CNBC is running a decent series this week on the Worst Trade Ever by various key industry leaders. Warren Buffett’s story today was pretty neat. He went into how he bought out a textile company early on basically due to emotion (the head of the company really pissed him off) and that company (Berkshire Hathaway! haha!) hemorrhaged money for years while he missed great opportunities in insurance companies. He told Becky Quick that had he put that money into the core business of buying insurance companies instead, Berkshire Hathaway would easily be worth double what it is today. While it’s tough to say what “would have” happened had you done x, y or z decades ago, it’s often obvious very quickly that you’ve made a terrible investment, and chances are, that experience has stayed with you ever since.
My Worst Trade
I’ve made a few bad investments over the years to say the least. Most of my bad “trades” involved buying a stock or an option on something looking to make some quick money without fully researching the underlying stock and I got burnt by a reversal in market momentum. That’s kinda boring and each of these probably cost me a few hundred bucks. So, I’ll tell you about how I lost THOUSANDS in my Twenties, which was particularly painful, since this time coincided with needing money to buy a home, an engagement ring, getting married, having kids, etc. I really could have used that money, and I blew it – damn stock market trends. Here’s how:
DRIP-ed To Death
When I first started investing, I was a teenager without much money. But I was making a bit here and there with part time jobs and summer work – and I was enamored by the prospects of compound annual growth, starting early, dividends and such. So, I found about about Dividend Reinvestment Programs (DRIPs), which basically allow you to buy shares in many well-known companies for as little as $25 a pop, and then the dividends are reinvested in partial shares as well. Many of these programs had no fees or very low fees, and were very easy to deal with. You could basically write a little check here and there, send some Christmas money in, whatever. So, over the years, I started to accumulate large positions in big, well-known Blue-chip companies like General Electric, Intel and Lucent. These were the best of the best – (only 4 AAA Companies Left now amazingly). Everything I’d ever read had said that held over 10 years or more, blue-chip companies always returned 10% or more with dividends reinvested.
I thought I was doing great – and I was! That is, until the internet bubble burst. See, Lucent went from a $70 to a 70 cent stock over a period of a few years. I’d ridden GE from the 20s to the 50s and it came right back down. Intel stopped growing at 50% per year pretty much the year I bought it – it basically went nowhere. In the end, on Lucent especially, I probably lost $7,000 or more. This was basically everything I’d saved through high-school and college and a few years into my professional career. I had a 401(k) and IRA going, but as far as taxable investing accounts, my DRIPs were pretty much it. I probably lost 50-60% over 2 years by sitting there watching that bubble deflate. I know, it doesn’t sound like a lot of money, but it was like watching an accident in slow-motion. I could have bailed at any time but I always believed these stalwart household name companies would rebound. I didn’t adapt. My investments withered away and died.
This is why I rely on Evolutionary Investing here at Darwin’s Money (RSS). Buying and Holding individual stocks is akin to complacency and is much more risky than it used to be (GE’s latest leg down was even worse! They almost imploded completely were it not for the US taxpayer-funded bailout). Investors need to be constantly vigilant and take advantage of changes in the market ranging from secular trends and structural changes in the economy to tax law changes and unique investment opportunities. Right before our very eyes, we’re seeing a potential Gold Bubble, a likely Bond Bubble, and market mis-pricing opportunities like pairs trades for easy money. That’s not to say that I don’t have a long-term retirement account investment strategy – I do – and I don’t tinker with those strategies thinking I can time the market on a macro scale. But, for my taxable trading account? I’m not just sitting on shares of General Electric and IBM for the next 30 years. I’m adapting to what’s happening around me – as Darwin would expect. See how I’ve done with my portfolio recently here.
What Was Your Worst Trade?