Financial Intelligence Investing

Afraid to Invest? So was I… but here’s what I’ve learnt

For someone who’ve lost upwards of $15K in the stock market, I had every reason to be afraid of investing.

How did I lose 15 grand?

 

I thought I was smart

I thought investing was difficult for the average Joe due to the amount of research required, but not for me. I’d been googling lots for my school projects. Googling for stocks to make money should be fine.

And so I went ‘researching’ and ended up at some forums, trying to dig up chatter about up and coming stocks cheap enough for me to ‘invest’ in. Found quite a few, all supposedly at prices ready to ‘take off’. The next IBM. So I bought in.

Penny stocks they called them. Back then I didn’t even know they had a generic name, much less their reputation. So much for research.

I didn’t know that what I was doing wasn’t ‘investing’ but ‘speculating’. On rumors.

I also didn’t know that I was being suckered into elaborate ‘pump and dump’ schemes. That’s when the really rich folks push share prices up by buying them in large quantities, before going to forums or other channels to start spreading rumors that drive prices even higher, before selling off their shares at the peak — and causing the share prices to nosedive. Sometimes, they would rinse and repeat.

Apparently, I’ve checked all the boxes as the sucker falling prey to all of the above. It wasn’t until much later when plenty of ordinary folks, who were burnt like me, finally uncovered and revealed the whole plot on the very same forums.

You really won’t know what you don’t know… until you do.

 

I never knew I lacked so much emotional self-control

Things were not all that bad from the beginning.

Initially my “investments” were in the green. It felt good, but not good enough. If I were to sell, less the transaction fees, I would’ve barely broke even. So I sat and hoped that they would go higher.

Kinda think of it, I never did sold any of my “investments” for a profit back then.

When all the pumping was done, came the dumping.

First it was negative in the single digits. No worries, they should go up again. That’s what the ordinary guys in the forum are saying.

I was practically staring at my monitor from 9 to 5 every day. Jobless. Clueless. Just watching my negative numbers grow deeper and deeper. Negative percentage in the tens, then twenties.

I couldn’t sleep. Those numbers just kept floating in front of me the moment I closed my eyes. My gut was wrenching all the time.

In the end I caved, sold at the bottom. Sure it made no sense, buying high and selling low — but it felt good to finally let go, like dead weights suddenly lifted from my shoulders.

Then, as if the whole thing was scripted, the prices started moving up.

Maybe I can make some money back if I were to buy more now. Just make up for the numbers. Checked the forums. The wise folks were saying it was all normal, things could only head upwards from that point on. We should double down!

Bought those shares back again, at a higher price than what I sold them for and acquired even more shares then before. Then as if on cue again, prices resumed the plunge immediately. Gut twisted. Sleep lost. Sold at bottom.

Rinse and repeat. I was being hung up and battered, each time shedding a chunk of my savings, like a pinata — except I was bleeding money instead of candy. Each time I told myself I should double down to make back what I’ve lost. Sounds familiar? This would be what gamblers would say.

I was using all the tools available from the brokerage, including margin and leverage. That is when you could “borrow” from the broker to enter into larger trades by paying less than the full price of the trade. Unless I was able to buy and sell within the same couple of days before the settlement date, I wouldn’t need to pay the full amount. If I did not settle, then I would have to pay the absurd interest on the margin loans, something like 5% or 10%.

So I was hoping to make some quick turnarounds with margin day trading.

As it turns out, things went downhill really quick once leverage came into the picture. Eventually to a point where I didn’t even realize I didn’t have enough cash to make the settlement. To avoid the insane interest, I had to get my dad to bail me out.

I still remember bringing in the cheque for $15K to the brokerage to pay for that bleeding pile of shares. It sucked. Especially knowing that’s my dad’s hard-earned money.

 

I didn’t know when to cut my losses

So I ended up holding those useless shares, watching them lose their value with each passing day. Every now and then, I would think they’ve hit rock bottom, and would turn around eventually, and sometimes they do recover quite a bit, but not as much as I would’ve hoped.

When you shares lose 50% of its value, it would’ve to gain 100% before you are back at square one.

Movement anywhere above 50% in any direction seldom happens. So you can imagine the kind of momentum required to get your investment back to its original price once it has lost so much value. Good news seldom come in succession for such obscure penny-stock companies, unless its artificial hype or fake news, which usually are not sustainable to gain momentum over time. Unless it so happens the company you’ve invested in is the next Google or Amazon in their early stages — or you had the resources to double down, buy more shares while it’s cheap and hope for the best.

The odds are always against you when you’re holding onto what you can’t afford to lose.

The prices of those shares in my portfolio never did recover. I also never did find the satisfactory price to let go of them either.

In the end, I chose the path of least resistance — to ignore my portfolio and hope that years later, when I eventually do come back to check on them, things would’ve turned for the better. I didn’t even bother going through those company publications, annual reports or announcements that I received in the mail.

More than 10 years later, when I’ve finally gotten wiser on investing and logged back to my brokerage account. 3 out of the 5 companies had been de-listed, and the totally value of the remaining shares was just around $2-3k.

A loss of 80%.

Usually, people will say as long as you don’t sell your shares, you’ll just be sitting on “paper losses”.

This is way beyond that.

Once a company becomes de-listed, it is realized loss whether you like it or not.

 

A very expensive lesson on investing

Overall, that’s what the entire episode was all about.

It did however, made me realized the following:

  1. I am no Warren Buffet. I couldn’t find the next Coca Cola or Apple even if I were to spend every waking moment looking for one if my life depended on it.
  2. See point 1 and therefore, avoid penny stocks.
  3. I do not have the stomach and I’m too greedy to make good trading decisions.

Now that I am wiser with my money, it seems that I did not just lose $15k. Being afraid of the stock market and staying away from it for more than 10 years have resulted in losing so much more. The stock market is dangerous for fools but it is the most effective tool for growing one’s wealth. If I wasn’t such a fool with my money back then, those $15k would’ve grown to close to $25k assuming a stable 5% compounded annually.

Well, I guess it is better late than never.

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