A “Cheap” $2,000 lesson in Investing

By | 2016-10-28

I was reading through Financial Samurai’s “Tough Love” post and thinking back to situations when I could have used a dose of reality…….. Unfortunately, I was given great advice by many individuals and crapped all over it.

It’s too bad, but “better late than never” doesn’t always apply and I can’t re-coup my losses.  Time to throw my experience out here and see if I can save someone else.

Let’s walk through my “Cheap” trading lesson.

I was just starting to learn how the stock market worked and started reading books by the pros (Peter Lynch, John Bogle, Warren Buffet). They all were making similar recommendations that are best summed up in a few quotes:

“We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.” – Warren Buffet

“The worst thing you can do is invest in companies you know nothing about. Unfortunately, buying stocks on ignorance is still a popular American pastime.” – Peter Lynch

“We encourage investors to trade about $32 trillion a year. So the way I calculate it, 99% of what we do in this industry is people trading with one another, with a gain only to the middleman. It’s a waste of resources.”John Bogle – Bloomberg Interview

So with the advice from investing icons – I started an E*trade account with a small amount of money and started watching stock prices. Two things I noticed right away:

  • I was not able to buy a lot of shares unless I bought cheap stocks
  • Day to day stock price fluctuations are insane

Armed with my new knowledge and being the genius that I am, I decided to buy a bunch of cheap stocks and try to capitalize on the price fluctuations.

In other terms, I blocked out all of that sage knowledge I acquired reading about investing and replaced it with: “I can make a bunch of money fast, then follow their advice”

I will skip all the small details and go straight to the facts

  • Made 25 buy/sells over a 6 month span in 6 different companies
  • Started with $300 and added to the account until I was playing with about $3000 over 6 months
  • Primarily invested in micro-cap stocks that were under $15 a share
  • Held stocks for 1 day up to a month in a few cases
  • I used a social media stock trading site to watch the stocks that were “trending”

For awhile I was actually making great returns (the market being on fire helped) and I thought it might be a legitimate way to earn extra money. Then I started gambling on some earnings reports.

“Gambling” because I knew nothing about how the company actually handled its business. Then placed bets that they would continue their streak of beating expectations.

At one point I owned stock in a Chinese company that made edible alcohol……. Since I am not from China, nor eat alcohol (only drink). It’s safe to say I “invested in a company I know nothing about.”

I am not going to go through all my trades/companies – but was up over $1000 (which did not last). Then saw some crazy stuff happen – including a 50% 1 day drop (if anyone is curious reach out and I can share some details).

Lessons Learned 

  • Time consuming – Not only did I check tickers multiple times an hour, but the amount of time I wasted “researching” my next trade could have been used to start this blog 3 years earlier
  • Trading Costs – When you are playing with small amounts of money, $20 is a huge percentage of your capital ($10 for buy, $10 for sell)
  • Stress – Caring about 10 cent swings every hour is extremely stressful and I was on the edge of being obsessed with trading.
  • Danger – Micro-cap is very volatile and high risk – I got caught a few times and lost 60% of my investment because I didn’t cut losses

A few positive notes

You can gain all of this knowledge without day/swing trading, but I did learn some valuable information.

  • Earnings Reports – Learned what makes up an earnings reports and how they connect to market expectations
  • General knowledge  – I found that having real money on the table pushed me to learn a lot more about the stock market. Including EPS, Revenue, Filing Dates, IPOs, Institutional Ownership, etc.
  • Fear – Seeing your investments fly all over the board forces you to accept market swings. I think my short lived swing trading stint made me more comfortable with the investing I do now.

I no longer day trade (or buy individual stocks for that matter). But do have one big red number still sitting in my E*Trade account that I will eventually sell for tax losses.  In the meantime it serves as a “don’t ever do this again” flag.

If you are looking to get into this arena, be prepared to spend a ton of time doing research and be willing to take some losses. One other downfall is you are competing against highly skilled investors and computers.  It’s a tough way to make a living.

Take Aways:

Do your research, find long term value, and don’t be swayed by short term market fluctuations. Most importantly, if you are a new investor, stick to broad market funds that track major indices.

Losing a few thousand dollars is nothing compared to the path this experience set me on. It was one of my first “Take Action” moments. The action was misguided, but it shows that doing something is better than doing nothing as long as you learn from your mistakes.

I am curious if any readers have done (or continue to) do something similar? Any horror/success stories?

 

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16 thoughts on “A “Cheap” $2,000 lesson in Investing

  1. Team CF

    Did exactly the same in 2009-2010 with leveraged products. The short summary is: I feel your pain!
    It’s good to realize that it is hard, even practially impossible, to time the markets. You will get lucky a couple of times, but when it goes sideways, it goes sideways really quickly and usually really badly too.
    Good for you for sharing this!

    Reply
    1. Apathy Ends

      haha – glad to know I am not alone!

      It can definetely go from real good to real bad in a day. Stocks fall so much harder than they rise.

