robert’s story of investing failure may just save you from the same tragedy.
Lucky Times before my Investing Mistakes
Like most investors, the stock market crash in 2008 hit my portfolio hard with a loss of about 23% in my stock investments. Fortunately, I didn’t have that much invested at the time having just graduated from college a few years prior. I still had some money in my company’s 401k plan and some money in bonds.
I resolved to bounce back and work as hard as I could to rebuild my investment portfolio. I did really well in the rebound, especially when commodity prices shot up over the two years to early 2010. It’s all about coal in Kentucky and I rode one coal stock up about 240% from 2009.
I ended up cashing out much of my stock investments early in 2011 for a down payment on a house. A couple of bonuses and a lot of hard work and I was able to build my portfolio up again to just over $50,000 by mid-2014.
That’s when the pain started. Coal had made me money but companies in the industry had fallen on hard times due to low natural gas prices and environmental regulations. Alpha Natural Resources, the company in which I had invested before, had fallen 90% since I cashed out.
But coal still accounted for something like 35% of electricity generation in the United States and China was buying up massive amounts for its own needs. All the pundits on CNBC were talking about a bottom in coal stocks and massive gains going forward.
I got dollar signs in my eyes and started making a lot of investing mistakes. The drop in shares of another coal company, Peabody Energy, had not been as bad as that of Alpha Natural. All the pundits said Peabody was the stronger company and could withstand the ‘short-term’ problems for the industry.
I put about a quarter of my portfolio in the shares and started making plans for early retirement.
As you can see from the stock chart above, things didn’t go well.
With each plunge in the share price, Wall Street analysts revised lower their target price but talked about how a turnaround was just around the corner. That’s what really makes me mad about the whole situation. The people that were supposed to know about stock prices were predicting a fair value for the stock of at least 30% higher at all times but just kept lowering their target price. I felt more than a little betrayed.
But I still believed that a rebound was coming soon. I followed my initial investment by buying more shares all the way down. I even started using margin, basically borrowing money to invest, so I could buy more. If I could average out my price to $10 or so then all I would need is for the shares to regain some of their value to get back to even.
By July 2015, shares of Peabody Energy had fallen 92% to $1.25 per share and my stock portfolio was down nearly $30,000 over just a year.
What I Learned from my Investing Mistakes
Telling this story still stings, it’s only been a few months since I cut my losses and decided to take control of my investments. I read the article on investing basics last month and saw a lot of the investing mistakes I had made.
The first investing mistake I made is #2 on the list of investing basics, thinking that TV pundits are there to make me money. The huge plunge in coal stocks was big news throughout 2014 and a big rebound was an exciting story for investors. On the possibility of double-digit gains, I ignored other calls for caution in the stocks. Lesson from this investing mistake, always question the advice you’re getting and do your own research. Just because you hear it on TV or from a popular analyst doesn’t make it good advice.
The second investing mistake I made was forgetting that my portfolio is about me and my needs. Even if the advice I was getting on TV was correct, it wasn’t right for my needs and risk tolerance. I had done well financially and really didn’t need super-high returns to meet my long-term investing goals. If I had looked at my goals and my investment portfolio, I would have found that a safer, more stable strategy was all I needed. Lesson from this investing mistake, only take as much risk as you need to meet your investing goals – and no more than you need.
[Editor’s note: we actually talked about this last week as well. Take a look at your financial goals and you might be surprised to find that you don’t even need the stock market to get there.]
The third investing mistake I made is #4 on the list of investing basics, diversification. At one point, I had more than half of my portfolio invested in just one stock. That’s ridiculous and I should have known better. The result was when this one stock plunged, it took almost all my portfolio with it. Lesson from this investing mistake, I now have a rule that I don’t hold more than 3% of my portfolio in any individual stock.
The last investing mistake I made, and probably the worst, was using margin. By using margin, and borrowing on my account, I could buy more shares than I could actually afford on my own money. If the stock price went up, it would have amplified my return and gotten me back to where I started. Since the stock price kept plunging, I ended up losing more money than I would have otherwise. Lesson from this mistake, don’t use margin – just don’t do it!
Fortunately, I realized my investing mistakes before I lost all my money. I’ve since cut my losses and gotten back to the basics that I should have been following all along. It was a tough lesson but one that I’ll get over with time and I hope you won’t make the same mistakes I did.
I want to thank Robert for sharing his investing story. It might not be much of a relief but I see the same investing mistakes in a lot of the emails I get from readers. Be sure to check out the 8 stock market basics on our How to Start Investing page.