Five Investing Mistakes I Learned the Hard Way
Avoiding these mistakes will save you thousands...
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My late grandmother used to say, “you learn something new every day.”
And that’s especially true with investing. For instance, I served as the senior analyst for an investment research company for nearly a decade.
I’ve also written a book on investing that sold thousands of copies around the world.
And as you know, I’ve established a bit of a social media presence where I help 500,000 people every month understand the stock market.
Despite this experience, I don’t know for sure what the stock market will do…
But while I don’t have a crystal ball, I do have a list of mistakes I won’t make again.
And I hope by reading this you can avoid them too.
Mistake #1 Don’t Fight the Fed
This classic market axiom held true in 2022. The Federal Reserve made it clear in late 2021 they would aggressively hike rates in 2022.
I correctly forecasted the rate at which the Fed would likely hikes rates almost exactly (i.e. three-times faster than the previous cycle):
At the time, I was convinced the market would likely have a new “taper tantrum” where the S&P 500 would fall ~20% before the Fed “pivoted.” This is what happened in 2018 and is what I expected to repeat in 2022.
And while the pivot did come in mid-2023, it didn’t come without some heartache in the form of a tough -23% pullback for the S&P 500 in the meantime.
The lesson here is when the Fed tells me they’re going to do something in the future, you should heed their warning and play defense.
Mistake #2: Don’t Be Too Bearish
I remember when I was setting up my Roth IRA back in May 2012. I was a fresh-faced junior analyst at an investment research company armed with an economic degree.
And I was convinced the US was on the verge of a double-dip recession that would lead to another crash in stocks (like we’d seen a few years earlier in 2008).
My financial advisor at the bank was pushing me to go into an all-stock mutual fund, but I was hesitant. We compromised on a 80/20 stock-to-bond portfolio.
By allocating that 20% to bonds, I left a lot of money on the table as the S&P 500 surged +233% since I opened my account:
While I course corrected later on, I learned a valuable lesson: bears sound smart but bulls make money.
Mistake #3: High Conviction Doesn’t Mean I’m Correct
Just because I have high confidence in an investing thesis - like that the US will fall into a double-dip recession in 2012 - doesn’t mean it’s correct.
I saw this firsthand with my audience during the meme stock craze in 2021. I went on record in Time Magazine in July of that year saying that retail investors should not buy meme stocks.
This is because hedge funds were inflating the value of stocks like GameStop (GME) and AMC Holdings (AMC) to suck in more retail capital, only to dump on them later.
At the time, I was inundated with messages like this for posting a video critical of the AMC investment thesis:
All these people had very high conviction on their AMC trade. But they also had conviction without any risk management.
Since I posted this video, AMC shares are down nearly -90%:
Having conviction is important to any investment. However, ignoring all warning signs, abandoning risk management, and investing based on emotions is a good way to lose money.
Mistake #4: Don’t Use Leverage
Everyone wants to get rich right away.
Many people see using options contracts or “leverage” to do that. But what many people forget is while using leverage feels great on the way up, it can bankrupt you fast on the way down.
While I’ve traded options professionally (and even wrote a chapter on them in my book), I too have lost nearly 100% on an options trade before.
These days, unless I’m using relatively low risk strategies like selling puts on stocks I want to own, I eschew using options.
As the great Charlie Munger once said:
As Warren Buffett’s right hand man for sixty years, Charlie knows a thing or two.
#5. Invest to Survive for the Long-Term (Not Short-Term Upside)
During the 2022 bear market, I had many members of my Patreon investing community ask why I wasn’t being more aggressive “buying the dip.” This was after I’d increased my cash position to over 40% early in the year after it became clear the Fed was serious about hiking rates.
Everyone wanted to know what I was going to buy, particularly in the high-growth stock and cryptocurrency market that was getting obliterated.
But my answer was consistent: be patient.
This turned out to be great advice, as I added to many companies that were market leaders this cycle including Microsoft (MSFT) and Alphabet (GOOGL). But I didn’t do it by mindlessly buying the dip; I did it by seeing which stocks bounced back first.
Considering my portfolio is +35% this year, I’d say it worked.
Making Mistakes is Part of the Game
There are many out there who think if you’ve been investing as long as I have, you should be right all the time.
But this couldn’t be further from the truth. While I do my best to not repeat the same mistakes, even the best money managers in the world are only correct 55% of the time.
Being wrong is part of investing, and it’s something many new investors have a hard time grappling with.
But the most important thing you can do it limit your downside as much as possible.
Because if you avoid losing money, the upside will take care of itself.
Stay safe out there,
Robert