You’ve heard me brag when I was winning. Now you get to listen to me lament as I eat losses and share some important lessons learnt. If you are just starting out, and you consider yourself a noob investor, do spend some time reading this post unless you want to suffer the same noob investing mistakes as me.
Investing was never all sunshine and rainbows for me. When I first started in 2010, I made losses after losses. Nobody likes losing their hard earned money. But when the loss is realised, there’s nothing else for us to do except suck it up and try to learn some lessons from it.
I have made many investing mistakes, and because the stock market acts in such weird ways, I still managed to profit from silly investment decisions. I thank luck and the stock market gods for letting me get away with some mistakes. A few however, have hit me hard, and the following are 3 of the most painful investments I have made. I lost a 5-figure sum from these mistakes.
*I have summarised the lessons learnt at the end of this post for your reading pleasure.
The very first investment I made was when I first started out working in 2010. I read about this vegetable processing / retailing company from analyst reports and thought that they were doing very well. At that point in time, my understanding of financial statements was still very lacking and I had only read a few investment books. I was excited and inspired by the books and decided to dump some money into this stock.
I did not know about the business model, I did not really know how to interpret financial statements, and I did not know what risks I was facing. I also did not quite understand how the stock market works. Most of the advice, I just took from friends and colleagues who were probably just as clueless as I was.
The moment I bought the stock at $1.39 on 21 October 2010, it started slipping…
Then, I remembered that US and China were having some currency war ongoing at that moment. What the specifics were, I was not clear. But the fear in the stock market caused China Minzhong’s stock to plunge by 13.66% in almost one day!
That was when I got into trouble. I started to chicken out. I remembered a technical analysis book telling me to sell when I suffer a 8% loss. However, I had bought this stock with a long-term perspective in mind. Sell or hold? Technical or Fundamental? I was confused.
Finally, I decided to sell. I told myself that I had made a good decision in taking some money out of the market to wait for things to get ‘better’. It was my very first stock and very first loss.
Realised loss: 13.66%
As if I learnt nothing from the previous loss, I went on to make another stupid mistake a few months later.
At that time, Cosco Corp was boasting some record breaking profits for that current quarter. Analysts released bullish reports predicting how the stock would hit a target price of $3, (it was about $2 at that time.)
Again, I did not understand the ship-building industry. I only knew that it was cyclical and I probably thought that I was catching the up-cycle.
Convinced by analyst reports, deluded by over confidence, I bought Cosco Corp at $2.06 on 9 Nov 2010.
It went up at first and I went around bragging to every one about my good decision. I even added on to my position 17 Jan 2011 at a price of 2.34. That was probably when it peaked.
Then it just started dropping.
The analyst reports that praised Cosco Corp to the high heavens suddenly vanished and was replaced by a flurry of bearish reports on Cosco Corp. Cosco clients cancel a project. Cosco has a bad track record of delivering. Cosco this Cosco that.
Never mind, I told myself, I will hold for the long term this time! I thought I was right to have a long term view even if that meant that my long term view was blocked by a wall…
In this case, I should have probably sold earlier and not hold long term at all!
Holding a crappy stock for the ‘long-term’ does not help much. I accepted that I have made a bad decision and finally sold it at $1.06 in 22 Aug 2012. (Cosco Corp is now trading at $0.38.)
Realised loss: 51.06%
This company has hogged the headlines this year due to accusations of accounting scandals ….that I didn’t really bother to read. I sold this stock few years back and I never wanted to look at it again.
Again, convinced by analyst reports (do you see a pattern here?), I dropped a bag of cash on Noble Group shares on 5 Jan 2011 at a price of $2.26, shortly after watching my Cosco Corp shares rise, thinking I was some smart-ass.
Again, I did not understand the business (until today I still don’t understand it) and had just blindly bought into it after looking at all the cool nice pictures of agricultural commodities in their annual report. It made me feel sophisticated and savvy…
Investing in agricultural shit yo!
Sure enough, the same pattern ensued. The stock started sinking. But this time, I decided to value-average into the stock at $1.16 because the analyst reports remained bullish on it.
Finally I put my ego aside, admitted that I had made a mistake and decided to cut loss (or realise loss) at a price of $0.885 in 2013. Because I value-averaged down on this stock, Noble Group remains as my most painful loss till date. ( I sure hope it remains that way!)
Realised loss: 49.30%
So if you don’t make money, you better learn some lessons.
Don’t trust analysts’ reports
Ever since I got burnt on these 3 stocks, I am always skeptical of analyst reports sent to me via my brokerage. In fact, I try to direct them into the junk folder. I realised that I was better off not reading any of these reports. Even if you wish to read the reports, make sure you apply your critical thinking and evaluation to check if the analyst’s assumptions make sense. If you can’t, then stay away!
Don’t trust newspaper headlines
Don’t trust newspaper headlines or any headlines for that matter. Critical-thinking skills come into play whenever you read a report or article on a certain stock. In the investing world, the only ‘experts’ are those investors with a long-proven track record and have a history of putting their money where their mouth is (e.g Warren Buffet). Most of the others are just as clueless as you are, or even worse, pretending to act like they know something.
Don’t Buy Anything that you do not Understand
Other than blindly following analyst recommendations, all 3 stocks that burnt me so badly had 1 similarity. I did not understand the business. And because I did not understand the business, I could only base my decision-making on the analyst reports that told me to sell… ( which is strange because a few months earlier they were all telling me to buy!)
A lack of understanding of the business will also leave you open to fear-inducing headlines in newspaper reports and such reports will appear for at least one of the stocks you hold currently. With thorough understanding of the business, you will be able to make decisions and understand the situation better and not buy or sell based on the ‘reported’ information.
In fact, to further elaborate on this point, in the investing world, there are so many assumptions, information and opinions floating around that it’s hard to decipher what’s real or false. Think critically and do ample research on a stock before you buy. This is to make sure that you won’t buy into a fantasy story of prosperity and ever-increasing earnings.
The research done and knowledge of the business will also firm up your belief in the company or the industry.
If not, you will easily end up folding the weak hand you are holding.