      Thanks for the comment

      Reply
  2. AustralianDividendInvestor

    This one hits close to home. I mismanaged some option trades once upon a time and ended up with an extremely significant amount of metal in my account that apparently I was required to take delivery of? I got out with a small loss and a few extra grey hairs… never again!

    Better to get your mistakes out of the way early on and when the account size is still small.

    Reply
    1. Apathy Ends

      Couldn’t agree more ADI – make mistakes early and often before you have to much to lose.

      I don’t need to expedite my grey hairs 🙂

      Thanks for the comment

      Reply
  3. Amanda @ centsiblyrich

    Here’s my takeaway: you learned quickly, didn’t lose a ton of money, plus you STARTED! 🙂 All great things! I’ve never tried it (we have mostly index funds), but my father in law still believes he can time the market and will, one day, get rich from some secret tip he gets from his newsletters (that he pays for, mind you). But, I’ve been hearing this from him for years and I have yet to hear he’s gotten rich from it. And I hope he doesn’t read comments on pf blogs.

    Reply
    1. Apathy Ends

      I am on the index fund side of the fence now as well – the start expedited the path to them. Blessing in disguise.

      haha – is it something along the lines of Investors Business Daily? They were popular on the trading site I used. hopefully he gets lucky once and adopts your strategy.

      Reply
  4. Financial Panther

    I did a similar thing in college, although with much less money. I remember I had read about a “Roth IRA” and thought that’d be cool to put some money into it. So I went and set up an account on E*Trade. I only had $100 to put into it, so I went looking for some stocks. The only ones I could were from really cheap and crappy companies. Ended up putting the $100 into Borders stock. A few years ago, I happened to look and saw my $100 had turned in $1.69. (Guess it gave out some dividends). Would have been nice to have actually tried to learn about investing back then.

    Reply
    1. Apathy Ends

      haha, the tax free Roth IRA trap – in theory you can make MILLIONS and never pay taxes! Or end up with $1.69 🙂

      Been there, now my Roth is super boring – just the way I like it

      Reply
  5. ChooseBetterLife

    I agree with Amanda. It was a small loss in the grand scheme of things and provided a valuable lesson. Better to lose $2000 than $200,000!
    We had an advisor recommend a bunch of funds with high fees and expense ratios, then we started reading on our own and realized what a mess we’d made. We sucked it up and paid the fees to get out, but better then than waiting until retirement to learn our mistakes.

    Reply
    1. Apathy Ends

      Hearing about advisors recommend crap like that makes me worry – I should do some research into how many people have a financial advisor.

      Glad you found a way out sooner than later.

      Thanks for the comment

      Reply
  6. P
    Paul Andrews

    You’re braver than most. If you’re ever looking for a really solid look into why trading stocks doesn’t work out for 99.99% of the people that try it (and why NO ONE is in that 0.01%) check out “A Random Walk Down Wall Street” if you haven’t already. Also, my degree is in finance, and I only had one professor admit that there is even a way to be the market (on a risk-adjusted basis, anyone can beat the market) and that’s with options. He then said don’t ask him about it because it’s too complicated and no one here is smart enough to do it. Really gave us hope, that one… 😉 anywho, glad you got it, learned what you had to, and got out!

    Reply
    1. Apathy Ends

      I will check that book out – sounds interesting

      haha – motivating the students by saying they aren’t smart enough. Gotta love that.

      Thanks Paul

      Reply
  7. Andrew

    Great points, trading can sure have dangerous outcomes. Luckily you got out early!

    I know a few people that have done well short-term trading, but in the end they all revert to the mean (or lose out big). The horrible thing is that there are a lot of scammers out there trying to market trading software/platforms/newsletters so people can invest like “pros.”

    Reply
  8. FPF

    I never got into day trading, but I lost 50% of my initial Roth IRA investment in just a few months. I had read that Roths were the way to go, so I opened one and bought a few index funds. I didn’t know anything about the market. I ended up buying right at the peak in 2008, and it promptly lost half its value over the next few months.
    I didn’t know enough to keep buying at the bottom, and was scared enough that I didn’t buy again until 2010. Luckily, I didn’t sell anything, so my losses existed only on paper. I’ve since gained it all back, and now put money in every month, regardless of where the market is.

    Reply
  9. Millennial Money

    Dude, when I started trading I ended up losing $13,000 in 3 months. But I carried the loss over for 3 years! So it’s not all “lost”. I don’t day trade anymore either – but own a core portfolio of stocks that I invest 5% of my portfolio in.

    Reply
  10. droppedcoin

    Well I recently blogged (www.droppedcoin.com/2016/11/14/penny-stocks-cautionary-tale/) about a similar folly I perpetrated a few years back. The good thing we can both say is that we have learned from our experiences! In my case I bought penny stocks in a small UK oil company that was ultimately liquidated. My losses ran to almost $14k. I can’t say I learned as much as you did, about balance sheets and so on, but I did learn not to dabble in risky investments that I know nothing about!
    Cheers, Paulie

    Reply

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