I recently talked about my first investment, Intimate Brands and how I felt like the man. While I was successful with that investment, investing wasn’t always a positive experience. There were two times in particular that I tried to outsmart the market, and ended up having to lick my wounds.
Shortly after I invested in Intimate Brands, I bought into Worlcom. At the time, I was debating between this stock and Philip Morris. I chose Worldcom. To this day I can’t remember why. But I do know that had I bought Philip Morris, which was at $20 per share at the time and rose to $70 per share, I would have made out like a bandit.
In any case, I bought into Worldcom. This stock was volatile. This was the late 1990’s and all tech stocks had huge movements on a daily basis. During one week when there were rumors of Worldcom buying Sprint, the stock would move by $5 a day. To me, this was huge. As with Intimate Brands, I was completely focused on the short-term.
Unfortunately, the merger fell through and slowly but surely, so did Worldcoms business model. The stock started dropping. What was once a $40 stock was now $20. I bought more thinking it was still a good buy. The stock kept dropping. Down to $8. Being the genius that I am, I bought more!
Then the news came out that Worldcom was cooking the books all along. The stock dropped to zero and the company went under. The good news in all of this is that I was able to write off the losses on my tax return. A small consolation however.
The Dot Com Booms Hits Me
Unfortunately, Worldcom wasn’t my only bad experience. Again in the late 1990s, my grandfather gave us grandkids some money. I was in college and wanted a computer of my own, so I bought a computer with my money and invested the rest.
Instead of buying a stock, I opted for a mutual fund. It was a Fidelity mutual fund, but I can’t remember the name anymore. I don’t even think it is around – which is foreshadowing for where this story is going.
Since this was the tech boom, I put my money into a technology mutual fund. Why? Because I saw it returned 60% last year. I quickly started projecting out 10 years worth of 60% annual returns and almost passed out from excitement. I was going to be able to buy the world! If you don’t know, I never bought the world.
The dot com bust hit the following year. I lost 50% of my money. I was smart enough to jump ship and keep a few hundred dollars of my investment. The loss of that money still stings to this day.
So what did I learn from these investments? First, I chalk some of my bad decision making up to being a first time investor. I wasn’t sure what I was doing and was going to make mistakes. I came out ahead with Intimate Brands, but lost a lot with Worldcom and the Fidelity fund.
But overall, what I learned and carried with me are the same things I preach to you:
- Focus On The Long-Term: I would check stock prices daily and watch CNBC all of the time. If you want to make money in the stock market, you have to stay committed to focusing on the long-term. Over the short-term there is a ton of volatility in the market. Over the long-term, the general trend is positive.
- Keep Emotions In Check: I was purely riding the highs and lows emotionally. This was a byproduct of watching the markets every day. I was 100% emotionally invested with these holdings. I held Worldcom to zero simply because I couldn’t part ways with it. I was hoping it would come back. By buying more shares, I was simply trying to make up for some of my losses.
- Have An Exit Plan: The majority of your investing should be for the long-term. But I understand that some people need to trade stocks. I do it myself in a “play account”. It’s money that I am OK with losing, but that’s not the goal. The goal is to still make money. To protect myself, I have an exit plan. I get an alert if the stock drops by 10% of what I bought it for. At that time, I review what happened and either cut my losses or I stay in. The key though is having an exit plan in place. Without one, you will ride it all of the way down.
Investing in the stock market is a fun experience. It is not something to be scared of. As long as you are able to focus on the long-term and keep your emotions in check, you are miles ahead of the rest.
For help with this, I have two suggestions: first, try investing with Betterment. The company is set up to make you be successful when it comes to investing. Yes they charge a small management fee for this, but it is well worth it. Don’t get caught up with the cost, focus on the benefit – the benefit of being successful when investing and being able to sleep at night.
Secondly, I urge you to read my eBook, 7 Investing Steps That Will Make You Wealthy. It’s an easy read that will teach you the basics of investing so that you can reach your financial goals. And the best part, it’s only $5!